EY finds no major lapses in IndiGo dealings after Gangwal points finger

Illustration by Ajay Mohanty
An independent review of IndiGo’s related-party transactions has found no major procedural lapses by the company. The forensic review of the airline, done by consultancy firm EY, says all such transactions since its public listing were done at “arm’s length”, approved by the audit committee.

However, the report also notes instances where permission from the audit committee came after the transactions were executed. According to corporate law parlance, a transaction is said to be done at arm’s length when a proper tendering process has been followed. 

“All transactions entered into with related parties as defined under the Act and the Listing Regulations during the last five financial years were on an arm’s length basis. All related-party transactions were placed before the audit committee for review and were approved. None of the transactions with any of the related parties was in conflict with the interest of the company. Rather, they synchronise and synergise with the company’s operations,” goes the EY report.

“Apart from showing minor irregularities which were hence corrected, the report doesn’t show any transgression of rules,” said a person who saw the report. The audit was ordered by Chairman M Damodaran. He had directed the management to engage a forensic expert for an independent review of related party transactions for the past five years. This was after co-promoter Rakesh Gangwal had raised the issue multiple times in earlier board meetings, saying there had been violation of corporate governance norms. 

Following the complaint, market regulator Sebi has asked IndiGo's board of directos for an audit report.

M Damodaran-headed IndiGo board will meet on Friday amid a public feud between the airline’s promoters
EY primarily looked into the contracts IndiGo had signed regarding leasing of space for its offices, appointing a general sales agent and a cargo sales agent for the domestic business, simulator for pilot training and hotel accommodation for airline crew.

Gangwal had in a letter to the Sebi chairman alleged the office space IndiGo had rented from Interglobe Real Estate Ventures at Global Business Park, Gurgaon, was detrimental for the business and decided on without a proper tendering process.

However, EY has said this transaction had followed a clearance from the audit committee, which compared the leasing rates at Delhi and found the agreement to be fair. “The committee did a benchmarking to identify an arm’s length price, after which the transaction was approved,” the report is said to have noted. The purpose of benchmarking studies is to determine the general conditions surrounding transactions conducted by third parties under normal market conditions.

IndiGo has favourable terms for the real estate deals it has entered into with Interglobe. For instance, for the Global Business Park contract, the company pays half the normal security  deposit, has no lock-in period and no annual rent escalation.

Similarly for a 15-year contract IndiGo signed with CAE Simulation Training Pvt Ltd (CSTPL) in 2013, EY says the board of directors after five years took a quotation from other companies to decide if it was beneficial. “In 2018, when the review was done, it was found CSTPL is charging IndiGo a lower price than other Indian carriers,” the report is said to have noted.