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.
 
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Q1 Revenue Growth To Be the Slowest in Two Years: CRISIL
Corporate revenue is seen growing 5%-6% in the first quarter of FY19-20, the slowest pace in two years, because of a broad-based slowdown in consumption, which has affected sectors such as automobiles and fast-moving consumer goods (FMCG), says a research note. That compares with an average revenue growth of 14%-15% in the past four quarters.
 
The estimate is based on CRISIL Research's analysis of 295 companies which account for about 60% of the market-capitalisation of the National Stock Exchange (NSE). The analysis excludes banking, financial services and insurance (BFSI) and oil sectors.
 
 
Miren Lodha, director at CRISIL Research, says, "Automobiles, one of the key sectors driven by consumption spending, continues to reel under a demand slowdown. Higher cost of ownership continues to dampen consumer sentiment for passenger vehicles, while commercial vehicle sales are being impacted by new axle norms, inventory build-up and liquidity crunch. This also impacts ancillary sectors such as auto components and tyres, which are expected to report lower growth. As for FMCG, weakened rural consumption and a high base are expected to cause a moderation in growth." 
 
Adding to the pain from a slowdown in consumption, according to the ratings agency, is a fall in realisations in key commodity categories, which supported revenue growth in FY18-19, especially the first half. 
 
It says, an expected softening in commodity prices will moderate growth in sectors such as steel, aluminium, natural gas and petrochemicals.
 
"A slower weakening of the rupee, at around 4% on-year compared with about 8% on average over fiscal 2019, is also expected to scrape some growth off key export-linked sectors such as information technology (IT) services. Revenue growth for the latter is expected to moderate to about 12% on year compared with the 17% average growth rate over the past four quarters," it added.
 
 
According to CRISIL, the decline in revenue growth, is cushioned somewhat by sectors such as airline services, cement, and sugar where price hikes have aided realisations and consequently topline growth.
 
Prasad Koparkar, senior director at CRISIL Research, says, “With lower topline growth, India Inc is also staring at lower profitability at the operating level. Growth in operating profit, or EBITDA, is expected to be lower at about 3% on-year compared with around 13% on average in the preceding four quarters. Operating margin is seen contracting up to 50 basis points to about 19.5% as topline shrinks.”
 
 
However, the ratings agency feels an expected softening in prices of most of the common commodities and crude oil on-year is expected to limit margin erosion as end-use sectors benefit from lower input prices.
 
Domestic prices of flat steel and aluminium are lower by around 5% and 15%, respectively, while long steel prices will report only a marginal increase of about 1% year-on-year (y-o-y) in the first quarter. Additionally, oil prices are estimated to lower by 8% y-o-y. Thus, while lower realisations for commodities will impact revenue growth this quarter, a fall in commodity prices will lend support to profitability for end-use sectors, CRISIL concludes.
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Budget 2019-20: Incentive for Affordable Home Buyers
The union budget for FY2019-20 turned out to be a mixed bag for realty sector, with buyers of affordable homes receiving an additional tax incentive, while builders were left out from receiving input tax credit (ITC) benefits under the goods and services tax (GST).
 
In her maiden budget Finance minister Nirmala Sitharaman on Friday, increased interest deduction on loan taken for an affordable home by Rs1.50 lakh. This means that the owner of a  self-occupied house in the affordable segment, valued at up to Rs45 lakh can show interest deductions of Rs3.50 lakh instead of Rs2 lakh.
  
Ramesh Nair, chief executive (CEO) and the country head of JLL, says, “With an objective to help buyers in the affordable and mid-housing segments, an additional exemption of Rs1.5 lakh on interest paid on housing loan, over and above the existing Rs2 lakh, has been provided for properties up to Rs45 lakh. Considering that a majority of homebuyers fall in the lower and mid-income segments, this tax benefit will boost demand substantially. 
 
This will significantly benefit first time homebuyers who will enjoy the benefits of interest subvention under the CLSS scheme and the announced tax benefits. With effective interest coming down, it will increase the eligibility for the mid-income housing segments, open up land parcels of government and PSUs to be utilised for affordable housing and public infrastructure”, according to Mr Nair.
 
Liases Foras, an independent non-broking real estate research company, believes that the move would rationalise housing cost for end user and stakeholder and that it will give an “immense boost to affordable housing in tier-II cities as well as to real estate in peripheral areas of tier-I cities”.
 
Our data shows affordable units (priced less than Rs45lakh) contribute 53% of the unsold supply and 53% of sales across 50 cities in India, says the firm. 
 
 
There was emphasis on several government programs like the Prime Minister Awas Yojana (PMAY), Gramin, a program aimed toward affordable housing for the middle, and lower classes, with the objective of housing for all by 2022, as envisioned by Prime Minister Narendra Modi. 
 
Ms Sitharaman also proposed to bring in a model tenancy law which may give a huge boost to rental property at a time when many youngsters prefer to lease rather than buy. 
 
Commenting on this, Mr Nair from JLL says, “This (the model tenancy law) will be finalised and circulated to the states. Archaic rental laws in the country so far have proved disadvantageous for both, tenants and property owners. The new rental act will bring the required institutional framework in the country and make it more organised and fair for landlords and tenants.” 
 
Non-banking financial companies (NBFCs) and housing finance companies (HFCs) play a crucial role in supporting the real estate sector. 
 
Ms Sitharaman told the Lok Sabha while preseting her budget that housing sector needs efficient and conducive regulation and that National Housing Bank (NHB) plays a difficult and contracitory role of being both lender and regulator of the housing finance sector. "Efficient and conducive regulation of the housing sector is extremely important in our context. The NHB, besides being the refinancer and lender, is also regulator of the housing finance sector. This gives a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulation authority over the housing finance sector from NHB to Reerve Bank of India (RBI)," she said.  
 
According to market players, unification of the regulatory body and to place both NBFCs and HFCs under the aegis of RBI will lead to better regulation of HFCs and improve transparency in the system.
 
The Budget has proposed a one-time provision for six month period to offer partial credit guarantee to public sector banks to buy high rated pooled assets worth Rs1 lakh crore from NBFCs. This will provide the much needed liquidity to the NBFCs. They can thus liquidate their portfolio and meet their liabilities in a timely manner. Additionally, it will induce an atmosphere of confidence.
 
While the budget had a lot for the housing sector, expectations were riding high and there was disappointment as well. Pointing to the flip side, Anuj Puri, chairman of Anarock Consultants Pvt Ltd. Says, 
 
“From the real estate perspective, the budget did not meet many expectations as it failed to address the sector's most pressing concerns. We may not see consumers and investors return to the market in sufficient numbers - barring in affordable housing. The all-important ‘industry status’ remained elusive, taxes were not sufficiently moderated and land reforms were not mentioned at all,” he says. 
To revive the ailing real estate sector and ease the liquidity crisis, the government has to revive investor sentiment. However, according to Mr Puri, the budget failed to announce sufficient key initiatives and measures to bring investors back to the real estate market and thereby help pump some badly needed liquidity into the system.
 
Pre-budget, there were strong indications that the Centre would create a stress-asset fund to get work started on the stuck projects and provide relief to cash-starved developers as well as aggrieved homebuyers. The fact that it did not materialize is a major disappointment, he says, adding increase in customs duty on various raw materials such as PVC, and vinyl floor may put additional pressure on the pricing of residential real estate.
 
ITC benefit in GST left out
Without ITC benefits, builders suffer a major cut in their profit margins, Mr Puri says. “Not only are the consequent losses offset by higher prices to buyers, but they also result in a curtailed supply pipeline which does not bode well for amenable pricing going forward,” he added. 
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COMMENTS

Pradeep Kumar

1 week ago

Focus on affordable housing segment is much appreciated. I believe a little more could have brought by unifying the interest rate offered by different banks under different methods. Mainly RBI interest rates & NHB interest rates different, not getting much benefits under NHB, this issue should have been given priority.

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