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

FP Staff

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.

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

Also See: OYO to raise $1.5 bn in Series F funding; money to be used for expansion in US, strengthening vacation rentals business in Europe

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