On July 19, IndiGo Airlines — the country’s largest carrier — declared its June 2019 quarter results. It was a standout performance with the airline’s profit (₹1,203 crore) up nearly 43 times compared with the year-ago period. Many factors helped the stellar show — big capacity expansion, strong pricing power aided by the grounding of competitor Jet Airways, benign costs, especially that of fuel, and a low base effect. It was the highest ever quarterly profit reported by the airline — that has gone from strength to strength since its inception in 2006 to now corner about half the domestic skies.
But the mood at the company was hardly celebratory — overshadowed as it was by the no-holds-barred slugfest between its promoters, Rakesh Gangwal and Rahul Bhatia. The Rakesh Gangwal group owns 36.68 per cent in the airline, while the Rahul Bhatia group with 38.26 per cent owns a little more; the rest is held by public shareholders.
That not all is well between the promoters was known for some months, and the two have reportedly appointed lawyers to negotiate. But the scale of the discord and the extent of the bitterness revealed by the documents submitted by Gangwal to the bourses earlier this month aggravated the crisis. The allegations of violation of corporate governance norms and irregularities in related party transactions levelled by Gangwal meant that the gloves were truly off. IndiGo was being run worse than a paan ki dukaan , suggested Gangwal. Bhatia hit back hard and accused Gangwal of levelling false allegations to escape agreed obligations and gain more control.
The fight is getting uglier
Despite its only slightly higher shareholding than the Gangwal group, the Bhatia group has the major say in the appointment of the top brass and in the day-to-day operations of IndiGo. This is due to a shareholder agreement and related provisions in the company’s Articles of Association (AoA). While this chugged along fine for years, it has now become a bone of contention.
Due to the shareholder agreement and provisions in the AoA, the Gangwal group is forced to lockstep and vote along with the Bhatia group on the appointment of Directors. Gangwal says that this bestows unusual rights to the Bhatia group — a fallout of which are the irregularities in related party transactions, and other corporate governance violations. Even after most of the provisions of the current shareholders agreement expire in November, these rights will continue since they have been embedded in IndiGo’s AoA, says Gangwal. A change in this will need the approval of shareholders holding at least 75 per cent in the company.
The Bhatia group has the power to block changes it may deem unfavourable. So, Gangwal has gone public and has petitioned the SEBI, Ministry of Corporate Affairs and the Prime Minister’s Office. He is seeking safeguards for the related party transactions so that they are not misused, and is also seeking to do away with provisions in the shareholders agreement and AoA that bestow unusual rights on the Bhatia group.
Rahul Bhatia has not taken this kindly to this. The related party transactions, he says, are in order, as confirmed by an independent review by EY, which has only flagged off certain procedural lapses. These transactions are also not material to the airline’s revenue, he contends. The shareholders agreement, Bhatia says, is an outcome of an arrangement which recognised that the major financial risk in IndiGo in its fledgling days was taken by the Bhatia group. Meanwhile, Gangwal was in safe harbour with minimal financial risk and was missing in action, alleges Bhatia. In short, Bhatia seems to be in no mood to relent on the changes.
Reconciliation seems remote
One concession was made last week. As sought by Gangwal, the Board of Directors has decided to amend the company’s AoA to expand the Board up to a maximum of 10, including four independent directors. This will likely include at least one independent woman director, whose absence currently is a violation as pointed out by Gangwal. At present, IndiGo’s board has six members including Bhatia and Gangwal, and former SEBI chief M Damodaran as Chairman. While this is a small step forward, the major areas of dispute between the promoters including allegations over corporate governance, unusual rights, and related party transactions remain unresolved. Interestingly, while the Bhatia group claims that the EY report has given it a clean chit on related party transactions, IndiGo has not made public the contents of the report.
Reports suggest that the recent order placed by IndiGo for CFM engines was seen as the last straw by Rakesh Gangwal. Engine orders for IndiGo’s planes were traditionally Gangwal’s domain, and the company so far had gone with Pratt and Whitney engines. As the dispute between the promoters simmered, Bhatia seems to have decided to take over this key function. According to reports in the past few weeks, the Bhatia group plans to question Gangwal about ‘exclusive parleys’ that he had with Pratt and Whitney, implying some wrongdoing on that front.
Going by the contents and the tone of the public exchanges, the chances of reconciliation between the parties seem remote. While it may be business as usual for IndiGo in the near term, the company’s medium- to long-term decision-making, strategic direction, and execution of ambitious expansion plans, including international routes, risks being impacted by the dispute. The possibility a long-drawn war of attrition between the promoters will hit both tactical operations and long-term strategy at the airline. It does not help that competitors such as SpiceJet are also on a rapid expansion spree.
Beyond the tussle
IndiGo also runs the risk of getting ensnared with the regulators and the government over the alleged corporate governance lapses. The company is said to have responded to SEBI regarding Gangwal’s allegations and is expected to respond to the Ministry of Corporate Affairs too. Meanwhile, these entities have reportedly started digging into the allegations of governance lapses and violations.
It is important that SEBI and the Corporate Affairs Ministry investigate and address the uncomfortable questions raised by the high-profile feud. Given that IndiGo is a listed company, the interests of thousands of public shareholders are at stake.
As the dispute is also about fundamental corporate governance norms, many questions need to be addressed. One, were the related party transactions in full compliance with the Companies Act and SEBI norms? Two, what is the legal sanctity of the shareholder’s agreement entered into between Gangwal and Bhatia that effectively gives the latter unusual, and persisting control and influence over the airline’s management? Three, can the articles of association have clauses that perpetuate such control and influence? Four, did the management underplay the extent of the dispute between the promoters and keep shareholders in the dark? There has been much destruction in shareholder value since the outbreak of the hostilities. Five, what is the nature and implication of the “exclusive parleys” that Gangwal is reported to have had with engine provider Pratt and Whitney?
Connecting all these questions and others that could arise in the coming days is a common thread — was the interest of non-promoter shareholders compromised at any stage? This is not something to be taken lightly. The matter now goes well beyond the promoter battle.