An aircraft approaches the runway before take off. (Photographer: Matthew Lloyd/Bloomberg)

IndiGo Promoter Dispute: The Road Ahead, According To Experts

InterGlobe Aviation Ltd., the operator of budget carrier IndiGo, is roiled in a promoter dispute where Rakesh Gangwal has accused co-promoter Rahul Bhatia of questionable transactions, violations of governance regulations and the firm’s code of conduct.

Gangwal also sought an extraordinary general meeting, wanting shareholders to vote o to enforce the company code of conduct and recommend safeguards to related party transactions.

IndiGo shares plunged as much as 20 percent, hitting the lower circuit earlier this morning. The promoter dispute raises question on the implications for the airline and its promoters, both legal and operational.

Tushad Cooper, advocate at the Bombay High Court, and aviation expert Amrit Pandurangi explain the nuances to BloombergQuint.

Watch the full discussion here:

Also read: IndiGo Promoter Dispute: All You Need To Know

Here are the edited excerpts of the interview:

Rakesh Gangwal says Rahul Bhatia has “unusual rights”. How will SEBI view these rights in the shareholder agreement and also in the articles of association? So far SEBI hasn’t raised any objection to them.

Tushad Cooper: We have two issues here. One is, whether or not ‘unusual rights’ is offensive to what SEBI will consider valid and tenable. In my view, such rights which are reserved under the shareholder agreement and which have been embodied in the articles can and ought to be upheld. However, if in the implementation of those rights and the exercise of those rights there is wrongdoing, then SEBI can and undoubtedly will interfere.

Therefore, the questions which Mr. Gangwal has raised are tenable issues which SEBI can look into and seek to pass suitable directions to resolve those issues. I believe that the issues raised by Mr. Gangwal are substantial and should be looked into. SEBI has asked the company for a response to the issues raised by Mr. Gangwal.

To the extent to whether such preferential rights are valid, according to me, they can be incorporated in the articles and they have been approved by the shareholders prior to joining of shareholders under the IPO. So, that I don’t think that is a real issue.

Infact, preferential rights have been exercised by many other corporate entities. We have seen this issue playout during the Tata Sons drama. But if exercising those rights leads to diversion of funds or mismanagement, then there are courses and remedies apart from SEBI too, available for Gangwal to approach the NCLT for redress.

It comes down to whether these related party transactions procedurally or substantively were irregular enough to draw the regulators attention. Would that prompt SEBI to intervene and relook or review these rights as Mr. Gangwal has called for?

Cooper: Absolutely. I am not buying the argument of the Bhatia Group that merely because they (RPTs) reflect a very small percentage of the turnover, they are insignificant. Obviously, the turnover in the airline industry is huge. As the turnover increases, it is possible that the proportion of related party transaction reduces but that is not a consideration which can or should weigh in dismissing these allegations as substantial. I am not saying that the allegations are correct. I am saying the allegations are serious enough to warrant an enquiry.

Also read: IndiGo Promoter Dispute: Rakesh Gangwal Wants Shareholders To Vote For RPT Safeguards

EY is said to have reviewed the RPTS. Gangwal has raised issues with thoroughness of that report and the fact that the report has not been shared with all board members. Is it within SEBI’s gamut of powers to assess whether these RPTs amounted to mis-governance?

Cooper: I believed the NCLT will be the more appropriate forum to carry these issues. Undoubtedly, there appears to be some cloud on the EY report given the fact that it has refused to share with board members. I can’t see justifiable reason for that course of action. That itself gives rise to some element of doubt as to the scope of report, and what the report says. It does appear that there are conflicting statements emanating from what was stated earlier about the related party transactions and what is now conceded by chairman. It is a grey area. Unless one has full facts, you can’t really comment on it.

At what point can SEBI can use the RPT issue to examine the articles and say the rights are unfair? Can SEBI do it? If not, can NCLT look at the AOA and sit in judgment of rights that the shareholders agreed to when the company was founded?

Cooper: I don’t believe that SEBI will look into the issue of those preferential rights that Bhatia Group holds. Because according to me there is nothing inferred in preferential rights being accorded. It is any wrongdoing thereafter performed in the exercise of those rights which can be subject matter of scrutiny. I don’t believe that SEBI will have to relook at the articles of association at all.

It may seek to delve into allegations of RPTs, corporate governance, etc. There is nothing wrong in having rights embedded in one group to nominate directors. Ultimately, the airline was founded by them and they have relevant expertise. And shareholders who subscribed through public issue were fully aware of these rights and did so on that basis thereof. I don’t think that is something SEBI will interfere with.

Also read: IndiGo Promoter Dispute: Gangwal’s Allegations A Red Herring, Bhatia Says In Earlier Letter

Rakesh Gangwal has also requisitioned an extraordinary general meeting of shareholders in which he will ask shareholders to vote on two resolutions. One is to enforce the company’s code of conduct, including how the company should not enter into RPTs unless absolutely unavoidable. Second, he wants them to vote on a list of safeguards for such RPTs. He earlier wanted shareholders to mandate these safeguards but now he’s asking them to recommend these to the board so as to avoid a special resolution. But recommendations to a board that has so far been fine with these transactions, can that have any persuasive power?

Cooper: Given the requisition, the company ought to have acted on it. It’s left ultimately for shareholders to pass whatever resolution they feel fit in their discretion.

Such a resolution, given the fact that it is only a recommendation would not be binding on the board. But it ought to have persuasive value. If the board did not act on basis of those recommendations, it could perhaps strengthen the Gangwal group in any action to be then desired to be adopted. The resolution would have a persuasive effect. It would bring in public domain the issues which are raised by the Gangwal group. It would perhaps act in some way to restrain the Bhatia Group from disregarding those recommendations.

What impact will this have on InterGlobe Aviation over the course of next three to six months if this matter were to linger that long?

Amrit Pandurangi: The business certainly will take a significant impact. The attention of the key people in the management is going to be on these issues rather than what is happening in market. Not only the market deserves a continuous focus, but the competition will take full advantage of the fact that the key people’s focus has been taken off the market for few days or weeks. Definitely, there will be a market impact. Whether it will be a temporary or will last few weeks or months and then they will come back with full attention, it’s too early to say. Even if nothing happens in the marketplace, the corporate governance issues will have an impact. I have no idea whether it will be positive or negative or volatile. It is crucial that the owners and key executives of the company are focused on market.

Would you reckon that there would be a shift in market share?

Pandurangi: Other players temporarily will benefit. But whether they will benefit for slightly longer term, it is difficult to say. Also, whether they will benefit more in domestic or international is difficult to say because each of the other players have strengths and attention of different segments of the market. Almost continuous growth of IndiGo to achieve the high market share may take a small hit. Whether they will come back, solve those issues in whatever manner, within couple of weeks is anybody’s guess.

But I suspect this will go longer then that. Corporate governance issues are never simple to deal with. To that extent, competition will benefit for some time.

Bloomberg Quint

Add BloombergQuint App to Home screen.