IndiGo Promoter Dispute: Gangwal Says 10-Member Board Will Lead To Large Governance Loophole

Rakesh Gangwal, co-promoter of InterGlobe Aviation Ltd. that runs India’s largest airline IndiGo, said he is unable to support the special resolution for expanding the company’s board to 10 members in its present form as it will lead to a large governance loophole in favour of the Rahul Bhatia-controlled InterGlobe Aviation Enterprises Group.

“I am no longer in a position to vote affirmatively on the special resolution for ‘Alteration in Articles of Association of the Company’, unless, as discussed in numerous emails, (i) a complimentary board resolution is passed to prevent IGE Group from getting even more rights and abilities that they have today and (ii) the new RPT policy is adopted, language for which has already been agreed,” said Gangwal.

A special resolution requires 75 percent of shareholders to vote in its favour. Gangwal has 37 percent stake in the company, which puts the resolution at risk.

In a letter to the board of directors, Gangwal said while the board has agreed on all contractual language for the new related party transaction policy and the board size composition, the sequence of the adoption of these policies, as suggested by Bhatia, will benefit the IGE Group in terms of corporate governance. The RPT policy, too, has not been formally approved by the board, which may lead to its dilution once the IGE Group gets an upper hand, he said.

“Subsequent to the board meeting and in finalising the language on the Article, all of us realised that the proposed board structure created a large loophole that gives the IGE Group additional powers that they not have today. Essentially, when there are less than four independent directors, it will allow the IGE Group to pass any company policy that they want just on the basis of their board numbers being larger than all other board members combined,” Gangwal said in the letter.

Once the loophole was flagged, the IGE Group on July 24 proposed that appointment of their nominee directors would not precede the appointment of the independent directors. The group, however, refused to close the large loophole, Gangwal said. “It is inevitable that in the future, there will be periods of a few months when we will have less than four independent directors (retirements, resignations, etc). And for these situations we have not resolved the governance loophole.”

On July 22, the airline’s operator told the bourses that it is expanding its board strength to up to 10 members, including up to four independent directors. The changes to Articles of Association proposed in the forthcoming annual general meeting on Aug. 27 allows for appointment of two additional non-independent directors by the IGE Group, including a key managerial personnel and two independent directors.

InterGlobe Aviation’s board currently has six directors. These include Chairman M Damodaran, Rakesh Gangwal, Rahul Bhatia, his wife Rohini Bhatia, Anupam Khanna and Anil Parashar. Of these, only Damodaran and Khanna are non-executive independent directors.

Gangwal now suggests that the chairman should have a board resolution passed to raise the board’s size to seven members (instead of 10) and allow for the addition of an independent woman director, and then issue a resolution to alter the Articles of Association to accommodate a seven-member board. “Due to how the math and SEBI rules work, a seven-director board will close the large loophole automatically,” he said.

He also suggested that the new RPT policy be put in place immediately.

In response to Gangwal’s letter, Chairman Damodaran said after the amendment of Articles of Association, the first vacancy will be filled by a woman independent director, the second by a wholetime/executive director, the third by an independent director and the fourth by an IGE nominee.

“In the event of the position of an independent director falling vacant, the nomination remuneration committee, headed by Dr. Anupam Khanna, independent director, will be required to take steps to fill in the vacancy,” he said in the letter disclosed by the company on the stock exchange. “The fear that, in the interim, the IGE Group will push through questionable decisions, does no credit to the independent directors that will be on the board, or to the fiduciary responsibilities of the directors, including those nominated by the IGE Group.”

Damodaran also said the company will convene the meeting of audit committee, NRC and the board after the Aug. 27 annual general meet. The meetings will approve RPT proposals and appointment of the woman independent director.

Shares of InterGlobe Aviation extended their decline for the fourth session on Tuesday. The stock fell more than 5 percent intraday compared with a 0.40 percent gain in the Sensex. IndiGo shares have fallen 8.5 percent in the past three months compared with a 5.3 percent decline in the Sensex.

Read Gangwal’s full letter and Damodaran’s response here: