Hotel operators who partnered with Oyo call it 'biggest online fraud', demand criminal probe against Softbank-backed startup now poised to raise $1.5 bn

  • Oyo charges hotels a roughly 20 percent franchise fee on room revenues when hotels join its network, but some Indian hotel operators say the startup often ends up taking half or more of revenues through fees that were not initially disclosed

  • The backlash against Oyo, while limited to a small share of the more than 10,000 hotel owners in India who work with it, comes at a crucial time for an emerging-market unicorn valued at $10 billion and its major investor

  • Founded in 2013, Oyo started by aggregating bookings for India's budget hotels, promising a standard of service in a market where that was more often the exception

Even as Oyo Hotels and Homes, le by 25-year-old Ritesh Agarwal expands its horizons with Series F funding, it is finding itself in the cross hairs of an increasing number of Indian hotel operators who have partnered with it and are complaining about being blindsided by fee increases.

Oyo Hotels and Homes shot out of nowhere to become one of the world’s largest hotel chains with a simple promise of “hassle-free” online booking, transparent pricing and cheerful lodging.

But as the Softbank-backed startup pushes toward profitability, the backlash against Oyo—while limited to a small share of the more than 10,000 hotel owners in India who work with it—comes at a crucial time for an emerging-market unicorn valued at $10 billion and its major investor.

Softbank, which has invested nearly $1 billion in Oyo, through its Vision Fund, is struggling to raise funding for a second investment fund in the wake of the failed offering of office-rental company WeWork and amid questions about the path to the profitability of other marquee investments like Uber, Oyo has not yet turned a profit.

In the background of the discontent is the disruption Oyo has brought to India’s lodging market—often to the delight of India’s middle-class travelers and to the dismay of hotel owners who have seen room rates driven down at a time when economic growth has slowed.

How Oyo operates

Oyo charges hotels a roughly 20 percent franchise fee on room revenues when hotels join its network, but some Indian hotel operators say the startup often ends up taking half or more of revenues through fees that were not initially disclosed.

A group representing hotel operators in Bengaluru called for a criminal probe into Oyo last month, saying the company was withholding money because of unfair fee increases, according to Reuters report.

Two hoteliers in the southern state of Karnataka filed separate police complaints last month accusing Oyo of deceitfully increasing commissions, and accusing Oyo’s 25-year-old founder and CEO Ritesh Agarwal of fraud.

Agarwal successfully appealed to the Karnataka High Court for a stay order on one case in Bengaluru, the court website shows, and a police official said the order barred police from investigating.

In the other complaint, in the town of Chikkamagaluru, police are investigating, an official there said.

Oyo has denied the allegations and said Agarwal declined to comment on the legal complaint. The company said it operates with a high level of “integrity, transparency and commitment” with its partners.

 Hotel operators who partnered with Oyo call it biggest online fraud, demand criminal probe against Softbank-backed startup now poised to raise <img class=

Representational image. News 18

Agarwal said hotel operators who have raised complaints represent a tiny fraction of Oyo’s network and were seeking to drive prices higher at the expense of consumers.

“On an annual basis, Oyo is able to retain 99 percent of its asset owners. If, for instance, people were unhappy, our retention rate would have been lower,” he told Reuters.

Softbank, which owns a roughly 45 percent stake in Oyo, declined to comment.

'Platform fee' and 'visibility boost'

Oyo says it is in constant contact with its hotel partners. “We have always disclosed any changes applicable to contracts with asset owners,” Oyo said in a statement.

For their part, owners and managers say Oyo has introduced fees—including a “platform fee” and a fee for a “visibility boost”—which they only discovered in monthly statements.

Reuters interviewed with 22 hotel owners and managers who run hotels under the Oyo brand in 10 Indian cities suggest the discontent has grown since late last year.

Several hotel groups have organised protests. Amitabh Mohapatra, head of one such group in northern India, says over 300 hotels have quit Oyo’s India network this year, while Kunal Rajpara, who heads another group in western India, said a few dozen hoteliers from Ahmedabad ditched Oyo last month.

“The situation with Oyo has gone from bad to worse,” said PC Rao, president of the Bruhat Bangalore Hotels Association. “We want to make sure the business of small hoteliers isn’t hurt.”

Some hotel operators say Oyo continued to list their properties on its mobile app with a “sold out” banner after they asked Oyo to sever ties.

Three hotel operators in Ahmedabad said they had e-mailed Oyo representatives on 23 September, asking to be removed from the platform but received no response. Reuters found all their properties still listed on Oyo’s app with “sold out” messages even though the hotels had rooms available.

Oyo says once a hotel has served a 30-day notice period and accounts are settled, the property is typically delisted within 72 hours. It tags all properties serving their notice period that may deny check-ins to customers as “sold out”, the company said.

Oyo's Series F funding

Oyo is now set to raise $1.5 billion (nearly Rs 10,650 crore), from its founder, Softbank and other investors as it gets ready to expand for expansion in the US and strengthening its vacation rentals business in Europe.

Softbank, has invested nearly $1 billion in OYO, through its Vision Fund and owns roughly 45 percent stake in it.

The latest round of funding will be a part of Series-F funding round.

Founder and CEO (Global) Ritesh Agarwal, through RA Hospitality Holdings, will infuse approximately $700 million as primary capital in the company. The balance $800 million will be supplemented by other existing investors, the company said, according to a PTI report.

A significant part of the funds will be diverted towards continued growth in OYO's fastest-growing market - the United States, and in strengthening the company's position in the vacation rentals business in Europe, it added.

Agarwal said the company has continued support of its investors like Softbank Vision Fund, Lightspeed and Sequoia Capital to its commitment of "making #LivingTheGoodLife a reality for over 3.2 billion middle-income people around the world".

"With the Competition Commission of India (CCI) approval now in place, the company will get a capital infusion of approximately $1.5 billion for this mission, supported by me and other shareholders," he added.

On a year-on-year basis, OYO Hotels and Homes is operating profitably at the building level, and at the same time its earnings before interest, tax, depreciation and amortisation (EBITDA) has also improved by 50 per cent, Agarwal said.

"The growth across verticals in India and globally has been phenomenal and we believe that we will be able to build a truly global brand out of India, while ensuring that the business is run efficiently and with a clear path to profitability," he added.

Earlier this year, RA Hospitality Holdings had received CCI approval to invest $2 billion in OYO Hotels and Homes. In order to facilitate this transaction, Lightspeed Venture Partners and Sequoia, are selling part of their shareholding in the company to help the founder increase his stake while remaining invested and committed to the company's long-term mission.

OYO Hotels and Homes currently has more than 35,000 hotels and 125,000 vacation homes in its portfolio.

Hotel operators' complaint can't be ignored

Founded in 2013, Oyo started by aggregating bookings for India’s budget hotels, promising a standard of service in a market where that was more often the exception. Oyo has expanded to China, Europe and the United States, calling itself the world’s fastest-growing hotel chain.

Many hotel owners in India were upbeat when Oyo gave properties in smaller cities visibility but began to raise concerns when profits failed to improve, said Darshini Kansara, a hospitality industry analyst at CARE Ratings in Mumbai.

“It isn’t something Oyo can ignore as they look to capture more market share.”

Based in Gurugram, near New Delhi, Oyo signs up hotels as franchisees by rebranding them and upgrading amenities and then charges fees from the owners.

Oyo says hotels are updated on any new contract terms on a tablet-device at the hotel that Oyo provides to manage bookings.

But some hotel owners say the devices are operated by junior staff, leaving them in the dark until fees have been charged. Ashraf Ali, a hotelier in Mumbai, said a notification offering new terms would keep showing up on the tablets until the hotel employee hit accept.

--With inputs from agencies

Updated Date: Oct 08, 2019 14:24:11 IST