The PhonePe-Affle Fight Over OSLabs
The digital payment service PhonePe, operated by Flipkart Online Services Pvt., is demonstrated during an arranged photograph in Bengaluru, India. (Photographer: Samyukta Lakshmi/Bloomberg)

The PhonePe-Affle Fight Over OSLabs

There’s an intense, high-stakes cross-border love quadrangle playing out in the startup world. It involves one target company, one new suitor, one miffed investor and other venture investors. While the Singapore courts are main adjudicators, to make it more interesting, Securities and Exchange Board of India has been dragged into it as well — to decide on, of all things, fiduciary duties of an alternative investment fund.

Let's rewind a bit.

Singapore-based OSLabs Pte Ltd. is the owner of Indus OS, a mobile platform that claims to have over 100 million users and over a billion app installs. Its investors include Omidyar Network, Samsung Venture Investment, JSW Ventures, Ventureast and Affle Global Pte.

OSLabs is being wooed by PhonePe Pte Ltd. but investor Affle Global is resisting the match.

Even before PhonePe could take its relationship with OS Labs to the next level, the Singapore High Court has asked it to take it slow. On June 18, the high court granted an interim relief in Affle Global’s favour, restricting any transfer of OSLabs’ shares to PhonePe.

The Love Triangle: How It Started

Earlier this year, Walmart-owned PhonePe sought to acquire OSLabs by buying out the founders, a few investors and through the purchase of fresh shares to be issued by the mobile platform company. It claims to have acquired 31.8% so far.

But Affle Global has opposed the deal.

Affle Global describes PhonePe’s acquisition effort as “aggressive corporate tactics to push for low balled valuations to the detriment of existing shareholders,” in an email statement to BloombergQuint.

PhonePe has valued OS Labs at $60 million, Affle Global says it's worth over $90 million.

Affle Global claims OSLabs' early investors, including itself, have the right of first refusal to buy the founders' shares, which was violated when founders agreed to sell to PhonePe.

On June 18, the Singapore High Court invalidated the resolutions by OSLabs approving its acquisition by PhonePe. BloombergQuint has reviewed a copy of this order.

The high court has also granted an interim injunction restricting OSLabs from registering any further share transfers or taking any action on the acquisition by PhonePe. OSLabs has been directed to convene a general meeting to vote on the proposed acquisition. The high court has disallowed PhonePe from voting in the general meeting, until its stake in the company is validated in the pending arbitration proceedings.

While it may seem like Affle Global has won the first legal round, PhonePe hasn't given up yet. It has in turn disputed Affle Global's 23% shareholding in OSLabs.

The Ventureast Angle

As per Affle Global's account, on May 6, Ventureast Proactive Fund-II, an alternative investment fund registered with SEBI, sold it a 15% stake in OS Labs - taking Affle Global's shareholding to 23%.

PhonePe is contesting this acquisition on grounds that it had a deal underway with Ventureast and that by selling to Affle, the fund violated contractual obligations with PhonePe.

Typically, no-shop clauses or exclusivity clauses are standard to a term-sheet, Kosturi Ghosh, partner at Trilegal, said while explaining how deals are often done. These clauses prevent the parties to the agreement from discussing or entering into similar contracts with others during the period for which it is in operation, she said.

Mostly, the no-shop clause is binding. But once the exclusivity period is over, the parties can permissibly engage with third-parties as well. So in that sense, a term sheet does not by itself create any binding obligations on the parties after the term of the exclusivity has expired.
Kosturi Ghosh, Partner, Trilegal

If a party wrongfully sold the shares while it was under another contractual restriction, then it can be alleged that the sale was null and void, Tejesh Chitlangi, senior partner at IC Universal Legal, elaborated.

But courts would be cautious in declaring such cancellation if a third-party has otherwise genuinely acquired them without knowledge of the deficiency. The situation will get even more interesting if Affle Global has a right of first refusal on the founders’ shares as claimed by it.
Tejesh Chitlangi, Senior Partner, IC Universal Legal

Why SEBI Features In This Story

PhonePe has challenged this alleged breach of contractual obligations by both Affle and Ventureast before the Singapore High Court.

More interestingly, PhonePe has also sought SEBI's intervention. On grounds of a fund's fiduciary duties.

“PhonePe has now approached SEBI to look into these gross ethical violations and dereliction of VPF’s [Ventureast] fiduciary duties to protect the interests of OSLabs, its investee company” – PhonePe.

As recently as May 5, SEBI has introduced a Code of Conduct in its AIF Regulations, whereby fund managers and its key personnel have been directed to maintain ethical standards and deal fairly with investee companies.

The idea of the code is to ensure that governance standards are maintained at the portfolio entity level too as this will ultimately impact the returns to investors in the AIF, Chitlangi said.

Though PhonePe is not an investor in the Ventureast AIF, nothing stops them from alleging such a violation, he said.

If SEBI believes that it’s more of a shareholders’ dispute, considering the fact that the concerned fund’s investors or the portfolio entity have not filed a complaint, it may abstain from taking an action for the time being. SEBI would be careful in creating this kind of precedent.
Tejesh Chitlangi, Senior Partner, IC Universal Legal

But if the alleged regulatory violations appear to be potentially serious, then SEBI may be inclined to take an independent action for breach, Chitlangi said.

As Affle Global and PhonePe slug it out, in Singapore and Mumbai's Bandra Kurla Complex — OSLabs' future hangs in the balance.

The next episode in the startup saga will play out on July 15 at the OSLabs shareholder meeting.

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