Why IndiGo's co-founder Rakesh Gangwal might be exiting the airline

The country's largest airline, IndiGo, which is in news for more than six months over spat between its co-founders Rahul Bhatia and Rakesh Gangwal has recently informed the stock exchange that it's planning to hold an EGM (extraordinary general meeting) in end January to make amendments to the company's Articles of Association (AoA). The AoA was signed between Bhatia and Gangwal to define their rights in the company. Now, these rights are heavily loaded in favour of Bhatia which has led to the fracas between the two.

The EGM, which is requisitioned (or called) by Gangwal, has sought to delete some articles pertaining to the transfer of equity shares, acquisition of shares, and other provisions on equity shares. The reasoning given by RG Group (Gangwal's side) is that since the shareholder's agreement (SHA) has expired last November, so some of the provisions of SHA which were included in the AoA have also expired, and need to be removed. The operative word here is "remove", and not "re-incorporate" as one would expect from Gangwal if he wanted to protect his shareholding in the airline (more on that later). At the moment, IGE Group (about 38 per cent) and RG Group (about 37 per cent) have an almost identical shareholding in IndiGo.

More importantly, Bhatia's IGE Group has agreed for the EGM request by the RG Group. It may be noted that Gangwal's earlier request to hold EGM last year on controversial RPTs (related party transactions) was categorically denied by the IGE Group after seeking  a legal opinion from a retired judge of the Supreme Court. In fact, the fight between the promoters escalated largely because IGE Group was against the idea of holding an EGM sought by the Gangwal camp.

But what does it imply? In order to understand the issue better, it's important to dig deeper into the articles (in AoA) that deal with the transfers and acquisition of equity shares of both RG Group and IGE Group. Broadly, these articles say that if one of the two parties is interested in selling its shares to a third-party, then the other party has the first right of refusal and right to tag along.

Let's understand with an example. If RG Group wants to sell its 37 per cent shareholding in InterGlobe Aviation, it would have to tell IGE Group about the price at which it plans to offload those shares, disclose the name of the buyer (which cannot be a competitor), and the date of the share sale. If IGE Group matches the price, then it would get preference over the third-party buyer. In addition, the IGE Group can also direct RG Group to ask the third-party buyer to purchase shares from IGE Group as well which should be at least 18.5 per cent of the InterGlobe Aviation's shareholding.

By removing these "binding" articles, each party would then be free to sell their shares (in part or full) to anybody they choose to (subject to SEBI's regulatory norms). But why does Gangwal want to remove these articles in the first place when he can simply exit the company by selling his stake to Bhatia at a competitive price? It's becoming clear that the idea behind this EGM - and that's why the fight has possibly dragged on for so long - is that Gangwal doesn't want to sell his stake to Bhatia's IGE Group. Why? Nobody knows. But evidences are somewhat obvious.

The fact that Bhatia has agreed to an EGM is perhaps the first step in making it easier for Gangwal to sell his stake in the low-cost carrier. Bhatia, who is probably tired of fighting with his former friend, seems to be looking for a closure after the EGM. He might be open to give an exit to Gangwal at the terms which are suitable to Gangwal (which essentially involve selling his stake to anybody except Bhatia).

Email queries sent to IndiGo didn't elicit response.

Bhatia seems to have already given in to the demands of Gangwal by adding a woman director (Pallavi Shardul Shroff) to the IndiGo's board in September - taking the total board strength to seven, which was Gangwal's proposed number. Bhatia had earlier sought board strength to be increased to 10 members.

In October, Bhatia had submitted a request for arbitration in the London Court of International Arbitration against Gangwal. Prior to that, both promoters were engaged in a bitter dispute making tall allegations against each other. For instance, in a June 2019 letter to the board, Bhatia wrote that "the script of the play stands exposed even more starkly as Gangwal makes innocent fig leaf statements of standing by and honouring the SHA and being a crusader of corporate governance."

Gangwal, in July, wrote to SEBI chairman that "the unusual rights available to the IGE Group in conjunction with the lack of diversity and paucity of independent directors in the board may very well be at the root of why governance matters have taken such a back seat at IndiGo."

The genesis of this fight, according to Bhatia, goes back to early 2018 when Gangwal asked him to expand the board. Bhatia was fine with the expansion as long as his board representation remained intact, which meant 50 per cent IGE Group nominees. This seemed to have irked Gangwal who then requested an EGM from IndiGo's board to adopt new RPT protocols for transactions between the airline and Bhatia's IGE Group.

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