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Indigo
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The Indigo Affair

The simmering differences between Rakesh Gangwal and Rahul Bhatia, reportedly long time friends who floated Indigo in 2005, now India’s largest domestic airline, with a whopping market share of 49% have taken an ugly turn and are now out in the open. Their festering differences, which threaten to degenerate into a full blown dispute, will not ground the airline, but if not resolved immediately and amicably, it will certainly destroy huge chunks of shareholder wealth and will also curb its ambitious international foray. As per the facts now emerging, Rakesh Gangwal who was the CEO of an American airline, partnered with his friend Rahul Bhatia, to float Indigo, wherein Rahul Bhatia was the investing partner, who bore the entire economic risk of investing in a new airline. He took a financial risk of upto Rs. 1100 crores, including furnishing of personal guarantees. The two signed a shareholder agreement between them, under which special management rights were given to Bhatia, as any investor who invested such huge sums would demand. These rights of Bhatia included the right to appoint the chairman, president and CEO of Indigo, as also the right to appoint 50% of the directors of the airline, thus giving him effective control over its management. Thus though under the said agreement, the shareholding of these two promoters is almost equal, Gangwal’s at about 37% and Bhatia’s at about 38%, with the balance 25% being with the general public, yet it is Bhatia who has actual management control, which Gangwal now alleges, that it has been misused.

The differences between these two promoters have been in public domain since a few months, but with Rakesh Gangwal writing a 49 page letter to SEBI, containing numerous allegations against his partner, this matter which should have been amicably resolved behind closed doors, is now an open public tamasha. The primary allegations he makes against Bhatia, are in the matter of financial transactions of Indigo, with Bhatia’s firms, which we call related party transactions, and in the matter of gross violation of corporate governance norms as alleged by him.

Gangwal has raised objections to dozens of related party transactions, which he says have been entered into by the Bhatia controlled Indigo, without checks and balances and which he says are not in the best interests of the airline. He says that these transactions were executed without the approval of the Audit Committee of the airline and without calling for competitive bids from independent parties. For example he says that all office spaces of Indigo are owned by Rahul Bhatia and his firms and there has been a 25% jump in lease rent in one single year. In respect of these transactions he says in his letter to SEBI that even a pan ki dukaan would be better managed. He objects to the unusual management controlling rights of Bhatia, due to which there is lack of diversity and paucity of independent directors. He says that Bhatia has refused to call a meeting of shareholders to discuss these issues and that there has been a gross violation of corporate governance and code of conduct, which if not resolved, will lead to unfortunate outcomes. He has thus requested SEBI to look into the matter and if necessary to make changes in the unusual controlling rights of Bhatia in Indigo.

In response to these allegations, Bhatia says that Gangwal’s demands are unreasonable and that he is only trying to dilute and diminish his controlling rights, under the shareholders agreement. He points out that five year related party transactions of Indigo were audited by EY, which found no substantive irregularity therein. He says that there were mere procedural irregularities and that these allegations are false, frivolous and misleading and that Gangwal raised no objection against them for 13 years. He says that these transactions with related parties constitute less than 1% of the turnover of Indigo. He further points out that he took a financial risk of over Rs. 1100 crores as the investor, as against Rs. 200 crores agreed between the two and that Gangwal is merely trying to dilute what was agreed upon in the shareholders agreement.

It is unfortunate that India’s largest airline is becoming a victim of a promoter dispute. It will immensely erode shareholder wealth if not sorted out immediately. Such matters need to be settled indoors and by bringing it out in the open, Gangwal has exposed the utter failure of the Indigo Board, which happens to be headed by a former SEBI chief. The airline CEO says that the promoter dispute has nothing to do with the functioning of the airline, but the damage is done. A contractual dispute between the two promoters is harming the airline. The unfortunate part is that something is seriously wrong with India’s governance and management systems, that is unable to keep such matters in check and let our enterprises crumble, destroying build up of shareholder wealth.

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