Rakesh Gangwal writes to Sebi, escalating IndiGo feud

Mumbai: The simmering feud between the two founders of InterGlobe Aviation Ltd, which runs India’s largest airline, took an ugly turn, with Rakesh Gangwal seeking the regulator’s intervention to curb alleged governance violations by co-founder Rahul Bhatia.

The charges were denied by Bhatia, who accused Gangwal of trying to dilute the controlling rights of his holding company InterGlobe Enterprises Pvt. Ltd (IGE) in the low-fare carrier, IndiGo.

In an 8 July letter, addressed to Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi, Gangwal alleged several violations at IndiGo including those pertaining to related-party transactions; appointment of senior management personnel, directors and the chairman, who has always been an independent director by convention.

“The onus is now on the management and Sebi to probe the allegations, which appear to be serious in nature,” said Shriram Subramanian, founder of InGovern Research, a proxy advisory firm. “The management has not been proactive in highlighting the disagreement between the two promoters and now the hope of a peaceful reconciliation is completely out of the picture.”

The clash between the two founders could potentially impede IndiGo’s strategy to expand its presence to overseas destinations and consolidate its dominance of Indian skies. The airline, founded in 2005, has quickly expanded to grab half of India’s domestic air traffic market.

In his letter, Gangwal alleged that the current articles of association (AoA) of the company, which gives sweeping rights to Bhatia over key appointments including the nomination of the chairman by Bhatia’s holding company IGE, compromises the independence of the chairman, a post currently held by former Sebi chairman M. Damodaran.

“The unusual rights available to the IGE Group, in conjunction with the lack of diversity and paucity of independent directors on the board, may very well be at the root of why governance matters have taken a back seat at IndiGo,” he alleged.

“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,” Gangwal wrote. “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 non-independent, which would then have required IndiGo to have a majority of directors to be independent.”

Mint had reported on 18 May that Bhatia could practically veto any decision taken by his partner despite the two promoters owning almost identical stakes, citing InterGlobe Aviation’s AoA. In addition, Bhatia and Gangwal have signed a separate shareholder agreement that reaffirms Bhatia’s supremacy in the company’s internal affairs, especially the edge he has in appointing key directors and executives, Mint had reported.

“We have always believed that such shareholder agreements in public listed companies are not in the interest of shareholders as many times extraordinary rights are vested with one set of promoters,” said Subramanian.

Watch | Rift between IndiGo co-founders widens as tussle reaches Sebi doorstep



Denying Gangwal’s allegations, Bhatia said in a letter to the company’s board that Gangwal took full advantage of the opportunity offered to him 14 years ago, when he was allotted 50% equity. “Gangwal did not mind that the IGE Group was taking the entire economic risk, which at peak exposure (between redeemable preference shares, unsecured loans and personal guarantees) was in excess of ₹1,100 crore.” Bhatia further said that Gangwal has not cited a single instance where a related-party transaction was not at arm’s length or where any undue advantage has been shown to have been taken by any IGE Group entity, and year after year signed and approved annual accounts without raising objections.

Following Gangwal’s letter, Sebi has asked the airline to respond by 19 July.

Anirudh Laskar contributed to this story