Signs of truce at IndiGo as promoters Bhatia, Gangwal agree on compromise formula

IndiGo's feuding promoters, Rahul Bhatia and Rakesh Gangwal, have finally managed to hash out a truce, sending the share price of parent firm InterGlobe Aviation up nearly 2 per cent in intraday trade. The two-day board meeting over July 19 and 20 - to consider the unaudited financial results for the June quarter as well as to discuss governance issues, which was the bone of contention between the promoters - helped pave the way forward.

A source in the know told The Business Standard that IndiGo Chairman M. Damodaran, played a key role in brokering peace between the promoters. While Bhatia and his InterGlobe Enterprises (IGE) Group own around 38 per cent of the airline, Gangwal and his affiliates own a 36.68 per cent stake. Here's a look at the compromise formula that the duo have agreed on so far:

Amending the Articles of Association

According to reports, the April 2015 shareholders' agreement between Gangwal and Bhatia that will expire in November, won't be renewed. The Board of Directors agreed to amend the Articles of Association of the Company for expanding its size from six members currently up to a maximum of 10. The Institutional Investor Advisory Firm (IiAS) had recently flagged off IndiGo's board size as an area of concern, pointing out that the median size on Indian boards is 8-9 directors.

"The said amendment of the Articles will be subject to approval of the shareholders at the forthcoming Annual General Meeting of the Company," InterGlobe Aviation said in a regulatory filing last week. The AGM is expected to happen towards end-August. A head hunting firm will reportedly be appointed by the board to search for new directors in order to ensure their independence.

Board composition

Of the airline's current six-member board, three are promoters, one is a promoter nominee and only two are independent directors. But the new board structure will pack in four independent directors, including a female one. According to Securities and Exchange Board of India (SEBI) regulations, all listed companies must have at least one woman director on their boards, something that IndiGo is yet to comply with. This was one of the examples of poor governance cited by Gangwal in his complaint letter to the regulator earlier this month.

According to the daily, of the proposed 10-member board, IGE will nominate five, including chief executive officer. Gangwal will continue to be the only representative from his side, and will not nominate any director. Incidentally, in his letter to SEBI, Gangwal had requested SEBI "to look into and, if thought fit, ask the Company to make necessary changes to the unusual controlling rights available to the IGE Group". Courtesy these unusual rights, Bhatia enjoys greater control over the board and management, including the right to name its managing director, CEO and president. While SEBI is still looking into the allegations, the current compromise formula does not change much for Gangwal in terms of control.

Related party transactions

The board has reportedly unanimously approved a new policy on related party transactions (RPTs). Gangwal had alleged "questionable" RPTs between IndiGo's parent and Bhatia's IGE Group, and had wanted all such transactions to be vetted by an independent agency. Under the new policy, external advice would be sought for all such transactions that are worth over Rs 2 crore and a bidding process would be mandatory for those contracts. Furthermore, any further changes in RPTs would have to be unanimously approved by the airline's independent directors.

"This is to ensure that neither Bhatia nor Gangwal will be able to amend the RPTs in their favour in future," said a source. The four top executives of the company - CEO Ronojoy Dutta, CFO Rohit Philip, General Counsel Priya Mehra, and Company Secretary Sanjay Gupta - have been asked to design stronger procedures for entering into such transactions. However, the audit committee will decide whether or not to have an independent agency to vet all matters related to RPTs.

Stake sale agreement

In case either Bhatia or Gangwal decide to sell their respective shares, they have to first make an offer to the other promoter. This first right of refusal clause, which would have lapsed in November, will now continue

(Edited by Sushmita Choudhury Agarwal)

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