IndiGo flouted rules in some related-party deals, finds Sebi

MUMBAI: InterGlobe Aviation Ltd has violated governance and listing guidelines in some of its related-party transactions (RPTs), a regulatory investigation found, sending shares of India’s largest airline operator plunging.

The Securities and Exchange Board of India (Sebi) has sent its findings to an internal committee for possible penal action, two people aware of the investigation said on condition of anonymity. Shares of InterGlobe, which operates low-fare airline IndiGo, fell as much as 7.6% on the BSE on Tuesday, before closing 4.68% lower at ₹1,376.70, while the benchmark Sensex index fell 0.2%.

“The regulator has found that some of the RPTs, which were considered not material by the company, exceeded 1% of company turnover (the threshold for materiality) and thus needed shareholder nod,” said one of the two people cited above. The transactions were conducted without shareholders’ approval.

The Sebi investigation also found that only some of the transactions were approved by its audit committee after the transactions occurred, said the second person.

The results of Sebi’s preliminary investigation revive turbulence at the airline, which was rocked by a feud between its founders last year. Sebi had started investigating IndiGo after co-founder Rakesh Gangwal complained to the regulator in July 2019. In his complaint, Gangwal alleged violation of governance norms by Rahul Bhatia, the other co-founder.

Sebi also examined the contentious shareholder agreement between the promoters, which gave the Bhatia-led group the right of first refusal to buy Gangwal’s stake if the latter decided to sell. On 29 January, shareholders rejected Gangwal’s proposal to amend InterGlobe’s articles of association. Out of the total votes cast, 48.55% favoured the motion and 51.44% opposed it.

“While the shareholders have ratified the current shareholder agreement, Sebi is within its rights to relook at the agreement if it finds violations against the small shareholders. The supposed violations of RPTs can make a case for that,” said Ramesh Vaidyanathan, founder of law firm Advaya Legal.

In his letter to Sebi chairman Ajay Tyagi last year, Gangwal, a former chief executive of US Airways, alleged that there were several violations at IndiGo, including those pertaining to RPTs and appointment of senior management personnel, directors and the chairman, who has always been an independent director by convention. Bhatia had denied the charges.

While Gangwal and his associates hold nearly 37% in InterGlobe Aviation, Bhatia’s InterGlobe Enterprises (IGE) holds over 38%.

IndiGo said in a statement that the company hasn’t received any communication from Sebi in this regard.

IGE and Gangwal didn’t respond to Mint’s queries. An emailed query to Sebi remained unanswered.

Bhatia had earlier maintained that his RPTs with IndiGo were worth only 0.53% of the airline’s annual revenue. He had also denied charges made by Gangwal against this.

Some of the instances cited by Gangwal include an office lease rental agreement, which was to expire in 2019. To ensure an arm’s length relationship, the company decided to negotiate with third parties for office space. Bhatia had said the lease agreement with the related party was favourable to the airline on several counts when compared to third parties.

Following this, IndiGo said in October that InterGlobe Enterprises and Bhatia submitted a request for arbitration to the London Court of International Arbitration under the shareholder agreement of InterGlobe Aviation on 23 April 2015 between IGE Group and Rakesh Gangwal Group.