What put the co-pilots on a collision course
Allegations of governance lapses while awarding deals lie at the heart of the feud at the budget airlineAn analysis of disclosures shows that total RPTs were about 1.4-1.7% of the firm’s turnover
MUMBAI : At the heart of the bitter feud between the two billionaire founders of InterGlobe Aviation Ltd are alleged lapses related to transactions entered into by India’s largest airline with entities controlled by one of the two promoters, Rahul Bhatia.
In his complaint to the markets regulator and the aviation ministry, co-founder Rakesh Gangwal did not pull any punches in terming the related-party transactions (RPTs) as contravening the company’s code of governance. In the year ended 31 March 2018, InterGlobe’s total reported RPTs were ₹332 crore, according to Mint’s analysis of company disclosures. This climbed to ₹504 crore in the following year.
“All RPTs have been executed on an arm’s length basis and in the ordinary course of business," said Bhatia in a statement on Wednesday.
Mint’s analysis of company disclosures shows that total RPTs were about 1.4-1.7% of the company’s turnover. As per the disclosures, one of the big-ticket RPTs involved an agreement with a ticketing vendor—InterGlobe Air Transport Ltd W.L.L. The airline is due to receive ₹299.24 crore from the ticketing vendor against the sale of tickets as on 31 March 2019.
Bhatia, however, said that his related party transactions with IndiGo were worth only 0.53% of the airline’s annual turnover.
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, the company decided to negotiate with third parties for office space.
“The final outcome of such negotiations was that the company has now entered into a new, multi-year, lease agreement with the IGE Group (controlled by co-founder Bhatia) entities. However, instead of the lease rates logically increasing at renewal, the new lease rates going forward are now lower by more than 25% compared to what the company was paying historically for years to the IGE Group entities. These facts speak for themselves. To the best of our knowledge, such competitive bidding was not entered into when the original lease agreement was entered into with the IGE Group entities years ago," said Gangwal in his complaint, highlighting the higher rentals paid by the airline to IGE Group in the previous years.
However, Bhatia said that the lease agreement with the related party was favourable to the airline on several counts when compared to third parties.
“Most recent renewal of the lease has been for Global Business Park, Gurugram where the rental was actually revised downwards for bona fide reasons including benchmarking with prevailing market rentals. The benchmarking was based on comparative rentals in the relevant market," Bhatia said. According to company filings, IndiGo has entered into rental agreements with InterGlobe Enterprises Pvt. Ltd and InterGlobe Real Estate Ventures Pvt. Ltd.
The IGE group countered these allegations by arguing that the value of the transactions were not material under the applicable laws (Companies Act and Sebi Act) as the monetary payment to any one related party did not exceed 1% of total consolidated revenue of InterGlobe Aviation.
“These are abhorrent arguments since we are a publicly listed company and IGE Group should not use materiality thresholds as boundaries or a Lakshman Rekha to seek sanctuary as well as justify and potentially seek any unfair advantage for an amount whatsoever and at the expense of other shareholders," said Gangwal in the complaint copy.
This was not the first time that these RPTs came under scrutiny. In January, Bhatia wrote to the board saying that all RPTs that RG (Rakesh Gangwal) group was seeking a review of were at arm’s length basis. This coincided with a review by E&Y, which did not point out any substantive irregularities but said that agreements with related parties were executed even before audit committee approvals, although it was approved later. The review also pointed out that agreements were extended without any changes and audit committee approval.
As of 22 May, the EY report analysing the RPTs is available only with InterGlobe Aviation chairman M. Damodaran and no other board member, Gangwal asserted.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!