IndiGo’s promoter shareholders blame each other for corporate governance irregularities

Oops! It seems like a bad year for Indian aviation, where airline after airline seems to be going for “let’s have something go wrong for us” as the trend of the season. Air India has been in a financial mess and living on a dole forever, Jet Airways has sort of all but wound up, SpiceJet is sort of under fire from DGCA for security lapses, GoAir is without management of sorts. One airline which has made up for the others has been IndiGo. It mostly has had a straight growth over the years, with the big bang growth making them reach 50% market share in the domestic market and the second-largest airline in Asia.

However, over the past few months, there has been brewing trouble in IndiGo as well. There has been a spat amongst the IndiGo promoters, which were first spoken about in May 2019. IndiGo is about 38% owned by Rahul Bhatia through his company InterGlobe Enterprises Limited and about 37% owned by Rakesh Gangwal and his family plus trusts, making it almost equal ownership for both of them. Subsequently, both of them lawyered up. At that time, I wrote in Firstpost that, Rift between promoters Rakesh Gangwal and Rahul Bhatia makes airline miss out on opportunities.

We did not hear much of it over the past couple of months, except a CNBC interview with the CEO, which clarified that it was an administrative issue between both of the promoters, and should be soon clarified. You can read the whole interview here, but it for the first time touched upon the issue, which was about the provision of other services from InterGlobe to IndiGo, in corporate parlance known as related party transactions.

Today, things took a serious turn when IndiGo asked for the intervention of the capital markets regulator SEBI to fix the issues they have amongst themselves. The first letter came from the side of Mr Gangwal, which you can read here in full. What it talks about are some very interesting points. I’ll jot down a few below. First, he accepts that he signed over various rights to InterGlobe during the founding stage of the airline.

Rooted from a deep trust built over a decade long friendship and with no desire on my part to have any meaningful control of the Company, I entered into a shareholders’ agreement that allowsBhatia unusual controlling rights over IndiGo. Bhatia has the right (i) to appoint 3 out of 6 directors of IndiGo; (ii) that requires that “The Chairman of the Board shall be appointed on the nomination of the IGE Group … ” ; (iii) to nominate and appoint the Managing Director, (iv) to nominate and appoint the CEO; and (v) to nominate and appoint the President. These controlling rights give IGE Group, a minority shareholder, significant influence over the decisions of IndiGo and there is nothing wrong in that by itself, provided such influence is used judiciously and with prudence and is in the best interest of the Company.

Mr. Gangwal’s letter then goes on to list various issues he has with the current way things are operating:

  • Violations of various corporate governance regulations prescribed by SEBI and violations of the Company’s Code of Conduct for Directors and Senior Management.
  • In a split vote, the Board taking the decision to not allow an Extraordinary General Meeting of shareholders (EGM) upon being requisitioned by shareholders with approximately 37% of shareholding in the Company and also refusing to cooperate and provide the necessary information for the requisitionists to conduct the EGM themselves despite this right being available under law.
  • Board decisions and resolutions on critical matters being implemented without basic governance protocols and laws being followed.
  • Significantly diminishing and taking away the authority vested by SEBI to the Nomination and Remuneration Committee (NRC) for identifying persons who may be appointed in senior management. This was done by pushing through a Board resolution that now gives IGE Group the right to identify and screen the candidates for Managing Director, the Chief Executive Officer and the President of the Company. And, also the right to propose to the NRC the appointment, the job profile, qualifications and remuneration of such candidates and require the Company’s HR organization to provide all necessary support to the IGE Group on these matters.
  • IndiGo has since its inception had an “independent director” as its Chairman. However, the provision in the articles of association stating “The Chairman of the Board shall be appointed on the nomination of the IGE Group … ” has the real potential to take away the independence of the Chairman. It has been a common practice at IndiGo that IGE Group nominates or “recommends” a single person for appointment as IndiGo’s Chairman and, from this candidate pool of only one person, that individual is then appointed and designated as an “independent director”. While we aren’t questioning the independence of the current Chairman in his decision making, we are questioning the designation of such an individual as “independent”. This process of appointing an “independent Chairman” at IndiGo is the classic “Hobson’s choice” and a sophisticated way to circumvent SEBI rules and avoid the requirement of designating such a Chairman as non-independent which would then have required IndiGo to have a majority of Directors to be independent. It simply does not meet the requirements and spirit of the regulations prescribed by SEBI.
  • Not having appointed an independent woman director, a requirement that SEBI gave time to the Company since May 2018 to comply.

To simplify this for you, the chief grief that Mr Gangwal is pointing at is how he has signed away rights to major management appointments to InterGlobe which has, through various layers of legalese, taken over most of the rights to appoint key management personnel and the board of the organisation, hence, putting them in a position to side with InterGlobe on key issues.

Rahul Bhatia, the other promoter has not minced words as well.

I have highlighted in previous correspondence that the genesis of Mr. Gangwal’s angst lies elsewhere – the refusal of the IGE Group to succumb to his unreasonable demands to dilute the IGE Group’s controlling rights; and the hurt ego of Mr. Gangwal on realizing that upon his refusal to lend his hand in the Company’s ongoing negotiations with Original Equipment Manufacturers (OEMs), the Company had proceeded to make alternate arrangements for the  purpose. In hindsight however, the Company will remain eternally grateful to Mr. Gangwal for having attempted to hold the Company’s business to ransom (by purposely delaying the ongoing negotiations with OEMs), as this paved the way for the Company to institutionalize an area of operations which Mr. Gangwal had kept as his exclusive preserve (to serve his far-sighted motive which has now become abundantly evident).

It has been Rakesh Gangwal’s brainchild in the past to put out big orders to Airbus to get the best deal possible, and a good deal in the airline business is worth millions of dollars. IndiGo is a marquee customer for Airbus, and they collect a plane a week from Airbus, if not more. So, this is a serious blow if true that he is out of the negotiations for more aircraft. Further, Mr Bhatia alleges that all the proposals of Rakesh Gangwal were self-serving, sort of, to make sure that he could find his way out of the parts of the governing arrangement that were not suitable to him.

The letter of Rahul Bhatia goes on to paint Rakesh Gangwal as a sort of a freeloader, for the lack of a better word that comes to mind.

So, here is a man who: (i) took full advantage of the situation and the opportunity offered to him 14 years ago, when he was generously allotted 50% equity; (ii) did not mind that the IGE Group was taking the entire economic risk, which at peak exposure (between redeemable preference shares, unsecured loans, and personal guarantees) was in excess of INR 1100 crores (almost six folds the IGE Group’s contractual obligation of INR 200 crores in the understanding with Mr. Gangwal); (iii) happily agreed to the fundamental proposition that the IGE Group will have control; (iv) obliged himself to support the IGE Group in maintaining control through a voting rights agreement embedded in the SHA and in the AoA of the Company; (v) with great delight (since he was going to make a ton of money) he actively participated in the IPO -at which stage he once again agreed that the IGE Group would retain control – a disclosure made in the prospectus; (vi) did not raise for 13 years a whisper against any RPTs; (vii) year after year, signed and approved annual accounts without raising any objections; (vii) now at his conveniences dismisses as “Unusual” the controlling rights of the IGE Group which are part of the fundamental architecture on which the Company was founded; (viii) shied away from taking a position on the Board of a start-up being scared of liability in a highly regulated sector; (ix) now claims to be a guardian of corporate governance. Alternate facts are easy to construct. Truth hurts.

My mind blows at reading this because this just sounds so childish as well. Basically, I am sure Rakesh Gangwal brought something to the table that Rahul Bhatia was going to give him 50% equity in his company, seemingly as sweat equity. And this sounds like now they are having a slugfest in public where no one will spare any potshots at the other.

I have to be honest, I stopped reading after page 40 and just skimmed through it after, but this looked like a match to decide who had more say in the company.


I do expect that this will be dragged over a period of time, taking the airline’s eye off its ball as its promoters fight out for one-upmanship in the courts and now amongst the media, regulators and public. I just hope they are able to end it quickly and firmly, given India could do with one more airline not losing its path.

What do you make of the current situation with the IndiGo promoters’ spat?

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