IndiGo: Co-founder Rakesh Gangwal Seeks SEBI Intervention on Corporate Governance Issues
Rakesh Gangwal, one of the founders of lnterGlobe Aviation Ltd (IndiGo), has raised several issues on corporate governance in the carrier. In a regulatory filing
, the carrier has said that Securities and Exchange Board of India (SEBI) has forwarded it a letter from Mr Gangwal and asked for response by 19 July 2019.
In the letter to the market regulator, which is shared by IndiGo, Mr Gangwal says, he "is constrained to seek SEBI's intervention to direct the Company to amend its articles of association to comply with SEBI Regulations, to strictly follow the requirements prescribed by SEBI in letter and in spirit on board matters and proceedings and to direct the Company to allow for the extraordinary general meeting (EGM) resolution to be placed in front of all the shareholders of the company."
In effect Mr Gangwal has declared war by sending the letter to the finance minister, the minister of commerce and industry, aviation minister, DGCA (Directorate General of Civil Aviation), secretary of ministry of corporate affairs (MCA) and the stock exchanges.
Interestingly Mr Gangwal anticipates that IndiGo, with its powerful board members will try and dismiss the allegations as being procedural or trivial and seems to have decided to take the entire dispute into the public domain. It will be interesting to see how the government reacts at a time when the entire industry itself is roiled in turmoil.
Mr Gangwal points out to SEBI that he and Rahul Bhatia, the other co-founder have about equal shareholding of around 37-38% in IndiGo while the balance stake is held by public shareholders. But he entered into an agreement that allows Mr Bhatia and his affiliates (IGE group) 'unusual controlling rights over IndiGo' out of 'a deep trust built over a decade long friendship' and because he had “no desire” to have any meaningful control of the company.
Essentially he accuses Mr Bhatia of “building an ecosystem of other companies that would enter into dozens of related party transactions with IndiGo” and doing this without proper checks and balances.
He also alleges questionable practices leading to a failure of corporate governance and goes on to highlight what these are in precise bulleted points:
Violations of various corporate governance regulations prescribed by SEBI and violations of the Company's Code of Conduct for Directors and Senior Management.
In a split vote, the Board taking the decision to not allow an Extraordinary General Meeting of shareholders (EGM) upon being requisitioned by shareholders with approximately 37% of shareholding in the Company and also refusing to cooperate and provide the necessary information for the requisitionists to conduct the EGM themselves despite this right being available under law.
Board decisions and resolutions on critical matters being implemented without basic governance protocols and laws being followed.
Significantly diminishing and taking away the authority vested by SEBI to the Nomination and Remuneration Committee (NRC} for identifying persons who may be appointed in senior management. This was done by pushing through a Board resolution that now gives IGE Group the right to identify and screen the candidates for Managing Director, the Chief Executive Officer and the President of the Company. And, also the right to propose to the NRC the appointment, the job profile, qualifications and remuneration of such candidates and require the Company's HR organization to provide all necessary support to the IGE Group on these matters.
IndiGo has since its inception had an "independent director" as its Chairman. However, the provision in the articles of association stating "The Chairman of the Board shall be appointed on the nomination of the IGE Group... " has the real potential to take away the independence of the Chairman. It has been a common practice at IndiGo that IGE Group nominates or "recommends" a single person for appointment as IndiGo's Chairman and, from this candidate pool of only one person, that individual is then appointed and designated as an "independent director". While, we aren't questioning the independence of the current Chairman in his decision making, we are questioning the designation of such an individual as "independent". This process of appointing an "independent Chairman" at IndiGo is the classic "Hobson's choice" and a sophisticated way to circumvent SEBI rules and avoid the requirement of designating such a Chairman as non-independent which would then have required IndiGo to have a majority of Directors to be independent. It simply does not meet the requirements and spirit of the regulations prescribed by SEBI.
Not having appointed an independent woman director, a requirement that SEBI gave time to the Company since May 2018 to comply.
"In closing, we recognize that there are influential and powerful people on the Company’s Board who will use their position to influence the outcome of the campaign that the RG Group has embarked upon. Their biggest arguments to downplay the issues will be that these are minor “procedural irregularities” and the Company is addressing them. However, we take comfort in the fact that no one is above the law and India is changing for the better," Mr Gangwal concludes.