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Business & Finance

The Real Reason Why Promoters Locked Horns at India’s Biggest Airline

At a time when the country’s aviation sector is railing, with the likes of Jet Airways being taken to bankruptcy court and Air India put on the chopping block for disinvestment; the time was ripe for someone to step up, take the reins and usher in an era of dominance in the sector.

And who better to do that than India’s largest and most profitable airline which commands a market share of 50% of the entire industry – Indigo Airlines.

However, as luck would have it, just at this critical juncture, a turbulence of the worst kind has rocked Indigo and threatens to impede its dominance of the skies.

Indigo is facing probably its worst crisis ever, as promoters Rahul Bhatia and Rakesh Gangwal are in the midst of an ugly public spat, with one promoter making serious allegations against the other for lapses of corporate governance and initiating questionable related party transactions (RTPs) against the interest of the company. The matter took a turn for the worse when on Tuesday a letter was addressed to SEBI and the Prime Minister’s Office when one co-promoter detailed the misdeeds of the other, forcing the market regulator to intervene.

Interglobe Aviations Ltd. is the holding company that runs Indigo Airlines. If one takes a look at the shareholding pattern of the company, it can be seen that both the promoters, Rahul Bhatia (who has an experience of close to 30 years in the travel & hospitality industry and has been in charge of the operations of the company) and Rakesh Gangwal (who is a Mechanical Engineer from IIT-Kanpur and is the technical brains behind the company) have almost identical stake in the company with Mr. Bhatia holding 37.93% of shares and Mr. Gangwal controlling 37% shareholding and the remaining 25.07% is held by the public.

The crux of the matter is that Rakesh Gangwal accuses Rahul Bhatia of being the dominant partner and exercising control over the company that is disproportionate to his shareholding and further claims that he has been building an ecosystem of other companies that would enter into dozens of RPTs to Mr. Bhatia’s benefit and even gave an example of a related party entering into a rental agreement with Indigo at below market rates without inviting competitive bids from third parties.

Besides objecting to RPTs and serious lapses in corporate governance, Rakesh Gangwal raised objections to the fact that the Articles of Association of the company give Rahul Bhatia sweeping rights over important matters such as appointment of three out of six directors, appointment of the Chairman, right to identify and screen candidates for the posts of Managing Director, CEO and President of the company. However, what seems to be Mr. Gangwal’s biggest objection was when he tried to call an extra-ordinary general meeting of the shareholders to air his objections; he was vetoed as Mr. Bhatia had greater representation on the BOD.

While Mr. Gangwal’s arguments hold weight, Mr Bhatia argues that his co-promoter refuses to share details of transactions which were not conducted at arm’s length price, and that all such transactions have amounted to less than 1% of revenue each year.

Mr Bhatia further went to say that for 13 years Mr. Gangwal didn’t raise a whisper against such RPTs and year after year signed and approved the annual accounts. He also defended his stance stating that Rakesh Gangwal’s real agenda was to diminish and dilute his interests in the company. Mr Bhatia also raised a relevant point saying that when the airline began operations in 2005, it was him that undertook most of the economic risk and provided a significantly larger portion of guarantees and capital that was required, while Mr Gangawal was generously offered 50% of equity.

While these are the reported reasons for the feud, the real reason may be something else all together. Ever since its inception in 2005, Indigo Airlines has used Pratt & Whitney engines for most of its fleet, and goes without saying that it was Rakesh Gangwal, who had an engineering background from IIT, that was the brains behind the negotiations to acquire them. However, these engines did not match well with Indigo’s new Airbus Neo fleet of aircrafts and were leading to flight disruptions, forcing Indigo to look for other options. The airline in June signed a massive $ 20 Billion contract for supply of LEAP-1A engines with US based CFM International which would be used in the airline’s future fleet of airplanes. When Rajeev Gangwal refused to lend his hand to the company’s ongoing negotiations with CFM International, Indigo went ahead and proceeded with the agreement without his consent. This may have been the reason why Rajeev Gangwal’s ego could have been hurt to the point of no return, which led his anger to spiral out of control and cause a rift between the two former friends.

While the promoters slug it out in a board room battle, with their differences reaching as far as the market regulator, it is the shareholders of Indigo that bear the maximum brunt of their feud. Shares of the airline fell nearly 11% or 168 points to end the day at ₹ 1,398 per share.


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