Mint Explainer | OYO’s IPO-linked bonus shares: Why many investors are unhappy

The announcement comes as the hospitality firm makes a third attempt to go public and resumes talks with Indian and global investment banks for listing by the end of this financial year (FY26).

What exactly does OYO offer?

On October 29, OYO sent a postal ballot to its shareholders announcing the issuance of compulsorily convertible preference shares (CCPS), a special class of shares that will later be converted into regular equity.

Unlike a typical 1:1 bonus issue, OYO’s offer gives one CCPS for every 6,000 shares held. Investors were presented with two options: a default, low-reward option or an IPO-linked, high-reward alternative.

The response interval was unusually short; only three business days; If no action is taken after this period, the system automatically uses the cautious option as the default.

OYO said the structure was designed “to reward existing shareholders”. Under the Companies Act 2013, companies can issue bonus shares (equity) by capitalizing reserves or securities premiums. But in this case, OYO is issuing preference shares which are mandatorily convertible into equity capital; this is a more complex vehicle rather than the typical “free stock” route.

The company said the structure was designed “to reward existing shareholders.” Under the Companies Act 2013, companies can issue bonus shares (equity) by capitalizing reserves or securities premiums. But in this case, OYO is issuing preference shares which are mandatorily convertible into equity capital; this is a more complex vehicle rather than the typical “free stock” route.

“There is no clear precedent in India for bonus shares tied to the appointment of an IPO banker,” said Ankit Jain, partner at Ved Jain and Associates, a law firm.

How do the two classes of CCPS differ?

Under Class A (default), each CCPS is converted into a single share of stock, offering a simple, low-risk outcome for those who do not trade at all.

However, Class B (option to participate) is directly tied to OYO’s IPO progress. Each CCPS will convert into 1,109 equity shares, potentially giving it a huge raise if the company appoints merchant bankers for the IPO in FY26. If the IPO does not go forward, each CCPS will turn into just 0.1 shares, leaving investors with almost no value.

Essentially, Class B is a high-stakes bet on whether OYO will go ahead with its IPO plans in the current financial year. If the listing process begins on time, this could mean a significant windfall for those who sign up.

The company did not provide a basis for arriving at the conversion rate.

Such steps are common before an IPO to simplify complex shareholding structures created through multiple rounds of financing. OYO has accumulated various classes of shares with different rights; This move will likely help simplify the cap sheet, reset its par value and create a cleaner equity base before listing.

However, Rohit Jain, managing partner of Singhania & Co., a law firm, said, “An extreme conversion ratio of 1:1.109 is likely to be negotiated to produce a specific economic outcome (a very large increase in IPO success) and not an arithmetic ‘nominal reset’ per se.”

Why did the proposal receive criticism?

The structure attracted attention for two main reasons: timing and asymmetry.

First, the email notification was sent late on the night of October 29, leaving investors with just three business days to read and respond to the 50-page document outlining the terms. For most retail investors, this was too little time; This encouraged many shareholders to voice their concerns on social media, calling the timeline unfair and the structure confusing.

Second, the difference between the two options (potentially 1,109 shares versus one share) created a large gap in potential outcomes. This sharp asymmetry, combined with the short notice period, may favor insiders or sophisticated investors with prior knowledge of the structure, while smaller shareholders may risk missing out on the opportunity altogether.

Unlike completing an IPO (which depends on regulatory approval and market conditions) or financial performance measurements (which depends on business operations), banker appointment is a simple contractual step that management controls.

“This turns the ‘bonus’ into a loyalty test or insider quiz rather than a genuine shareholding reward,” said Ankit Jain.

“This is primarily a matter of disclosure and investor protection… but it is also a red flag for corporate governance because the transformation depends on an action controlled by management and if the process/authority is not transparent and not properly approved, it can have highly asymmetrical consequences for small shareholders,” said Rohit Jain.

How did OYO react?

Following the pushback, OYO on Sunday announced that the deadline had been extended by a week from November 1 to November 7, giving investors more time to make their selection.

The company also issued statements to reassure the market that neither founder Ritesh Agarwal nor the SoftBank Group companies will be eligible for the bonus CCPS issuance.

OYO described the move as an effort to reward long-term shareholders who continue to invest in the company during its private phase and continue to believe in the company’s plan to go public.

Why tie a bonus share to an IPO?

OYO described the move as an effort to reward long-term shareholders who continue to invest in the company during its private phase and believe in its plan to go public.

On the one hand, it aligns investor incentives with an effort to revive the company’s IPO; It rewards those who continue to support the company as it prepares for its next phase of growth. On the other hand, it serves as a sign of confidence, implying that the company expects concrete progress on the IPO front soon.

Still, tying shareholder rewards to vague corporate milestones such as the appointment of IPO bankers is unusual and reflects the creative but risky financial structuring often seen in pre-IPO stages.

What happens next?

The revised deadline of November 7 gives shareholders a little more breathing room, but the real story will emerge over the next few months. If OYO successfully moves forward with its IPO process, the bonus CCPS could become a rare example of pre-listing value creation.

Otherwise, the structure risks increasing investors’ uneasiness about the company’s management and scheduling discipline.

Where does OYO stand in its IPO journey?

OYO is gearing up for its third IPO attempt and is resuming talks with Indian and global investment banks for a potential $7-8 billion listing. The company has raised over $3.5 billion from investors including SoftBank, Peak XV Partners, Lightspeed, Airbnb, and Microsoft; It financed rapid growth but left a heavy debt burden.

OYO reports first full-year profit in FY25 ₹244.8 crore, revenue up 16%, largely driven by tax credits and one-time gains ₹6,252.8 crore. India business contributed ₹1,255.6 crore, muted growth of 4% and financing costs ₹959.16 crore continued to put pressure on margins.

While the profit is symbolic, it underscores that business performance remains fragile despite headline developments.