Good business ventures are destroyed in different ways. Here’s the self-destruct route. Success normally should stoke better long-term vision among co-promoters a kind of humility that understands that it is more difficult maintaining a competitive lead than getting to the top.
This lesson has obviously been forgotten by IndiGo’s two original promoters – Rahul Bhatia and Rakesh Gangwal.
The simmering dispute between Bhatia and Gangwal blew into the open when the latter complained to markets regulator Securities and Exchange Board of India (SEBI) that Rahul Bhatia, through his company Inter Globe Enterprises (IGE), had compromised corporate governance norms – a ‘paan ki Dukan’ is run better, he said. In particular, Gangwal also alleged that the Bhatia-controlled IGE had entered into dozens of related party transactions (RPTs) with IndiGo, without audit committee approvals.
In short, money was leaking; and Gangwal said he could do nothing about it despite his 36.7 per cent stake compared to Bhatia’s marginally higher 38.3 per cent. The reason was the skewed shareholders’ agreement and Articles of Association, which put the management powers entirely into the hands of his co-promoter. Among other things, Gangwal has demanded that the one-sided agreement be scrapped, and he has appealed to everyone that matters, including Prime Minister Narendra Modi.
WRONG TIMING?
It appears that till the middle of 2018, things between the two co-promoters were on an even keel, with Gangwal even participating in the firing of then CEO Aditya Ghosh in April last year. The first public indication of the divide came by August last, when Gangwal, through an email, recused himself from daily operational decisions.
However, it is still a mystery on Gangwal’s choice of timing to make the fight public. It is ironical that IndiGo is at its best today – it commands 50 per cent of the Indian aviation market with a fleet of 170 aircraft. After a year and several quarters of poor performance because of high fuel prices, InterGlobe Aviation, which runs IndiGo, on Friday said its profit after tax soared 43 times to Rs 1,203.10 crore in the first (June) quarter this financial year, compared with Rs 27.80 crore in the same quarter last year.
It isn’t even a simple case of “oppression” of the minority shareholder. The admitted position that is Rakesh Gangwal by choice took a back seat in the shareholders’ agreement, which he now wants to be changed. The covenant gives Rahul Bhatia not only the management control but also the right to nominate three directors compared to Gangwal’s one in a board of six, apart from the chairman.
In his reply, Rahul Bhatia has also pointed out that the shareholding pattern does not reflect the actual assets committed by the two partners. While Gangwal had capped the capital he would plough in at Rs 15 crore, Rahul Bhatia says he and his father Kapil Bhatia had scraped together Rs 1,100 crore in the initial years for IndiGo through personal guarantees.
REGULATORS SWOOP IN
The spat is now having serious fallout. Opening a can of worms in public has got the regulators peering in as well. The ministry of corporate affairs has asked the company to submit all documents, including an Ernst & Young (E&Y) report, on the RPTs. After all, the issues raised by a near-37 per cent equity-holder of India’s largest airline cannot be trifled with!
SEBI is examining whether the specific rights being enjoyed by dominant partner Rahul Bhatia has the concurrence of shareholders. When the company launched its public issue in 2015, the affirmative rights for Bhatia in the prospectus had been set aside by SEBI as violative of the Companies Act. Now, how did the clauses find their way back in the shareholders’ agreement?
Which way is the controversy heading? Rakesh Gangwal is no one’s fool. In better days, he had voluntarily accepted being a ‘sleeping partner’. Now he wants to come back into management, but he is aware that it is only possible if the shareholders’ covenant is torn up. The only way to make that happen would be through a flaming public row. With the sword of government regulators hanging over Bhatia’s head, Gangwal hopes he can strike a midway deal.
IndiGo CEO Ronojoy Dutta has asked employees to ignore the fireworks and keep it business-as-usual. Easier said than done. If the promoters fight, decision-making takes a toll; and sooner rather than later the impact will be felt in operations. As it is, the airline has grown faster than the management can keep pace; and CEOs have been changed a dime a dozen. If the two promoters do not smoke the peace pipe in quick time, we might see another airline on the descent trajectory.