In the bright story of India’s startup success, OYO Hotels has been a bright star in the hospitality industry. Ritesh Agarwal started the company when he was hardly a teenager, and it became a darling of investors and made the nation proud soon. But, like the neatly stacked pillows in a hotel room that look good until you actually use them, OYO’s bright exterior hides some uncomfortable realities. The recent scandal over fake bookings and GST issues is just another page in what seems to be a disturbing story.

Recent events in Jaipur have put OYO in trouble once again. Samskara Resorts has filed a police complaint against OYO, its CEO Ritesh Agarwal, and others on serious charges including cheating, breach of trust, forgery, and criminal conspiracy. Why was this legal notice issued?

A GST notice seeking Rs 2.66 crore from the resort, on the basis of what they allege to be “inflated” bookings reported by OYO. According to the complaint, whereas the actual business generated through OYO was only Rs 10.95 lakh (for which the resort had paid tax), the booking portal reportedly reported Rs 22.22 crore worth of transactions—giving any small business owner nightmares.

If these allegations were an isolated incident, one might assume that it was merely a mistake or a misadventure. But as Husain Khan, the president of the Hotel Federation of Rajasthan, explains, roughly 20 hotels have received identical GST notices on the basis of allegedly erroneous numbers from OYO. This is a pattern which indicates that perhaps there is something more amiss. It becomes more complicated when we consider that this is not the first time that OYO has had issues with its hotel partners—four years ago, 125 hotels in Rajasthan openly announced that they would no longer accept OYO bookings, and the signs exhibited essentially said, “Thanks, but no thanks” to the platform.

This is similar to things we have seen in the history of business, where explosive growth comes before good practices. The East India Company started out as a trading company but was notorious for reorganizing local economies to show more profits to shareholders in England. Although the scale and context are very different, the overall idea of putting appearance ahead of truth is the same. In both situations, the numbers reported back home looked much better than what was actually happening.

More recently, we’ve witnessed the same thing happen at firms such as WeWork, whose founder Adam Neumann sold a vision of a revolutionary firm remaking the future of work, only to have investors subsequently discover that the emperor’s new clothes were actually invisible. The pattern is the same: young charismatic founder, explosive growth, stratospheric valuations, and then—cracks in the foundation start to appear.

OYO’s ride has been a rollercoaster. It began in 2013 as a humble platform to list affordable accommodations and evolved into a huge hotel chain worth billions of dollars. Ritesh Agarwal became the face of young Indian entrepreneurial success—young, ambitious, and unstoppable. Global investors, such as SoftBank’s Masayoshi Son, were impressed with Agarwal’s vision and invested heavily in OYO. The company expanded rapidly to other nations such as China, the US, and Europe and became one of India’s most valuable startups.

But as the saying goes, “Marry in haste, repent at leisure.” OYO soon after entered into deals with numerous hotels in numerous countries, and this began to give rise to issues. Instances of unpaid bills, unauthorized amendment of contracts, and secret charges were reported. Hoteliers in numerous cities complained of what they perceived were questionable business practices. OYO’s vulnerabilities were laid bare during the COVID-19 outbreak, and the company had to lay off thousands of employees worldwide and scale down its operations.

The current allegations are especially troubling as they could ruin small business entrepreneurs. Hotel owners like Madan Jain of Samskara Resorts are not multinational companies with plenty of cash and many lawyers. They are generally small and medium-sized enterprises with very small margins. An abrupt tax notice requiring crores of rupees could lead to financial destruction for such businesses. It’s like being presented with the bill for a costly meal you never ate or ordered—this would infuriate even the most laid-back individual.

The case points up a larger issue with the platform economy. Platforms tend to think of themselves as only middlemen arranging the connection between consumers and service providers. But they tend to control prices, terms, and information. This imbalance of power can cause problems when the intention of the platform differs from that of service providers depending on them. As one hotelier put it, “We thought we were marrying a supportive spouse, but it feels more like we’ve been hitchhiked for a ride.”

The hospitality industry has undergone quite a lot of changes across the decades. While Howard Johnson redefined the nature of people experiencing America’s roadside hotels during the mid-20th century and when budget chain hotels like Holiday Inn brought their destinations within traveling reach, it was not quite smooth sailing for everyone. Nevertheless, the changes favored all who were involved—the travelers had enhanced choices, hotel owners had extended clients, and the corporations garnered their share.

The question around OYO is whether its business model actually benefits everyone or whether its expansion is harming its partners. The allegations of fraudulent bookings are a matter of concern. If the allegations are genuine, it would imply that the company is inclined to alter reality to pretend to be growing. That is likely to impress investors for some time, but it builds a business that is not strong but temporary.

This is not the first time OYO has faced legal woes. In 2019, the Competition Commission of India (CCI) began investigating complaints of unfair trade practices by OYO and MakeMyTrip. Hoteliers in dozens of states in the country have accused the company of breaching contracts and failure to pay due money. The company has never wavered in its argument that it has not done anything wrong, basing its argument on the fact that most of the complaints arise from expanding issues and misunderstandings.

Its greater implications for India’s startup ecosystem are significant. OYO is a representation of Indian business success—a domestic player that has grown very wealthy and competes on a global stage. Its fall could affect not only its own enterprise but also how others perceive Indian startups overall. As one venture capital investor astutely observed, “The problem isn’t that companies face challenges—that’s normal. The problem is when they refuse to acknowledge and address those challenges transparently.”

What follows will be keenly observed by hotel owners, investors, and the business community at large. Will OYO address these allegations immediately and alter its business methods? Or will it continue to treat these as isolated incidents while continuing business as usual? The company’s reaction will tell us a lot about its long-term success and principles.

For those accustomed to the convenience and affordability that OYO offers, these problems remind us that new business concepts can come with a price tag. The low tariff for the room might look appealing, but if it is built on unsustainable models, the real cost could be much higher than what appears in the confirmation of booking.

As the legal process unfolds, one thing is certain: India’s hospitality sector is at a crossroads. The traditional model of operating standalone hotels is being rapidly replaced by technology that is more advanced and expansive. But, as the saying goes, “The devil is in the details”—or, more likely, perhaps in partnership deals and guest records fine print.

OYO’s tale may still have a redemptive final act. There are numerous successful companies that have faced severe challenges and come out stronger for having battled and emerged victorious through them. But this will require more than crisis management—it will require a fundamental reexamination of how the company weighs the interests of all its stakeholders: investors, hotel partners, employees, and customers.

With OYO back in the news, the question is:

Is this merely another hurdle for a game-changing company, or does it suggest that the Indian hospitality leader, OYO has a thing or two to pick up on when it comes to hospitality? In the hospitality sector, one informs the customer that they are not always right, but if you pay too little heed to their grievances, you might well find yourself with a lot of empty beds.