|10 July, 2019

India's IndiGo airline row makes case for clipping founders' wings

IndiGo shares lost as much as a fifth of their value on Wednesday, after the publication of lengthy bitter, conflicting letters from top owners Rakesh Gangwal and Rahul Bhatia

An IndiGo Airlines Airbus A320 aircraft takes off in Colomiers near Toulouse, France, October 19, 2017.

An IndiGo Airlines Airbus A320 aircraft takes off in Colomiers near Toulouse, France, October 19, 2017.

REUTERS/Regis Duvignau

MUMBAI  - India’s favourite airline is flying into governance trouble. InterGlobe Aviation , or IndiGo, has grown into the country’s largest, most profitable carrier, accounting for about half the market. It has soared at a time when others, like practically defunct Jet Airways and loss-making Air India, have been dragged down by rock-bottom ticket prices. But the $9 billion outfit is now under a cloud of its own, as its founders spar over an old shareholder agreement handing one of them outsize control. It looks like a relic of bad governance past.

IndiGo shares lost as much as a fifth of their value on Wednesday, after the publication of lengthy bitter, conflicting letters from top owners Rakesh Gangwal and Rahul Bhatia. Alongside affiliates, they hold 36% and 38% of the carrier, respectively. However, a pact, in place in various forms since the company’s inception, gives Bhatia’s bloc the right to appoint half the directors, the CEO, and to nominate the chairman, radically skewing the balance of power.

That’s causing friction as IndiGo expands at a blistering pace, flying abroad and placing multibillion-dollar aircraft orders. Gangwal wants the securities regulator to step in over related party transactions. He says the board backed by his co-founder has also refused an extraordinary general meeting, and is flouting market rules by designating a chairman nominated by a top shareholder as independent. Bhatia has previously denied wrongdoing and claims his partner is trying to force through changes to their original deal.

Perhaps so. Either way, a wider overhaul is overdue. The IndiGo pact is an egregious example of the type of agreements that the regulator should purge from listed companies, says IiAS, one of India’s top proxy advisers. Disgraced tycoons like beer baron Vijay Mallya have used similar deals to hold onto the top job for much longer than is in the interests of shareholders.

A clean-up now would be timely, given the market watchdog has just approved strict new rules to allow companies with differential voting rights to list, making such contracts outdated. Although dual-class options are currently aimed at technology companies, the regulator requires shares with superior voting rights to convert into ordinary ones within five years. That suggests any corporate agreements that indefinitely give one shareholder more rights over another require a rethink.

CONTEXT NEWS

- A co-founder of InterGlobe Aviation, parent of airline IndiGo, has asked India’s securities regulator to step in over alleged governance violations at the country’s largest carrier. Shares in the company fell as much as 19% on July 10, after Rakesh Gangwal’s letter was made public.

- In the letter, dated July 8, Gangwal questioned related-party transactions. He also accused the company of refusing a request for an extraordinary general meeting, and of circumventing market rules by designating a chairman nominated by a major shareholder as independent.

- Gangwal and his affiliates own 36% of the company. Rahul Bhatia and associates own 38% through InterGlobe Enterprises (IGE).

- According to a long-standing shareholder agreement, IGE has the right to appoint 3 out of 6 directors at IndiGo, as well as the managing director, chief executive, president, and effectively, the right to nominate the chairman. The pact also requires Gangwal’s bloc to support IGE on the appointment of directors.

- In a separate letter, made publicly available at the same time, Bhatia dismissed the allegations regarding related party transactions as false.

(Editing by Clara Ferreira Marques and Sharon Lam)

© Reuters News 2019

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