IndiGo Promoter Dispute: All You Need To Know
An Airbus SAS A320 aircraft operated by IndiGo. (Photographer: Dhiraj Singh/Bloomberg)

IndiGo Promoter Dispute: All You Need To Know

Shares of InterGlobe Aviation Ltd. fell 20 percent on Wednesday morning after the airline company’s promoter Rakesh Gangwal accused co-promoter Rahul Bhatia of questionable related party transactions, and violations of governance regulations and the company’s code of conduct.

Here’s a quick summary of the promoter dispute, the battle points, the legal road ahead and the implications for IndiGo.

What's Gone Wrong?

Rakesh Gangwal has raised two key concerns

  • Questionable related party transactions between InterGlobe and Bhatia group entities.
  • Unusual rights that give Bhatia control over the board and that have led to governance failures.
In India there is a related party transactions ecosystem that has built around airlines which is not good in the long term and history has spoken to it.
Rakesh Gangwal To BloombergQuint


Read this for more on the key allegations and Gangwal’s letter to SEBI, Prime Minister, Finance Minister and others.


What Are These Related Party Transactions?

InterGlobe transacts with several companies owned by or connected to Rahul Bhatia for services ranging from ticketing to crew accommodation to simulation training. The value of these related-party transactions has increased from Rs 31 crore in financial year 2010-11 to Rs 315 crore in FY18, according to the company’s annual reports. The annual report for FY19 is yet to be published. To be sure, the transactions amount to just 1.3 percent of the airline’s revenue, but that’s almost double of the 0.8 percent in FY11.

Gangwal alleges several irregularities in these RPTs, ranging from lack of competitive bidding to lack of audit committee approval in some cases and backdating of contracts in others.

The InterGlobe board Chairman, M Damodaran, commissioned a review of RPTs by consulting firm EY earlier this year. Gangwal has questioned the scope of the review and its independence and thoroughness. He’s also asked why the EY report was shared only with the chairman and not the rest of the board.

He claims EY found procedural irregularities in the RPTs:

  • Some RPTs were not approved by audit committee
  • Some RPTs were executed before audit committee approval
  • Some RPTs were extended without audit committee approval

He claims that InterGlobe acknowledged that:

  • Numerous RPTs were done without seeking competitive bids
  • Third parties provided arms' length representations primarily to meet tax requirements
  • April 2016 onward, third party representations were done only for international transactions
  • "We have quite a few transactions that have been signed with retrospective effect".

Gangwal has sought an extraordinary general meeting of InterGlobe shareholders to enforce the company’s code of conduct regarding RPTs and to recommend new safeguards.

This story details what Rakesh Gangwal wants IndiGo shareholders to vote on.


The Control Issue

When the airline was founded, Gangwal with a 37 percent stake gave Bhatia, with a 38 percent stake, control of the board via several rights in the shareholder agreement that expires in October. But the rights will survive as they are embedded in the company’s Articles of Association.

  • Right to appoint three of six directors on board
  • Chairman shall be appointed on nomination of Bhatia
  • Right to nominate and appoint managing director, chief executive officer, president
  • Voting arrangement that requires Gangwal and affiliates to vote alongside Bhatia group on appointment of directors.

Gangwal claims these “unusual rights” are being abused to allow such RPTs and governance failures. He wants SEBI to review them and ask the company to amend its Articles of Association.

Read Rakesh Gangwal’s full letter to SEBI here.


The Rahul Bhatia View

Rahul Bhatia has denied any irregularities in the RPTs between InterGlobe and his privately-owned entities (IGE Group). "The fact is that the company has received the most favored treatment in each RPT", he said in a letter to the board.

He also pointed out that IndiGo CEO Ronojoy Dutta had said "I have to tell you I have looked high and low on RPTs and there is no smoking gun".

Bhatia claims Gangwal's real agenda is "to dilute and diminish the controlling rights of the IGE Group"

In the letter to the board, Bhatia responded to Gangwal’s allegations by saying:

"So, here is a man who:
(i) took full advantage of t he 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 Rs 1,100 crore (almost six folds the IGE Group's contractual obligation of Rs 200 crore 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."

Read Rahul Bhatia’s allegations on Rakesh Gangwal’s Real Agenda.


What Happens Next?

Gangwal has requisitioned an EGM in which he wants shareholders to recommend new RPT safeguards to the board. He has also asked SEBI to look into the "unusual rights" held by the Bhatia Group and amend the company’s articles.

Here’s what Bombay High Court advocate Tushad Copper has to say about the legal road ahead.

This video summarises what’s happened so far. Advocate Tushad Cooper and aviation analyst Amrit Pandurangi discuss the road ahead.

IndiGo CEO To Employees

The dispute between InterGlobe Aviation Ltd. promoters Rakesh Gangwal and Rahul Bhatia has nothing to with the airline or its functioning, Chief Executive Officer Ronojoy Dutta said in a letter to IndiGo employees on Wednesday, a day after the Indigo promoter dispute became public.

"The issues between them will eventually get sorted out, but I want to stress that these issues have nothing to do with the airline and its functioning," Dutta said, adding that the airline's mission, direction and growth strategy remains unchanged, and firmly in place.

"...it is very important that we all remain focused on running a high performance airline," he said, asking the employees to continue their work as usual.

Absolutely nothing has really changed for any of us, I will just go about doing my job to the best of my abilities, and I know I can count on you to do the same. Thank you for your dedication and efforts towards delivering our promise of on-time, courteous and hassle-free experience.
Ronojoy Dutta, CEO, IndiGo

Also read: Analysts Say Promoter Dispute To Hit IndiGo’s Share Price

Bhatia Explains RPTs

Rahul Bhatia tried to explain why Interglobe Aviation Ltd. has a number of related-party transactions with entities owned by him, a day after co-promoter Rakesh Gangwal termed them “questionable”.

  • In a statement today, Bhatia's InterGlobe Enterprises said that his group has provided certain services and facilities to the aviation firm since its inception.
  • All transactions were executed on an arms' length basis, the statement said.
  • Bhatia’s statement today said the related-party transactions with his IGE in 2018-19 were 0.53 percent of the consolidated turnover of Interglobe Aviation at Rs 150.12 crore. That was up from 0.5 percent in 2017-18 at Rs 118.96 crore.
All RPTs (related-party transactions) have been executed on an arms’ length basis and in the ordinary course of business. 
InterGlobe Enterprises Statement - July 10

Related-party transactions existed in six areas, according to Bhatia’s statement.

  • Real estate leased to Interglobe Aviation
  • Call centre and IT services
  • Simulator training facilities
  • General sales agents
  • Shared services
  • Crew accommodation at Accor Hotels

Of these, the statement said, related-party deals exist in four areas now—call centre and IT services and shared services being phased out.

For more on why these RPTs came into being, read this story.

Also read: IndiGo Can't Fly High With Fights in the Cockpit

Another Salvo From Rahul Bhatia’s InterGlobe Enterprises

In a statement on July 12, Rahul Bhatia-owned InterGlobe Enterpises Pvt. Ltd. (IGE) said “Paan ki dukaan has apparently done well and continues to do well; it is financially sound; it is well run and managed by a competent set of managers. Mr. Gangwal’s allegations about lack of corporate governance are much ado about nothing.”

Bhatia’s company is responding to a comment made by Gangwal in his filings with the stock exchange that the issue of RPTs were handled by the board with as much grace as a “paan ki dukaan”.

In response to Gangwal’s statement on the unusual rights that Bhatia has in the shareholders’agreement, IGE says it was negotiated in 2006 and amended twice in 2015 as a precursor to the IPO to comply with statutory requirements.

The IGE statement says Gangwal has failed to give even one instance where there has been any misuse of any such right in the shareholders’ agreement. And that his allegations are based on “whistleblowers who chose not to use the whistleblower mechanisms and procedures established by IndiGo”.

Regarding the EY report on related party transactions - Gangwal had raised concerns about the scope and depth of the rport and pointed out that it was not shared with the rest of the board, only with the chairman M Damodaran.

ICE’s statement claims

  • The chairman had sought the report to get a better understanding of the RPT issues.
  • At the March board meeting he summarised that there was nothing wrong with the transactions themselves but identified the procedural irregularities that had been noticed.
  • He then suggested process improvements following which the board constituted an internal committee to examine the RPTs and submit a report in 4 months and the CEO Ronojoy Dutta accepted responsibility for putting in place robust process for consideration and approval of RPTs.
  • Given the flow of deliberations at the meeting, no one asked for the report to be tabled.

Two days later, the Bhatia camp asserted that Rakesh Gangwal always limited his financial risks and was making insidious efforts to create an unseemly controversy about corporate governance. The arrangement between the promoter groups has been transparent from inception, the Bhatia group said on July 14.

Government Seeks Answers

Toward the end of the week, the government sought an explanation from IndiGo on Gangwal’s complaint. In a filing to the stock exchanges, the company on Thursday said it received a communication on Wednesday from the Ministry of Corporate Affairs regarding Gangwal’s complaint. Explanations have been sought under Section 206(4) of the Companies Act, 2013. Section 26 provides powers for the ministry to call for information, inspect books and conduct inquiries.

Best Quarterly Performance Since Listing

Profit surged more than 4,000 percent year-on-year to Rs 1,209 crore in the April-June quarter, the operator of India’s largest carrier IndiGo said in its exchange filing on Friday, June 20. Analysts estimates compiled by BloombergQuint had pegged the profit at Rs 761 crore. The jump in profit was on account of a lower base in the year-ago period due to foreign exchange losses and higher fuel costs.

  • Revenue rose 44.6 percent to Rs 9,420 crore.
  • Operating profit, or earnings before interest, taxes, depreciation, amortisation and rentals, jumped more than threefold to Rs 2,656 crore.
  • Operating margin expanded 16 percentage points to 28.2 percent.
  • Yields—a measure of average fare per passenger per kilometre—rose to Rs 4.08 per kilometer from Rs 3.62 a year ago. That’s the highest jump since listing.

After approving the quarterly earnings on Friday, the company’s board reconvened the following day, to consider potential changes to the Articles of Association, which would allow for changes in board composition.

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