The battle for control of IndiGo, the country’s largest airline by market share, escalated on Tuesday with US-based promoter Rakesh Gangwal firing off a letter to market regulator Sebi in which he accused fellow co-founder Rahul Bhatia, the existing management and the board of directors of severely undermining corporate governance standards.
“Various fundamental governance norms and laws are not being adhered to and this is inevitably going to lead to unfortunate outcomes unless effective measures are taken today,” Gangwal said in his letter to the market regulator. Copies of the letter were also sent to the Prime Minister, finance minister and the civil aviation ministry.
Sebi has asked the airline to furnish its response to Gangwal’s charges by July 19.
The battle at IndiGo comes within months of the collapse of Jet Airways and has the potential to change the pecking order in the airline industry.
Trouble at the airline has been brewing for close to a year after Gangwal raised questions about certain related party transactions between IndiGo and entities belonging to Bhatia’s IGE group.
Gangwal and his affiliates hold around 37 per cent in the airline while Bhatia and his associates hold 38 per cent.
The squabble between the two partners erupted into a full-scale battle after Gangwal’s request for an extraordinary general meeting to discuss the affairs of the company was turned down by a 4:2 vote at a board meeting on June 12.
“We believe that this whole set of events goes far beyond just poor governance and even a “paan ki dukaan” would have handled these matters with more grace,” he added.
The US-based promoter of IndiGo said he wrote the letter to the market regulator after the demand for an EGM to discuss issues relating to these transactions was turned down.
Question of rights
Under a shareholders’ agreement between the two founders, Bhatia enjoyed control of the airline’s affairs and the rights to appoint three out of the six directors of the board, nominate the chairman of the board and pick the managing director, the chief executive officer and the president of the airline.
The shareholders’ agreement between the two partners, which expires later this year, enjoins Gangwal to vote on all resolutions along with Bhatia’s IGE group.
“These unusual rights survive even after this coming November when most of the provisions of the current shareholders’ agreement expire, since, these rights remain embedded in the articles of association of IndiGo and will continue to survive unless the articles are amended by a vote of shareholders holding more than 75 per cent shares,” Gangwal said in his letter.
Gangwal said Bhatia, whom he described as a “long-time friend”, had contended that “these rights flow from the shareholders’ agreement and were disclosed in the prospectus at the time of IndiGo’s IPO in 2015. However, times, circumstances and behaviour of promoters have changed since 2015.”
“Such unusual rights for a minority shareholder need a fresh look in light of the facts that IndiGo is now a critical national asset, serves almost 50 per cent of the domestic air travellers, the aviation industry in India has regrettably experienced a checkered and difficult financial history and, especially, in the context that these unusual controlling rights seem to be the basis for the various violations of law and governance at IndiGo. The nation can ill afford IndiGo to ever falter,” the letter added.
“I have vigorously attempted for almost a year to persuade the Company to shore up its governance standards, and all my attempts have been thwarted by the IGE Group,” Gangwal said.
He said the decision to question the related party transactions arose after some whistleblowers had the courage and wisdom to send information that allowed for this pursuit of almost a year. Without that information it may not have been possible to uncover some of the specifics and facts that formed the basis of the EGM requisition.
Gangwal, a former chairman and CEO of the now-defunct US Airways, has alleged that the related party transactions (RPTs) between IndiGo and the IGE group did not have the approval of the board and the audit committee and were often backdated. He claims that many of these transactions undermined the interests of the airline.
The former US Airways boss also said: “I hadn’t contemplated that over the years, Mr Bhatia would start building an ecosystem of other companies that would enter into dozens of related party transactions with IndiGo.”
IndiGo made regulatory filings with the bourses of Gangwal’s letter and the response of Bhatia and his cohorts to the charges through letters that were exchanged between the two sides as the battle raged outside public gaze.
The rebuttal
Bhatia and IGE contested the charges, saying that Gangwal was raising a “red herring” about RPTs to mask his own intention of gaining control of the airline.
It claimed that many of these transactions had taken place years ago and Gangwal and his representative on the board had signed off on them. These transactions had also been disclosed in the prospectus to the airline’s initial public offering (IPO) in 2015.
The IGE group said in its response: “Here is a man who:
- took full advantage of the situation and the opportunity offered to him 14 years ago, when he was generously allotted 50 per cent equity;
- 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 Rs 1,100 crore (almost six folds the IGE Group’s contractual obligation of Rs 200 crore under the understanding with Mr Gangwal);
- happily agreed to the fundamental proposition that the IGE Group will have control;
- obliged himself to support the IGE Group in maintaining control through a voting rights agreement embedded in the shareholders’ agreement and the Articles of Association of the Company;
- with great delight (since he was going to make a tonne 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;
- did not raise for 13 years a whisper against any RPTs;
- year after year, signed and approved annual accounts without raising any objections;
- 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;
- shied away from taking a position on the Board of a start-up being scared of liability in a highly regulated sector;
- now claims to be a guardian of corporate governance. Alternate facts are easy to construct. Truth hurts.”
In a letter written on June 12, Bhatia said Gangwal’s ego was hurt as the company proceeded to make alternative arrangements for original equipment manufacturers.
He also alleged that the Rahul Gangwal group wanted to relieve itself of its obligations under the shareholders’ agreement and articles of association and that the real agenda of the RG group was to dilute and diminish the controlling rights of the IGE group.
IndiGo itself is under the umbrella of InterGlobe Aviation, one of the units of InterGlobe Enterprises. Apart from aviation, the group also has interests in hospitality, airline management, travel commerce, advanced pilot training, aircraft maintenance engineering and real estate.
