Banks Want to be Paid Out of Essel Non-Compete Fee

The proposed merger deal between Zee and Sony could run into rough weather and the bone of contention is the non-compete fee that Sony will pay to Zee promoters. It is likely that the banks who have lent to the Essel group companies could insist that the Essel group loans be repaid out of this non-compete fee of Rs.1,100 crore. There are a slew of banks and NBFCs that need to vote on the Zee Entertainment deal as creditors.

As of now banks have not clarified if they would use the vote of creditors as a bargaining chip to ask Subhash Chandra to part with some of his non-compete fee. The non-compete fee will allow Chandra and the Essel group to enhance their stake in the post-merger equity to nearly 4%. With the possibility that the banks may insist that the Essel group pay them first out of the non-compete fee, there could be trouble in getting the deal approved.

Now the problem is that the structure is a lot more complicated. For example, banks like IndusInd Bank, Axis Finance and Yes Bank have given loans to several privately held firms controlled by Subhash Chandra. Some of these loans were also backed by Chandra’s personal guarantees, apart from pledging the shares of some of its listed entities. That means, the lenders do have an option to demand their loans repaid first.

Typically, extant laws allow the lenders to move a petition before the NCLT asking that the non-compete money paid by Sony to the promotes be used to repay lenders. For this to be successful, all the creditors will have to jointly approach the NCLT and make a case. For instance, one way is to seek an escrow arrangement in which the non-compete payment paid by Sony to promoters would be deposited in an escrow account to repay banks.

There has already been some steps taken in this direction. For instance Axis Finance has sent a legal notice to Zee and its promoters demanding repayment of Rs.146 crore. Axis Finance has also threatened to oppose the Zee-Sony merger if the Essel group did not repay their loan on time. However, the Zee group continues to insist that Zee is a separate legal entity and hence the dispute of private entities will not impact the Zee Sony merger.

Sony will pay the non-compete fee directly to Essel Mauritius, an offshore subsidiary. One thing the lenders can do is to petition the NCLT not to approve the merger till the dues are cleared. Chandra had made a statement that 91% of the loans taken by Essel group had been repaid. The latest developments bring these claims into question.

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