Prism, the parent company of OYO, has disclosed its protracted legal battle with Zostel Hospitality Private Limited as a material risk factor in its draft red herring prospectus (DRHP), filed ahead of a proposed initial public offering (IPO). The company has warned that an adverse final ruling could compel it to issue or transfer up to 7 per cent of its shareholding — or pay an equivalent monetary value — to Zostel and certain other parties.

What the DRHP Discloses

In the draft prospectus, Prism stated that any unfavourable outcome in proceedings involving Zostel 'may materially and adversely affect our business, reputation, prospects, results of operation and financial condition.' The disclosure flags both reputational and financial exposure at a critical juncture — as the company prepares to tap public markets.

The company has explicitly warned prospective investors that a non-appealable court order in Zostel's favour could trigger the issuance or transfer of up to 7% of Prism's shareholding, or a payment of equivalent monetary value, in accordance with court directions.

Origins of the Dispute

The legal conflict traces back to a non-binding term sheet signed between Prism, Zostel, and certain other parties for the potential acquisition of Zostel's business by Prism. According to the DRHP, the proposed transaction never materialised.

Zostel has claimed it fulfilled all its obligations under the term sheet and alleged that Prism failed to complete the acquisition process. Prism, however, has firmly disputed this position, maintaining that the term sheet was exploratory and non-binding in nature. The company contends that no definitive agreements were executed, several commercial terms remained unresolved, and no part of Zostel's business was ever transferred to Prism.

Arbitration and Court Proceedings

An arbitral tribunal previously ruled that the term sheet was binding — a finding that went against Prism's position. Prism challenged the award before the Delhi High Court, which subsequently set aside the arbitral award on the grounds that it was in conflict with the public policy of India.

Zostel then filed an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 before a Division Bench of the Delhi High Court. That appeal remains pending, leaving the dispute unresolved ahead of Prism's planned market debut.

Why This Matters for the IPO

A potential 7% stake transfer is a significant overhang for any company approaching public markets. For Prism — which has spent years restructuring OYO's business and returning to profitability — the Zostel litigation introduces a variable that institutional investors will scrutinise closely during the book-building process.

Notably, this is not the first time the Zostel dispute has shadowed OYO's market ambitions; earlier IPO attempts were also complicated by the unresolved legal proceedings. The matter's outcome before the Division Bench will be closely watched by both the hospitality sector and the broader startup ecosystem as Prism advances its listing plans.