Prime Minister Narendra Modi's government has summoned key documents relating to the dispute between IndiGo co-founders Rahul Bhatia and Rakesh Gangwal. The government regulators are apparently intervening early in the dispute that has begun affecting the budget airline's governance fearing a repeat of the Naresh Goyal-founded Jet Airways fiasco, which is considered a blot on the nation's regulatory efficacy.
The Ministry of Corporate Affairs (MCA) and Securities and Exchange Board of India (Sebi) have sought details of the dispute between the promoters after Gangwal alleged irregularities in related party transactions (RPT) that the airline entered into with Bhatia's IGE Group companies. Gangwal, who controls about 37 percent stake in the airline, had approached the Prime Minister's Office (PMO), Finance Minister Nirmala Sitharaman, Sebi and the civil aviation authorities.
The Sebi and MCA have asked the airline management to submit all documents, including a report by auditors Ernst & Young (EY) that examined the issue of RPTs, Economic Times reported. While Sebi has specifically asked for the EY report, the MCA has asked IndiGo to respond point by point to the 10 issues raised by Rakesh Gangwal, the report says. "When a promoter owning 37 percent stake raises an issue, that needs to be looked into," the report quotes an unidentified MCA official as saying.
Apart from the report that EY had submitted to IndiGo chairman M Damodaran in March, Sebi has also sought the shareholders' agreement. Damodaran commissioned the report, which has remained confidential after he took charge in January. The brief for the EY was to study RPTs between IndiGo and firms affiliated to IGE Group in the past five years. Subsequently, the airline board formed a committee to examine some protocols that the EY report suggested, but the airline could not implement the recommendations due to differences between the two co-promoters.
The Sebi is also expected to examine if there had been any violation of the securities laws, according to the report. In his letter of June 12, Bhatia had alleged that when CEO Ronojoy Dutta sought the board's guidance in handling investor queries, Gangwal's advise and subsequent events demonstrated Gangwal's attempt that "other than only his version, no other version on the issue of RPTs (related-party transactions) should get conveyed". Sebi is also examining whether the company received shareholder approval for the special rights enjoyed by one of the promoters.
In 2015, when IndiGo was planning to go public, Sebi had struck down some special rights of one of the promoters like appointing the chairman as the relevant rules didn't provide for such a dispensation, the report said citing people close to the situation. Following this, the promoters had to rework the shareholders' agreement and articles of association and delete the affirmative rights.
"As between the promoters, the rights of participation in the management are laid down in the SHA (shareholders' agreement)," Bhatia said in a letter to the IndiGo board on January 30. These have been incorporated in the AoA (articles of association), approved both by Sebi and the shareholders, and disclosed in the prospectus. The RG (Rakesh Gangwal) Group may recall that they signed the SHA and Gangwal may recall that he signed the prospectus as a director."
Bhatia controls nearly 38 percent stake in the airline against Gangwal's 37 percent. Bhatia holds special rights, including the prerogative of appointing three out of six directors as well as the chairman of the board. Bhatia also has the right to name the managing director, the CEO and the president, according to the report.
An MCA official said the Companies Act will prevail over any corporate agreement. "The legal position is that if there is an agreement or memorandum or articles of association or resolution or special resolution passed by the board, which is contrary to the Act, the Act shall prevail."
Damodaran had cited the EY report to inform the airline's board on March 4 that while there were no "substantive irregularities" in the RPTs, some "procedural irregularities" had been noticed. He had recommended setting up an internal committee to draft a set of protocols for such transactions. The committee, comprising CEO Dutta and CFO Rohit Philip, among others, submitted its report to the board on April 4. But the board couldn't deliberate on it due to differences between Bhatia and Gangwal.