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Round two of the Indigo Airlines story

The battle between the two co-founders of India’s largest airline, Indigo Airlines, is intensifying. The spat has spilled over from a few days ago, and, after eroding 11% of shareholders wealth yesterday, the feud now threatens to do further damage, and the stock, after making an intraday low, ended the day with a further loss of close to 3.5%.

One promoter, Rakesh Gangwal, accused the other, Rahul Bhatia of serious lapses in corporate governance and entering into related party transactions without approval of the audit committee, that were detrimental to the company.

A letter addressed to the market regulator and the Prime Minister’s Office among other government officials, detailed all Mr. Gangwal’s objections as to how the company was being run by Mr. Bhatia in contravention of the companies act and regulations set out by SEBI, and appealed to the regulators to take necessary action.

Another bone of contention was that even though both promoters hold nearly identical shareholding in the company, Mr. Bhatia exercises much more control and has been given more decision making powers by virtue of the shareholders agreement and clauses contained in the Articles of Association. Powers such as appointment of 50% of directors on the board, right to screen and nominate the Chairman, CEO, MD and President are also within Mr. Bhatia’s domain, so Mr. Gangwal claims; which he also seeks to get redressed.

However, real reason why Mr. Gangwal may be upset is because of the being left out of a $ 20 billion negotiation for new engines for Indigo, as he may have felt that being a mechanical engineer from IIT-Kanpur and being the technical brains behind the company, he should have been consulted.

What has emerged now is that governance of the company and shareholder disputes are two distinct matters. And it is thought that the government will scrutinize the shareholders agreement, and will let SEBI handle the allegations of corporate governance failure.

A source was quoted as saying that if any violation in the shareholders agreement is found, it would be annulled. Meanwhile, the market regulator SEBI has initiated a preliminary enquiry into the alleged corporate governance failures and the issue of related party transactions, and has asked the company to give a response to this allegation by July 19th.

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