Why BlackRock is worried about SpiceJet

BlackRock, the New York-based asset manager that manages $10.01 trillion in assets, criticized the state of affairs at the airline as it exercised its voting rights when SpiceJet put two resolutions before its investors.

On 30 December, SpiceJet sought shareholders’ approval on the reappointment of Shiwani Singh as director and to adopt the financial statements. Singh is the wife of SpiceJet chairman and managing director Ajay Singh.

“Vote against audit committee member (Shiwani Singh) because of substantial accounting irregularities for which we believe the audit committee bears some responsibility," BlackRock said as it voted against the resolution, documents reviewed by Mint showed. BlackRock also said it voted against the resolution of adopting financial statements “because of serious qualifications by auditors".

A little over half of the public institutions voted against Shiwani Singh’s reappointment, while 46.76% of large investors voted against accepting the financial statements for the year to March 2021. However, both resolutions were approved as Ajay Singh and his family own 59.46% of the airline and retail shareholders own a third. Institutional investors, including foreign investors and mutual funds, own 1.96%. Three other foreign investors—Legal & General Investment Management (LGIM), American Century Investments and State Street Global Advisors—also voted against the two resolutions, the documents showed. LGIM said it voted against adopting financial statements because the “auditors expressed concerns regarding the company’s accounts" while it was unhappy with Singh being part of both the composition of audit and nomination and remuneration panels.

Globally, foreign investors like BlackRock have started wielding their vast shareholder voting power as they look to nudge managements of companies to comply with best corporate governance practices.

Most institutional shareholders have sold much of their shares in the past two years as the airline industry went through a crisis because of the pandemic. They cut holdings from 12% at the end of December 2019 to less than 2% at the end of the previous quarter. During the same time, retail shareholders’ ownership rose from 22.48% to 33.55%.

Mint cannot independently ascertain the accounting irregularities that BlackRock has referred to. An email sent to BlackRock seeking comment went unanswered. LGIM, American Century Investments and State Street Global Advisors did not respond to a questionnaire sent by Mint.

SpiceJet’s statutory auditor, Walker Chandiok and Co., highlighted that the airline recognized compensation from aircraft-maker Boeing for losses incurred because of the grounding of Boeing 737 Max aircraft as other income, before it received funds from the aircraft maker.

In November, SpiceJet said it had settled with Boeing on outstanding claims related to the grounding of the 737 MAX aircraft. The airline didn’t disclose the details of the agreement.

“The management of the company has recognized ‘other income’ of ₹5,604.48 million ( ₹560.45 crore) for the year ended 31 March 2021 ( ₹6,718.04 million for the year ended 31 March 2020) and related ‘foreign exchange loss on restatement’ of ₹270.61 million for the year to March 2021 for the amount charged to Boeing for reimbursement of expenses incurred on Boeing 737 Max aircraft, which has been grounded since March 2019," wrote Neeraj Goel, partner at Walker Chandiok and Co.

In a response to BlackRock’s observation, a spokesperson for SpiceJet said the reasons of the voting by the foreign portfolio investors are best known to them as they have never sought any clarification from the company.

“In fact, these investors have not even attended the annual general meeting wherein the company responded to various queries of investors," the spokesperson said, adding that the auditors have not highlighted any financial irregularities.

“There is only one qualification that has been mentioned by the auditors and the same is on account of difference in the opinion between the views of the management and the auditors regarding the manner and timing in which the compensation from the manufacturer of grounded 737 MAX aircraft is to be accounted. These are not financial irregularities and the same has been disclosed by the company in all transparency with full disclosures at all relevant times. In fact, the view of the management on the said qualification was disclosed and filed with BSE on 30 June 2021 and the same is reproduced below for your reference:

“The management always believed that it will be able to recover the compensation from the aircraft manufacturer, which was the basis for the management to recognize the amounts in the manner as reflected in its financial statements quarter on quarter. The same is now manifested from the settlement which the company entered with Boeing which was announced by the company on 17 November 2021. Since the company has now entered into settlement agreement with Boeing, the above said audit qualification will be removed/altered upon the publication of the financial results for quarter ended 31 December 2021."

“In any event, the resolutions put to vote at the AGM held on 30 December were passed by the majority shareholders voting over 98% in favour, as per the provisions of the Companies Act and the majority of funds voted in favour of both these resolutions."