IndiGo Promoter Dispute: Rakesh Gangwal Wants Shareholders To Vote For RPT Safeguards
Dear IndiGo shareholders, this is what Rakesh Gangwal wants you to vote on.
Rakesh Gangwal, the co-promoter of IndiGo Airlines is seeking an extraordinary general meeting of the aviation company’s shareholders to address the governance issues he has raised against co-promoter Rahul Bhatia. This was revealed by InterGlobe Aviation Ltd., the public listed company that runs IndiGo, in documents filed with the stock exchanges.
The same documents show that in a letter to the Securities and Exchange Board of India, the Prime Minister, Finance Minister and several other ministers, Gangwal has accused Bhatia of questionable related party transactions, and violations of governance regulations and the company’s code of conduct. (Read that full story here.)
At the EGM, Gangwal wants shareholders to vote on two resolutions -
- to ensure that the company, its board of directors and senior management adhere to requirements in the company's Code of Conduct for Directors and Senior Management.
- to recommend to the board and audit committee to put in place certain reasonable procedures and safeguards in entering into related party transactions with Rahul Bhatia and his affiliates (IGE Group).
The company’s code of conduct requires all directors and senior management to adhere to it. It also states, among other things, that they should avoid transacting business with relatives or related parties, and if such business is unavoidable then it should be done with proper and full disclosure.
The RPT safeguards in the resolution include -
- An RPT should only be entered into if it is demonstrably and quantifiably in the best interest of the company.
- RPTs should only be entered into after seeking competitive bids from qualified third-party vendors.
- The RPT should be backed by a management report by officials negotiating it and the company’s chief financial officer. The report should detail the various competitive proposals and explain why the RPT was unavoidable or necessary.
- The audit committee to seek independent opinion on the RPT.
- If convinced the RPT is unavoidable or in the best interests of the company the audit committee should provide directors with the management report and independent opinion, if any.
- Directors may provide comments on the RPTs within seven days.
- All existing RPTs to be re-examined by the audit committee and renegotiated if certain conditions, such as competitive bidding, not met.
- An RPT with the Bhatia group could be exempt from these procedures if the total payment for that RPT in a year is below Rs 50 lakh.
Why ‘Recommend’ Not ‘Mandate’ New RPT Policy?
Gangwal’s letter says several months ago his group had proposed a different EGM resolution - that mandated the board to adopt such new protocols for related party transactions. But the Rahul Bhatia group (InterGlobe Enterprises or IGE Group) countered that such a resolution would have to be a special resolution requiring a 75 percent vote to pass. With its 38 percent shareholding the Bhatia group could have blocked such a resolution.
Hence Gangwal is proposing that shareholders recommend to the board to adopt certain new protocols for RPTs.
The letter states this has been necessitated because -
- The Bhatia group has violated the code.
- Various RPTs were executed without seeking audit committee approval.
- Various RPTs were executed without seeking competitive bids from third parties.
- Various RPTs have been signed with retrospective effect (back dated).
InterGlobe - Bhatia RPTs
Gangwal’s letters to SEBI and shareholders share no details about the offending related party transactions. In an earlier story BloombergQuint had noted that between InterGlobe and Bhatia entities had risen several-fold in the past 8 years, though amounted to less than 1.4 percent of total revenue.
...we are a publicly listed Company and the IGE Group should not use materiality thresholds as boundaries or a “Lakshman Rekha” to seek sanctuary as well as justify and potentially seek any unfair advantage for any amount whatsoever and at the expense of the other shareholders...Rakesh Gangwal Letter
The disagreement over RPTs seems to have formally begun in November 2018 when Gangwal wrote to all board members. It was decided to evaluate and examine the RPTs. Bhatia wanted a Big 4 consulting firm to do a limited review, Gangwal’s letter alleges. Then chairman MD Mallya agreed.
On the death of Mallya, InterGlobe appointed a new chairman, former SEBI chairman M Damodaran, in January 2019. At his request the company engaged consulting firm EY to review the RPTs. The board chairman was the only person with access to the EY review and he mentioned that it did not find any substantive irregularity, but did point to procedural irregularities, Gangwal’s letter alleges.
• Some agreements with related parties had been put in place without seeking approval of the audit committee.
• Some agreements were executed before approval of the audit committee.
• Some agreements were extended, without any changes in the terms and conditions, but without such extension having been approved by the audit committee.
BloombergQuint was not able to independently verify the contents of the EY report. Rahul Bhatia and M Damodaran were not available for comment.
Gangwal says eventually the company acknowledged that numerous RPTs with Bhatia entities were done without seeking competitive bids and that third party representations on arms’ length were sought for tax and discontinued when the tax law didn’t require so. April 2016 onwards third party representations on arms’ length were provided only for international transactions.
And that, “quite a few transactions” were signed with retrospective effect.
“Paan Ki Dukaan” Has More Grace
Gangwal efforts to convene an EGM were thwarted by the board twice, his letter claims. He describes the chain of events after submitting the EGM requisition on May 22...
At the first board meeting after that, on June 5, the IGE nominee directors (directors nominated by Rahul Bhatia) did not attend the meeting.
The rescheduled board meeting on June 12 was the last day within the 21 day statutory deadline to decide on the EGM.
Minutes before the meeting Gangwal and independent director Anupam Khanna were given a legal opinion obtained by the board. In it a former Supreme Court judge had opined that the board need not call an EGM.
Based on that the board vote was split 4:2.
“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.” - Rakesh Gangwal Letter
Subsequently, on June 13 the Gangwal group obtained a legal opinion, authored by a former Supreme Court chief justice, which said the EGM requisition was valid in law.
The date and time for the meeting has yet to be notified by InterGlobe.