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IndiGo promoters’ feud takes serious turn; Gangwal seeks Sebi’s intervention

Gangwal in a letter to Sebi has alleged “collapsing corporate governance standards” at IndiGo.

, ET Bureau|
Updated: Jul 10, 2019, 08.43 PM IST
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All about IndiGo dogfight
All about IndiGo dogfight
The simmering feud between the IndiGo promoters took a turn for the worse on Tuesday after one of the warring partners complained to the Securities and Exchange Board of India (Sebi) about questionable corporate governance practices, alleging that even a `paan ki dukaan’ would have handled things better.

Rakesh Gangwal, who holds 37% in IndiGo compared with co-promoter turned rival Rahul Bhatia’s 38%, said in his complaint to the market regulator that a shareholders’ agreement between himself and Bhatia gave the latter “unusual controlling rights over IndiGo” and that these rights and “a lack of diversity and paucity” of independent directors “may very well be at the root of why governance matters have taken such a back seat at IndiGo.”

ET on May 17 reported the agreement skewed in favour of Bhatia was at the root of the conflict between the founders.

In his letter, Gangwal alleged that over the years, Bhatia began “building an ecosystem of other companies that would enter into dozens of related party transactions with IndiGo.”

The letter was also sent to Prime Minister Narendra Modi, finance minister Nirmala Sitharaman and commerce minister Piyush Goyal, apart from aviation minister Hardeep Puri and aviation regulator Arun Kumar.


In a separate letter to the board, Mr Gangwal has alleged that various related party transactions with the IGE Group were executed without seeking audit committee approval and many were executed without seeking competitive bids from third parties. He said many had been signed with retrospective effect (back dated).

He cited the example of IndiGo’s office spaces always rented from IGE Group companies. This year, when the lease expired, IndiGo again chose an IGE Group company for its office space.

However, instead of the lease rates logically increasing at renewal, the new lease rates going forward were lower by more than 25%.

“To the best of our knowledge such competitive bidding was not entered into when the original lease agreement was entered into with the IGE Group entities years ago,” alleged Gangwal.

Gangwal’s missive is bound to increase scrutiny of IndiGo’s practices by the market regulator and by other government agencies and marks yet another unhappy, unfortunate milestone for the country’s aviation sector, buffeted by headwinds such as the collapse of Jet Airways.

Speaking to ET, Gangwal confirmed the widening gulf between the two promoters on corporate governance issues. “This is a national issue where some companies have lost their moral compass of governance and the nation needs to address this issue formally," Gangwal said.

India’s biggest airline by market share shared the letters in a filing on the Bombay Stock Exchange. Rahul Bhatia, of the IGE group, the other co-founder could not be reached for his comments.

Bhatia’s affiliate IGE Group has the right to appoint three out of six directors at the airline, nominate the chairman of the board, nominate and appoint the managing director, the CEO and the president.

Gangwal said his affiliate had requisitioned in May an extraordinary general meeting to be held the following month which the board didn’t allow in a split vote. He said the board also refused to cooperate and provide the necessary information for the requisitionists (Gangwal and his affiliates) to conduct the EGM themselves despite this right being available under law.

“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 said in his letter to shareholders.

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In his response to the requisition for an EGM to point out the related party transactions, Bhatia called Gangwal’s stand “false, frivolous, and misleading”. Bhatia alleged that the “real agenda of the RG (Rakesh Gangwal) Group was “to dilute and diminish the controlling rights of the IGE Group and to relieve itself from its obligations under the Shareholders' Agreement ("SHA") and the Articles of Association ("AoA") which ensure implementation and enforcement of the IGE Group's controlling rights”

Bhatia called the “red herring issue of related party transactions is nothing more than a publicity seeking device to attempt to tarnish the reputation of the IGE Group and to position the RG Group as a saviour of the Company against alleged pillaging by the IGE Group,”

Bhatia said Gangwal didn’t raise “for 13 years a whisper against” the related party transactions. He also said the value of the transactions was less than 1% of the consolidated turnover of the company.

Gangwal said he ultimately will make the company hold the EGM to shed light on the related party transactions. Gangwal said that while IndiGo has always appointed an “independent chairman” the right given to Bhatia to appoint a chairman defeats the purpose. He said the IGE Group always nominates a single person as chairman and that person is appointed. He called the process “Hobson’s choice” usually referring to choosing what’s available or nothing at all. He alleged this was a way of “circumventing SEBI rules”.

Gangwal said that while most of the provisions in the agreement expires in November, the rights skewed in favour of Bhatia are part of the articles of association and will continue post November.

“I request SEBI to look into and, if thought fit, ask the company to make necessary changes to the unusual controlling rights available to the IGE Group, a minority shareholder with about 38% shareholding,” Gangwal said in his letter.

“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,” said Gangwal. He mentioned “whistleblowers who had the courage and wisdom to send information that allowed for this pursuit of almost a year.”

Here is the full text of the letter:
Dear Mr. Tyagi, Mr. Mahalingam, Mr. Baiwar and Mr. Sundaresan,
July 8, 2019

I am a co-founder and a director of lnterGiobe Aviation Limited (Company or IndiGo), a company listed on the Bombay Stock Exchange and National Stock Exchange and along with my affiliates hold approximately 37% share holding in the Company. Mr. Rahul Bhatia, also a co-founder and a director of IndiGo, along with his affiliates (IGE Group) owns almost equal shareholding of approximately 38%. And, a little more than 25% shareholding ofthe Company is widely held by public shareholders which includes retail shareholders and some of the most well-regarded, marquee, global investors and funds.

IndiGo was founded with the objective of creating an airline to serve the people of India with a world class product and built on foundations of transparency, uncompromising values and principles. The hard work of the employees of IndiGo has paid off. Now, IndiGo is one of the most successful aviation companies in the world and not just in India. However, today, IndiGo is at a watershed moment. It has started veering off from the core principles and values of governance that made IndiGo what it is today. Having spent more than 30 years working in and leading some of the most reputed airlines in the world, including United Airlines, Air France, and US Airways, I decided to join hands with Mr. Bhatia, a longtime friend, to build a large air transportation network in India that would make the nation proud.

Rooted from a deep trust built over a decade long friendship and with no desire on my part to have any meaningful control of the Company, I entered into a shareholders' agreement that allows Mr. Bhatia unusual controlling rights over IndiGo. Mr. Bhatia has the right (i) to appoint 3 out of 6 directors of IndiGo; (ii) that requires that "The Chairman of the Board shall be appointed on the nomination of the IGE Group ... " ; (iii) to nominate and appoint the Managing Director, (iv) to nominate and appoint the CEO; and (v) to nominate and appoint the President. These controlling rights give IGE Group, a minority shareholder, significant influence over the decisions of IndiGo and there is nothing wrong in that by itself, provided such influence is used judiciously and with prudence and is in the best interest of the Company. 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. We are not against RPTs as long as proper checks and balances exist and such RPTs are in the best interest of the Company.

Beyond just questionable RPTs, 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.

Allow me to bring to your attention some of the events that demonstrate the collapsing corporate governance standards at IndiGo. These run the gamut of:
• Violations of various corporate governance regulations prescribed by SEBI and violations of the Company's Code of Conduct for Directors and Senior Management.
• In a split vote, the Board taking the decision to not allow an Extraordinary General Meeting of shareholders (EGM) upon being requisitioned by shareholders with approximately 37% of shareholding in the Company and also refusing to cooperate and provide the necessary information for the requisitionists to conduct the EGM themselves despite this right being available under law.
• Board decisions and resolutions on critical matters being implemented without basic governance protocols and laws being followed.
• Significantly diminishing and taking away the authority vested by SEBI to the Nomination and Remuneration Committee (NRC} for identifying persons who may be appointed in senior management. This was done by pushing through a Board resolution that now gives IGE Group the right to identify and screen the candidates for Managing Director, the Chief Executive Officer and the President of the Company. And, also the right to propose to the NRC the appointment, the job profile, qualifications and remuneration of such candidates and require the Company's HR organization to provide all necessary support to the IGE Group on these matters.
• IndiGo has since its inception had an "independent director" as its Chairman. However, the provision in the articles of association stating "The Chairman of the Board shall be appointed on the nomination of the IGE Group ... " has the real potential to take away the independence of the Chairman. It has been a common practice at IndiGo that IGE Group nominates or "recommends" a single person for appointment as IndiGo's Chairman and, from this candidate pool of only one person, that individual is then appointed and designated as an "independent director". While, we aren't questioning the independence of the current Chairman in his decision making, we are questioning the designation of such an individual as "independent". This process of appointing an "independent Chairman" at IndiGo is the classic "Hobson's choice" and a sophisticated way to circumvent SEBI rules and avoid the requirement of designating such a Chairman as nonindependent which would then have required IndiGo to have a majority of Directors to be independent. It simply does not meet the requirements and spirit of the regulations prescribed by SEBI.
• Not having appointed an independent woman director, a requirement that SEBI gave time to the Company since May 2018 to comply.

The unusual rights available to the IGE Group in conjunction with the lack of diversity and paucity of independent directors in the Board may very well be at the root of why governance matters have taken such a back seat at IndiGo. I request SEBI to look into and, if thought fit, ask the Company to make necessary changes to the unusual controlling rights available to the IGE Group, a minority shareholder with about 38% shareholding. 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% shares.

These rights are:
• right to appoint 3 out of 6 directors of IndiGo.
• "The Chairman of the Board shall be appointed on the nomination of the IGE Group ... "
• right to nominate and appoint the Managing Director.
• right to nominate and appoint the CEO.
• right to nominate and appoint the President.
• a voting arrangement that requires me and my affiliates to vote alongside the IGE Group on the appointment of Directors.

In the past, Mr. Bhatia has argued 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 behavior of promoters have changed since 2015. Also, now, SEBI has rightly taken certain positions on these matters and most of these rights are not in accordance with SEBI regulations. Such unusual rights for a minority shareholder needs a fresh look in light of the facts that IndiGo is now a critical national asset, serves almost 50% of the domestic air travelers, 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.

Attached are letters that we intend to ultimately send to all our shareholders and hold an EGM and shed additional light on RPTs that the IGE Group has engaged in with the Company. These letters stand on their own merits and spell out in detail various governance failures. It is well known that quite a few prominent and important Indian companies have faltered due to, amongst other reasons, lax adherence to corporate governance and weak Board oversight. It is imperative that IndiGo has the confidence of the travelling public, its employees, the shareholders and the various government entities and officials by adhering to the highest level of corporate governance and transparency. We are big believers in the long-term potential of IndiGo and its business and operational model. However, we also firmly believe that IndiGo can only
realise its true potential and be a world class company if it has both- a world class business and operational model as well as world class governance standards Under a separate letter to yourselves, my counsel, Khaitan & Co, have highlighted numerous transgressions by Board members, the IGE Group and the Company that defy governance protocols and flout various SEBI Regulations. In that letter, Khaitan & Co are also providing you numerous troubling Company emails, reports and other material which by themselves establish the facts and list out the various violations of SEBI Regulations and corporate governance.

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. The Company's and certain Board members constant platitudes that they are "working on these issues ... going forward we will be more mindful ... we have been addressing these issues" have become just words. I am now constrained to seek SEBI's intervention to direct the Company to amend its articles of association to comply with SEBI Regulations, to strictly follow the requirements prescribed by SEBI in letter and in spirit on Board matters and proceedings and to direct the Company to allow for the EGM resolution to be placed in front of all the shareholders of the Company.

We are grateful to all the whistle blowers who 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 for the EGM requisition.

Understandably, this issue will become a topic of widespread national discussion, misinformation, speculation or worse. In fact, some of this has started to manifest itself in various media reports and Company management being less than forthcoming in its statements by down playing the underlying issues. To allay any concerns among various governmental authorities, our customers, our employees and our shareholders that the operations of IndiGo are not impacted or disrupted and, equally importantly, to keep such public and private discourse to the facts, we are sending copies of this letter and its attachments to various regulatory and other entities. However, recognizing the confidential and sensitive nature of the information, the letter being sent under separate cover by my counsel, including the attachments and information sources, is only being submitted to SEBI.

In closing, we recognize that there are influential and powerful people on the Company's Board who will use their position to influence the outcome of the campaign that the RG Group has embarked upon. Their biggest arguments to downplay the issues will be that these are minor "procedural irregularities" and the Company is addressing them. However, we take comfort in the fact that no one is above the law and India is changing for the better. Also, we would like to point out that other retail shareholders, promoters or institutional investors may also face similar issues with other errant, publicly listed companies. Either they do not have the means and resources or lack the internal knowledge and workings of the company to be able to take effective steps to correct the wrongs and, hence, resign themselves to such errant corporate behavior. We believe that our cause is in the larger national interest and not just because of the relevance of IndiGo to the nation. This is a landmark issue and SEBI has the ability to send a clear message to all errant companies to adhere to the spirit and intent of the regulations. Confidence and effective functioning of capital markets is anchored on such principles.

Sincerely,
Rakesh Gangwal
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