The rift between IndiGo Co-founders Rahul Bhatia and Rakesh Gangwal, over the alleged corporate governance issues raised by the latter, could go out of control if not resolved early, said a top due diligence expert.
"If they are talking to each other, and are amicable, then the whole controversy could become a non-issue. If not, then this could spiral out of control and may impact employees, customers and other stakeholders," said Tarun Bhatia, Managing Director and Head of South Asia in the Business Intelligence and Investigations practice of Kroll, a division of global valuation and corporate finance advisor of Duff & Phelps.
Gangwal has written to market regulator SEBI, highlighting alleged related party transactions between India's biggest airline and InterGlobe Enterprises, which is controlled by Bhatia. Gangwal has also questioned the 'unusual rights' of IGE, giving it more power when it comes to the appointment of senior leadership.
IGE, on the other hand, contended the claims and said related party transactions amount to less than a percentage of IndiGo's topline. Also, it has said the shareholders' agreement was agreed to by Gangwal and was re-negotiated and signed by both the sides when the airline got listed in 2015.
SEBI has asked IGE to respond by July 19, when the IndiGo Board also meets to discuss the June quarter financial results.
"From a customer's point of view, the airline industry has already been impacted, because of the suspension of Jet Airways operations, and a question mark over Air India's health. If this (the IndiGo rift) is not solved early, then there will be scepticism among employees and customers over the future," said Tarun, in a conversation with Moneycontrol.
While investors may hesitate to put money in the industry, and specifically on IndiGo stock, institutional lenders may also have a rethink.
"The lenders may want to raise questions... and won't be cutting cheques without getting answers," Tarun added.
Independence of Board
While differential voting rights is commonly seen in private companies, few listed companies have it, said Tarun.
In IndiGo, while Gangwal holds about 37 percent stake, Bhatia and his family have a little over 38 percent of the airline's shareholding. Though the difference in the shareholding is little, the shareholders' agreement between the two tilts the balance of power in Bhatia's favour.
While the agreement itself is not a corporate governance issue, the challenge may come when, for instance, one talks about the Board composition, said Tarun.
"IndiGo has a small board, with six members. Most companies have nine to 10 directors. But three of the six are nominees of a single shareholder. So one could question the process and independence of the Board," he said.
Apart from Rahul Bhatia, his wife Rohini is also a director in the airline. Anil Parashar is an IGE veteran. Apart from them, and Gangwal, IndiGo's board has two independent directors - Anupam Khanna, and M Damodaran, who is also the Chairman.
Procedural loop
If the two promoters fail to come to a compromise, then it will be up to SEBI to take a decision, and that could be a lengthy process.
"The market regulator will ask questions, investigate and also look into the report commissioned by IndiGo on the related party transactions. The whole case could go into a procedural loop," said Tarun.
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