Inter Globe Aviation (IGA), which runs IndiGo
Airlines, is co-promoted by Rahul Bhatia and Rakesh Gangwal. The Bhatias have a 38.26 per cent stake and the Gangwal family has a 36.68 per cent stake in the airlines. Institutional shareholders hold 20.12 per cent shares and non-institutional shareholders hold 4.95 per cent shares. IGA got listed in 2015. According to the shareholder agreement, Interglobe Enterprise Group (IEG), which is controlled by the Bhatias, has the right to nominate three non-independent directors and the RG Group, which is led by Gangwal, can appoint one non-independent director. IEG has the right to appoint the chairman of the board, the CEO, the MD, and the president of the company. The shareholder agreement, which will expire in October 2019, gives overarching control to Bhatia. IndiGo
is operating efficiently and growing fast because it has benefitted from the friendship between Bhatia and Gangwal, and their complementary capabilities.
Of late, a rift between them has surfaced. The IGA board has six members -- three non-executive promoter directors (Rahul Bhatia, Rohini Bhatia and Rakesh Gangwal), one nominee of the promoter director, and two independent directors. Both the independent directors (M Damodaran and Anupam Khanna) have excellent credentials. Damodaran is the chairman of the board. Gangwal is seeking regulatory intervention on past related-party transactions (RPT) and non-independence of the current chairman. The conflict in IndiGo
provides a context to look at an important corporate governance issue — independence of independent directors.
The composition of the IGA board meets the regulatory requirements, except that there is no woman director. The regulation requires that if the chairperson is a non-executive chairperson, one-third of the directors should be independent directors, and if the chairperson is an executive chairperson, half the directors should be independent directors. The board is not ideal, because it lacks diversity and the so-called independent directors are not perceived to be independent.
According to the regulation, a nominee director is not an independent director, because he/she represents a particular interest group. Damodaran and Khanna are not classified as nominee directors. They are classified as independent directors. It might be correct legally, but classifying them as such does not meet the highest standard of corporate governance, because Damodaran is nominated by the Bhatias and Khanna is nominated by Gangwal. Positions taken by Damodaran on various issues suggest that he is supporting the views of Bhatia. Similarly, the positions taken by Khanna suggest that he is supporting the views of Gangwal. It is quite possible that by application of mind independently, without any bias, Damodaran is finding the proposals of Bhatia more acceptable in the interest of the company, and Khanna is finding the proposals of Gangwal relatively acceptable. But, as they are nominated by Bhatia and Gangwal, respectively, it creates a suspicion that they may not be able to apply independent mind to the issues arising from the conflict between the two co-promoters. As it is said, perception is more important than reality. It will be interesting the see how the Securities and Exchange Board of India (Sebi) intervenes and what view it takes on the independence of the current chairman.
Under the law, the chairperson of the board does not enjoy any special power, unless the Articles of Association confers casting vote. He/she is responsible for conducting meetings effectively. Even in the absence of special power, the chairperson can influence board decisions in favour of the controlling group by creating a board culture, which stifles open discussion, and by setting the agenda in consultation with the CEO and prioritising agenda items according to the preference of the controlling shareholder. Therefore, to balance the power between the CEO and the board, the chairman should be a non-executive chairman, who is independent in its true sense, and independent directors are truly independent. In the absence of an independent nomination and remuneration committee, the dominant shareholder tacitly influences the board to nominate its candidates for the position of independent director. In most promoter-driven companies, independent directors are appointed with the blessings of the promoter. Therefore, in a way, they are the nominees of the controlling shareholder, although they fulfil the criteria of independent director specified in the Companies Act 2013. In the case of IGA, it is obvious that the independent directors, including the current chairman, are nominee directors.
Institutional shareholders and other minority shareholders may not be much concerned about the corporate governance issues raised by Gangwal. Good corporate governance does not necessarily create value. But the relationship of trust between the two co-promoters is essential for protecting and creating value.
The writer is director, Institute of Management Technology Ghaziabad
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