The ongoing turbulence at the country's largest airline may have been triggered by an uneven control over the cockpit, apart from differences between the promoters over its expansion strategies. Reacting to this negative news, the share price of InterGlobe Aviation, the parent of IndiGo Airlines, has dived nearly 10.5% since May 15.
The co-founders of IndiGo Rahul Bhatia and Rakesh Gangwal hold a 38.26% and 36.69% stake in the airline respectively, along with their families, The Economic Times reported. But despite this near equal-stake, Bhatia has enjoyed greater control over the board and management. His holding company, Inter-Globe Enterprises (IGE), has the right to appoint key managerial personnel - the chairman, MD, CEO and president - apart from the right to nominate three non-independent directors, one of whom will be non-retiring. On the other hand, the Rakesh Gangwal (RG) Group has the right to nominate just one non-retiring, non-independent director, as per filings with the Registrar of Companies.
The IGE Group represents InterGlobe Enterprises, Bhatia, his wife Rohini and father, Kapil. The RG Group represents Gangwal and his wife Shobha, his Caelum Investments and The Chinkerpoo Family Trust.
The articles of association (AoA) also gives IGE operational control over the company. "IGE Group shall at all times control the company in all aspects and manner including management and operational control thereof," it reads. The RG Group has to "fully comply with the terms of the shareholders' agreement and these articles" by voting at the general meetings as dictated by the IGE Group.
The shareholders' agreement also makes it difficult for the promoters to consider parting ways. "If any member of either the RG Group or the IGE Group proposes to transfer its shares to a third party purchaser (not being an affiliate) otherwise than on a stock exchange or by way of a pre-negotiated sale on a stock exchange, then the other group will have the right of first refusal and tag along right," states a clause. Furthermore, neither group can "transfer, either directly or indirectly, without the prior written consent of the other group, any of its shares to a competitor or to any person" in any deal that triggers an open offer as per SEBI's norms.
"In hindsight, would Gangwal change some clauses in the articles of association and shareholders' agreement? Absolutely! But there are other, bigger issues too," a source close to the development told the daily. Since the shareholders' agreement is inscribed in the company's AoA, any change will require a special resolution and approval of 75% of the shareholders.
According to experts, failing that, the National Company Law Tribunal can be moved under Sections 241 and 242 of the Companies Act, 2013. These sections provide that any member of a company can make an application to the tribunal seeking relief in case of oppression, prejudicial conduct of company affairs and mismanagement.
Significantly, the AoA reportedly states that the shareholders' agreement "will automatically expire on the fourth anniversary of the initial public offering". Since IndiGo went public in October 2015, the agreement will expire after three months.
Differences between the co-founders also cropped up over their divergent outlooks on IndiGo's expansion strategy - while Gangwal sought aggressive expansion to tap into India's aviation market, Bhatia called for a balanced and cautious approach. Last April, Aditya Ghosh had stepped down as IndiGo's President and Whole Time Director after a 10-year stint with the airline. His "before time departure", as some in the aviation circle dubbed his resignation, was reportedly spurred by the airline's rapid fleet expansion.
Just two months before his announcement, Gangwal had claimed to increase the airline's capacity by nearly 52% to 250. Questioning this approach, the Bhatia camp had reportedly raised the issue of "overcapacity" and "yield". The crises deepened after Ghosh's exit and the appointment of foreign executives on key management posts, including Gregory Taylor as its CEO. Most of these new appointees had worked with United Airlines earlier in their careers, just like Gangwal.
The promoters also have different strategies for IndiGo's international thrust, which is further widening their rift, although both believe that they can grab the space left by the grounding of Jet Airways. While Bhatia believes wide-bodied aircraft could be helpful in achieving IndiGo's international dream, Gangwal pushed narrow-bodied aircraft, like Boeing 737, for all its operations and codeshare agreements with other global carriers.
When asked to clarify news reports regarding the differences between Bhatia and Gangwal, InterGlobe said in a regulatory filing on Thursday that "the Company is not in a position to comment on such news as it relates to the promoters". The duo have reportedly roped in their respective legal advisers - J. Sagar Associates for Bhatia, and Khaitan & Co for Gangwal - to iron out their differences.