IndiGo co-founder Rahul Bhatia’s holding company can practically veto any decision taken by his partner Rakesh Gangwal despite the two promoters owning almost identical stakes, an examination of Interglobe Aviation Ltd’s articles of association (AoAs) reveals.
The AoAs invest Bhatia with such sweeping powers that neither any IndiGo shareholder nor the company’s board can take any decision related to control, business transactions, or appointment of directors or key managerial personnel, without the approval of the Bhatia-controlled InterGlobe Enterprises.
The AoA is essentially a company’s charter and describes the scope of its activities. It typically specifies the regulations for a company’s operations and defines the company’s purpose. The document lays out how tasks —including the process for appointing directors and the handling of financial records—are to be accomplished within the organization.
In addition to this, Bhatia and Gangwal have also 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.
Bhatia and Gangwal did not immediately respond to emails. Spokespeople for InterGlobe Aviation were not immediately available for comment.
As on 31 March, IGE held a 37.9% stake in IndiGo, while the airline’s other promoter group, the Gangwal-controlled RG Group and Chinkerpoo Family Trust, held a total of 36.68%.
According to the AoAs, RG Group has expressly acknowledged and agreed that IGE will, at all times, control the company in all aspects and manner, including management and operational control thereof.
“Accordingly, at all times, the RG Group shall fully comply with the terms of the shareholders agreement and these articles (including ensuring control of the company as aforesaid by IGE Group) by voting at the general meetings in the manner as directed by IGE Group," read the AoAs.
Typically, in a publicly traded firm, the board and the shareholders are given the power to appoint the chairman by passing a vote in favour of an individual (selected by the nomination and remuneration committee) with a majority (i.e. with 75% voting approval). The chairman’s appointment is then sent for approval to the Securities and Exchange Board of India (Sebi).
However, despite being a listed firm, IndiGo’s AoAs say: “On and with effect from the completion of the IPO (initial public offering), neither the company nor the shareholders nor the board shall take, approve or otherwise ratify any of the actions, deeds, matters or things described below without the prior written consent of the RG Group Director and the IGE Group Director."
The so-called “matters" in this clause of the AoAs include decisions to launch rights issues; any related-party transactions (between IndiGo or any of its subsidiaries with any shareholder or any of their affiliates); incorporation or acquisition of any new subsidiary or affiliate of the company; dividends; and any decision on any change in the number of directors on the board.
The AoAs say the IndiGo board shall always have six directors, out of which IGE alone will have the right to nominate five directors, of whom two will be non-retiring ones. The RG Group, on the other hand, can nominate one director. IGE is also empowered to remove any of these directors.
Additionally, IGE has the right to nominate three of the non-independent directors, one of whom will be non-retiring. IGE will also have the right to remove such directors and to appoint any other director to fill the vacancy. Also, IndiGo’s chairman will also be always appointed as per IGE Group’s nomination, say the AoAs. RG Group can nominate one non-independent director, who will be non-retiring.
Furthermore, the AoAs say that if the chairman is not present within 15 minutes after the time scheduled for holding a board or general meeting, the shareholders of the company can choose another director as the chairman, but only from the list of directors nominated by IGE Group.
“We may find it (AoA clauses) intriguing, but in companies which have joint promoters and such shareholding, it is common to see such shareholder agreements and AoAs. Power will be vested with a certain set of promoters while the other set will have negative rights to protect their interest. These articles were also part of the IPO documents when IndiGo got listed, so it has already passed muster of exchanges and Sebi," said a lawyer familiar with the matter.
However, the issues may not be as simple as they seem.
Gangwal and Bhatia have hired two top law firms to settle their differences and prevent the issue from turning into a long-drawn legal battle for control of IndiGo. Haigreve Khaitan and Jyoti Sagar (founders of law firms Khaitan & Co. and J Sagar Associates, respectively) have been appointed to advise Gangwal and Bhatia in reaching an understanding when both the AoAs and the shareholders’ agreement come up for renewal later this year.
Founded in 2006 by Bhatia and Gangwal, IndiGo is the largest domestic airline with a market share of 46.9% at the end of March, according to data from the Directorate General of Civil Aviation. It also has the largest fleet with at least 200 aircraft.