It was then only natural for IndiGo
founder and Interglobe Enterprises (IGE) chairman Rahul Bhatia to ask Rakesh Gangwal – who had spent his career in America’s aviation industry and built a formidable name for himself - to join him to set up IndiGo
Airlines. The company was set up in 2004 and a mutually agreed to shareholder’s agreement was entered into by the partners.
At the time, Gangwal had relinquished control to Bhatia since the latter was set upon it, arguing that his partner was unfamiliar with India and its ways and sitting far away in the US. To him, it was like acceding to a request as one would to one’s wife. Control was immaterial and his trust in Bhatia was complete. In fact so complete was the trust between the two owners that till the company’s IPO in 2015, Gangwal wasn’t even on the company’s board.
A shareholder’s agreement and articles of association of the company were drawn up, unusually tilted in Bhatia’s favour. Not only does the agreement give Bhatia three board seats as opposed to Gangwal’s one, it also gives him the right to nominate directors and senior management appointees and obliges Gangwal to go with his choices.
Things proceeded smoothly by and large and the company grew to a size neither had envisaged. The two partners were on an exciting journey together, worked in union, each handling what he did best and placing full faith in the other. This blind trust is what the two founders – and unfortunately millions of hapless shareholders – are paying for dearly today.
He’s Skimming Off The Company
In all journeys, there comes a point when one has to do what one thinks is right. That’s where Gangwal found himself when it comes to the “governance lapses” he’d been noticing for sometime. In his view, a lethal combination for any company’s success requires a great business model combined with great corporate governance.
While IndiGo’s model is intact, he felt the company was losing its way on the latter.
The relationship between the two had a good, long run but almost four years ago, a simmering mistrust had begun to set in the mind of Gangwal. He was increasingly getting uncomfortable with the related party transactions (RPTs) that the airline had entered into with Bhatia’s parent company Interglobe Enterprises (IGE). It was a concern he’d raised from time to time with Bhatia and other senior management. His doubts were always fobbed off with “we’ll look into it” or at times he was told that Bhatia himself was unaware of something. He’d always end up giving his partner the benefit of doubt.
But sources say Gangwal’s antenna were up. What started as a small niggling issue began to bother him more and more. Off and on some member from the top management team in Delhi – many were his hires - would also flag similar concerns to him. One thing rankled him, then another and then another.
The break point occurred in 2018 when a simulator contract that had been entered into got extended for 15 years automatically when all along he was told it would not be extended. The contract had a provision for extension and it was done without the knowledge of the audit committee. That’s when he snapped and what followed was the August email.
The matter was a point of significance for him even when the company was set up. His lawyers at the time had told him that the shareholder’s agreement that gave Bhatia almost all control he was entering into was absurd but they had warned him in general about the Indian promoter’s predilection to enter into RPTs that enriched their other companies.
As a result, he had two clauses inserted in the company’s code of conduct. One, the company would not enter into RPTs unless unavoidable and two, all RPTs would be entered into with full and complete disclosure to the full board.
Sources close to Gangwal say the RPT issue is not one about money. He began to find that the process followed for signing RPTs was at times flawed and in violation of the code of conduct of the company. RPTs in the past have been entered into without signing, backdated, cancelled or not renewed on a whim, entered or exited into without disclosure to the audit committee. Often, the board was not aware.
Some of these concerns were raised by him before Bhatia and other senior management or board members over the years but many came to his own notice only in 2018 or even later when he received some information anonymously by mail (the whistleblower he mentions in his letter to SEBI). Even if the total alleged misdeed don’t amount to much, the very fact that it is happening is critical for him.
Other than RPTs, Gangwal has also raised questions regarding Bhatia’s staying away from a board meeting to prevent quorum, doing a last minute surprise with legal opinion just prior to a board meeting and blocking a requisitioned shareholder meeting, alleging that his conduct lacks “grace” and is more in keeping with someone running a “paan ki dukaan”, highlighting just how ugly a turn this battle has taken.
The May 28 meeting
Although from August to May, there was a fast deterioration in the relationship between the two partners, one last attempt at reconciliation was made at a meeting held at Bhatia’s lawyer’s Gurugram office on the 28th
It was at this meeting Gangwal suggested expanding the IndiGo
board to eight members, adding one independent woman director and taking Bhatia’s representation on it from the present 50% to 57% while he continued to have only one nominee director. But he added two conditions : one, that new protocols with regard to RPTs would be put in place and two, he would be freed from his obligation to vote for nominees put forward by Bhatia in the future. According to sources close to Gangwal, the proposal was “great for the company”, “good for Rahul” and “bad for Rakesh” from a control point of view. But it would address his main concerns nonetheless.
However, the specific contract and its language as proposed post the meeting was rejected by Bhatia. The “package” was described as outrageous and one that revealed his “hidden agenda”. According to the Bhatia camp, the very fact that Gangwal was linking his desire to bring in more transparency into RPTs – something the board was already doing – with the need to drop the clause that binds him to vote in favour of Bhatia’s nominees reveals that this was his primary agenda : wresting back some of the control he’d willingly conceded years ago. Gangwal’s proposal implies amending the articles of association – the holy grail - of the company. Why should he agree just because it now suits his partner’s convenience? No robbery has been committed; why should he pay a penalty?
That was the last meeting between the feuding partners. Next thing, the matter had been escalated by Gangwal to SEBI, grabbing national attention and battering the company’s stock, leading to huge monetary losses in notional values of both the men and millions of shareholders.
The Crux Is More Control And Value
Bhatia for his part dismisses Gangwal’s objections to the RPTs as a “red herring” or a “bogey” to conceal his true agenda : wresting some control back from his partner. He is categorical in his assertion that not a single RPT entered into by the airline was not in its best interest at the time it was entered into. While there may be procedural glitches when contracts were drawn up, there was never any malicious intent or wrongdoing at any stage.
Moreover, sources close to Bhatia say that the RPTs have been around from the beginning and nobody objected to anything in the past. In fact, IGE entered into contracts in a supportive role. For instance rental contracts for IndiGo’s office space have been entered into without advances and deposits, something few landlords would agree to. The airline’s latest rental contract is lower than what was paid in the past simply because it’s designed differently.
Nonetheless, since the matter was irking his partner so much, he and the board members had started looking closely into the matter already and would have brought in the transparency Gangwal claims was missing. But on understanding his ulterior motive – which became evident from late 2018 and came out in the open on May 28th
, Bhatia sees no reason to play ball. As far as he’s concerned, his partner is welcome to parade himself as a “crusader for governance” but in the end the truth will prevail.
According to the Bhatia and Co., the shareholder’s agreement that is unusually titled in Bhatia’s favour is a consequence of the fact that Gangwal limited his financial risk in the airline while at peak Bhatia’s exposure was 80 times that of his partner. Sources add that in 2008 when the company went through a turbulent phase, it was again Bhatia who brought in money through IGE to tide the airline over its crisis while Gangwal watched from afar. In return for bearing a majority of the risk, he enjoys control.
Further till July 2018, this unusual control didn’t appear to bother Gangwal. Neither Gangwal nor Anupam Khanna, Gangwal’s board nominee on the audit committee ever raised any objections on any RPTs in 14 years of operation. This convinced Bhatia that the main thing that his partner is after is more control. This control means not just more board representation but also an equal say in who holds the reins and steers the company.
A second factor, sources in the Bhatia camp allege, is bothering Gangwal. One is no longer paying around with peanuts. The stakes have changed altogether from the time the two entered the pact in 2004-05. Today, IndiGo is a highly successful airline with a peak market capitalization of Rs 66,000 crore. With the kind of control Bhatia enjoys, his stake of 38 per cent of the airline is far more valuable than Gangwal’s 37 per cent. Most investors - be it an airline or a group of investors keen to buy - they would value Bhatia’s stake more than Gangwal’s.
Unfathomable Point And Supporter’s Views
How did the duo arrive at an agreement that puts so much control in one of the two hands even as both are almost equal owners of stake is a vexing question.
Gangwal argues that each of them put in an equal amount of equity to the penny when the airline was formed, a point Bhatia refutes. He is however unable to fully explain why he relinquished so much control to his partner if the contribution to the kitty was equal. “Blind trust” sounds like an implausible explanation to anyone who has known him. He’s highly respected both for his domain knowledge and his canny, sharp business instincts. Yet he appears to have signed this unusually tilted agreement.
Bhatia claims to have “generously allotted 50 per cent of equity” of the company at inception to his partner but borne most of the risk himself (in his letter to SEBI he claims it was Rs 1100 crore at the time taking everything into account). He alleges that his partner put the bare minimum equity at the time of formation of the company. Yet he fails to explain why at inception he handed out 50 per cent of the company’s equity to someone who was contributing far less than his share.
Further, when the “company went under the bus in 2008”, the Bhatia camp says that it was he who organized funds to ensure it stays afloat while Gangwal was content to watch from afar. While almost everyone acknowledges and agrees that Bhatia could probably not have built IndiGo into what it is today without Gangwal or someone equally competent and respected in the global industry, would a businessman as astute as Bhatia give up half the stake yet bear almost the full risk?
IndiGo senior management sources say that the fact that Bhatia had started asserting himself (see Part 1) and sidelining his partner irked Gangwal and led him to up the ante on a matter that was in fact trivial. They claim he’s made a mountain out of a molehill and adopted the moral high ground to secure his own position.
Supporters of Bhatia also question the assertion that all this hanky-panky would happen under the nose of the former SEBI chairman M. Damodaran, who is presently chairman of the airline’s board. Damodaran’s impeccable record and keen eye should be deterrent enough, an argument that many don’t buy as all corporate frauds in India do happen under someone’s vigil and often they are people with an unblemished record.
What observers find harder to swallow is that a man like Bhatia who is aiming high and is certainly not in need of cash would play around with RPTs, looking to make a quick buck, especially since the total value of the RPTs entered into is less than one percent of the consolidated turnover of the company. Many feel the suggestion that Bhatia would indulge in what can only be called petty thievery is laughable.
Sources close to Gangwal rubbish the “fighting for more control” story. To him, they argue, control has been and remains immaterial. He was quite content to strategise and guide from afar, as long as his trust was intact. Gangwal, they point out, raised the issue of governance and RPTs and withdrew himself from day to day running in August, well before the hiring of Datta and the engine deal was brokered. The RPT issue has been linked to his being obliged to vote for Bhatia’s nominees because without that and with board control and one pliable board nominee, the IGE group would be “back at the same game”. The very fact that he’s suggesting an expanded board that takes his partner’s representation up from the current 50 to 57 per cent while he retains only one nominee director as at present is evidence that control is not what he’s after. His single concern is better and more transparent governance.
There are numerous other points of dissension between the erstwhile friends that go beyond the scope of this article. Whatever the final outcome of this unhappy episode, one thing is clear : a glass once cracked cannot be fixed. The trust is gone forever and a relationship between two old friends lies in tatters. In this case, many hapless observers will end up paying the price for their inability to resolve their differences. Till that happens, IndiGo, the airline, is going to have to learn to soar with two angry and distracted commanders.