Institutional Investor Advisory Services India Ltd (IiAS) has faulted IndiGo’s promoter and managing director (M), Rahul Bhatia, for not leading from the front when the airline is facing its most challenging operational episode, even as the influential proxy advisory firm has sought a review of the current board structure, which allows Bhatia to nominate half of the board.
Bhatia, who, along with his friend, Rakesh Gangwal, founded IndiGo in 2006, owns 35.7%, while the airline’s senior leadership, including chief executive officer Pieter Elbers, have faced a nationwide backlash for flight cancellations, halting the country’s booming aviation sector in the first week of December.
“[A]s the only executive director on the board and the company’s promoter, it was expected of Rahul Bhatia to lead from the front, rather than from the sidelines,” IiAS said in a note on Friday. “Given that Rahul Bhatia’s role significantly overlaps with responsibilities typically assigned to a CEO, it is unclear how the Board has apportioned the responsibilities between the managing director and the CEO.”
IiAS also faulted the composition of the current board, noting that, according to the airline’s Articles of Association, the Bhatia-led InterGlobe Enterprises (IGE) Group has the authority to nominate five non-executive, non-independent directors, resulting in the nomination of half the board.
IGE Group also retains the exclusive right to appoint the airline’s managing director, CEO and president, irrespective of its ownership level. Mumbai-based IiAS pointed out that these rights continue even if IGE’s stake falls below 5%, though it currently holds 35.7%.
“This creates a scenario where a shareholder with just over one-third ownership exercises board control disproportionate to its stake,” the advisory firm said in a report.
An email sent to IndiGo seeking comment went unanswered.
Board independence
Interglobe Aviation Ltd, which runs IndiGo, has nine board members. Promoter Rahul Bhatia, who also serves as the managing director, is the sole executive member. The four non-independent and non-executive members include Anil Parashar, CEO of Interglobe Technology Quotient Pvt. Ltd; Gregg Albert Saretsky, former president and CEO of WestJet, Calgary, Alberta; former Securities and Exchange Board of India (Sebi) chairman M. Damodaran, and Amitabh Kant, former CEO of Niti Aayog.
Pallavi Shroff, managing partner, Shardul Amarchand Mangaldas & Co., the law firm, is classified by IndiGo as an independent member. However, IiAS describes Shroff as non-independent and non-executive, noting that her law firm does business with the airline and receives professional fees from it.
IndiGo chairman Vikram Singh Mehta, former CEO of Shell India, Birendra Singh Dhanoa, former Indian Air Force air chief marshal, and Michael Whitaker, a former administrator of the US Federal Aviation Administration, are independent directors.
IndiGo CEO Elbers is not a member of the board.
“A systematic review of the board structure is essential for IndiGo to emerge stronger from this crisis and position itself as a leading global airline,” said IiAS in its note.
“IndiGo’s board structure has been a concern for years,” said Sharmila Gopinath, an independent governance expert. “The imbalance between executive and non-executive directors, and the limited presence of truly independent voices, has repeatedly raised red flags for the investment community,” she said.
Failure in oversight
IndiGo has been a well-run airline, said Amit Tandon, founder and managing director of IiAS. “Indigo, it now seems, was efficient to a fault—one missed step, and the whole schedule collapses. Rakesh Gangwal and Rahul Bhatia, it seems, complemented each other. With Rakesh Gangwal no longer on the board, Rahul Bhatia may have lost his sounding board. And in any successful business, neither the analysts nor the Board may have asked the difficult questions,” he added.
“We need to remember, those on the board, who understand aviation are less familiar with Indian processes—the board’s ability to push back may have weakened,” he said.
Rakesh Gangwal-led RG Group, which held a 37% stake, has seen its stake shrink to 5.85% as of 30 September. Yet the AoA still grants the group the right to nominate one non-executive director, an option it has not exercised to date. As a result, IndiGo’s board currently has nine members, instead of 10.
In the first week of December, IndiGo had to cancel over 4,500 flights because it did not have enough pilots to comply with the new norms introduced by the directorate general of civil aviation, which limited pilots’ flying time between midnight and 6 AM. A nationwide uproar led the aviation ministry to institute an inquiry, reduce IndiGo’s daily flights by 10%, and seek explanations from CEO Elbers and the chief operating officer for the debacle.
Jittery investors sold shares as IndiGo’s shares have fallen 15% between 1 and 12 December.
To assuage concerns, IndiGo’s senior leadership, including Elbers and Chair Mehta, has repeatedly apologised and assured people that they would fix the issues. On Friday, the airline appointed Chief Aviation Advisors, LLC, a US-based aviation consulting firm, to assess how an airline which prided itself on always being punctual went wrong.
Promoter dominance
“For a company of IndiGo’s size and dominance, the board’s inability to foresee and manage the risks associated with the new pilot-rest rules is extremely worrying. This wasn’t a surprise regulation, but it was a known deadline,” said Gopinath, adding that while the board’s role is oversight, it was missing in IndiGo’s case.
“If the board was aware, why wasn’t management pushed to prepare? And if the board wasn’t aware, that is an even deeper governance failure,” she said.
Gangwal and Bhatia’s friendship soured after the airline went public in 2015, when Gangwal accused the latter of corporate governance lapses in late 2019. After much bickering, the two resolved their differences. Gangwal resigned from the board in 2022 and, since then, has sold much of his holding, cutting his stake from 37% to 5.85%.
While Indian regulations require one-third of board members to be independent, IiAS believes that companies with concentrated promoter influence should maintain at least 50% independent directors to balance control and oversight.
“I am not saying that if half the board were independent, this problem would not have happened. Just that as they fix the operational issues, the board needs to address its governance structures,” IiAS’ Tandon said.