Home / Companies / News /  IndiGo shareholder pact to be checked by govt for violations

New Delhi: The government will scrutinize a disputed shareholder pact between Rakesh Gangwal and Rahul Bhatia, the founders of InterGlobe Aviation Ltd that runs India’s largest airline IndiGo, even as it will let the markets regulator look into Gangwal’s allegations of governance failure in the company.

If the government’s scrutiny leads to the conclusion that the shareholder agreement was in violation of the Companies Act, the agreement which gives certain special rights to a company controlled by Bhatia could get annulled, a person privy to discussions in the government said on condition of anonymity. Gangwal had in the recent past met senior officials in the government.

The agreement that gives Bhatia’s InterGlobe Enterprises Pvt. Ltd (IGE) the power to appoint three out of the six directors of IndiGo, nominate a chairman as well as appoint a managing director and chief executive, has become a thorny issue between the two promoters of the airline. Gangwal and his associates hold about 37% in the company, while Bhatia and his associates hold 38%. One key right flowing from the agreement to Bhatia is that it requires Gangwal and his affiliates to vote alongside the IGE Group on the appointment of directors.

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Regulators such as the Securities and Exchange board of India (Sebi) and the Registrar of Companies under the ministry of corporate affairs tend to take note when shareholders with substantial stakes raise issues about governance in their companies.

Gangwal, who wants these clauses to be reset, said in his letter to Sebi earlier this week that even after the expiry of the shareholder deal this November, these clauses will survive as the charter of the company reflects it. He, therefore, wants Sebi to direct InterGlobe Aviation to modify its articles of association. Bhatia said in a letter to the company’s board last month that the Gangwal group wanted to relieve itself from its obligations under the shareholders’ agreement and the company’s articles of association that enforce the IGE Group’s controlling rights. In the same letter, which was shared with stock exchanges on Tuesday, Bhatia also rejected Gangwal’s criticism of certain related-party transactions of the company.

An email sent to the company seeking comments remained unanswered at the time of going to press.

Corporate law experts said that governance and shareholder disputes are two distinct matters. “If a shareholder raises concerns related to governance in a company, the government or regulators could seek a response from the company. However, shareholders will have to approach the appropriate judicial forum for settling disputes over shareholder agreement," said Pavan Kumar Vijay, founder of advisory firm Corporate Professionals. Disputes relating to mismanagement and oppression under the Companies Act are dealt with by the National Company Law Tribunal.

With major shareholders at loggerheads, decision-making in the company could face delays. IndiGo is facing the crisis at a time when the domestic air travel industry is going through a realignment after the collapse of Jet Airways (India) Ltd.

“The capacity constraint in the industry has affected volume growth, but firmer airfare has improved airline profitability in the June quarter," said Kinjal Shah, vice president of corporate ratings at ratings agency Icra Ltd.

IndiGo has a capacity expansion plan in place. It has already taken delivery of over 70 of the 430 A320 Neos it is scheduled to induct into its fleet over the next 5-6 years. The airline has 49% share in India’s air travel market, according to data compiled by the Directorate General of Civil Aviation. SpiceJet is a distant second with a market share of 14.8%.

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