Rahul Bhatia’s IGE rebuts Gangwal’s claims

Rahul Bhatia’s InterGlobe Enterprises (IGE) issued a detailed statement on Wednesday evening rebutting charges of having flouted corporate governance norms at IndiGo that were raised by the airline’s co-founder Rakesh Gangwal. Bhatia and IGE own approximately 38% stake in InterGlobe Aviation Limited (IGAL), which owns and operates budget airline IndiGo.

Gangwal in a letter to the Securities and Exchange Board of India had alleged violations of corporate governance norms by Bhatia and IGE, specifically with regards to related party transitions (RPTs) between IGAL and entities of IGE and its group companies (The IGE Group). His allegations over RPTs include instances of missing audit committee approvals, absence of competitive bids and retrospective signing of agreements.

“All RPTs have been executed on an arms’ length basis and in the ordinary course of business,” read IGE’s statement. “The materiality of the transactions for IGAL is not significant, it is only 0.53% of IGAL’s consolidated turnover for FY 2018-19.”

Over the years, the RPTs between IGAL and the IGE Group have been in six areas: real estate leased to IGAL; call centre and IT services; simulator training facilities; general Sales Agent agreement (GSA, originally for domestic passenger and cargo, and for certain foreign markets); shared services; and crew accommodation at Accor Hotels. The existence these RPTs were said to have been disclosed at the time of IGAL’s IPO in 2015.

“As on date, RPTs exist only in four areas: (i) Real Estate leased to IGAL (ii) Simulator Training Facilities; (iii) GSAs (for limited foreign markets only); and (iv) Crew Accommodation at Accor Hotels,” IGE clarified. The monetary value of these RTPs for fiscal 2019 was ₹150.12 crore, having grown by 26% over the previous year. The GSA business grew by 175%, which IGE said was a reflection in the increase in [international] flight operations and passenger traffic.

“In 2015, when the domestic passenger GSA arrangement came up for renewal, IGAL decided not to renew it. IGE accepted the decision. In 2016, IGAL terminated the domestic passenger GSA arrangement arbitrarily. The decision was accepted by IGE. Currently, the surviving GSA arrangement is for limited foreign markets and is on an arms’ length basis,” said the IGE statement, which went on to detail each of the existing RPTs between IGAL and the IGE Group.

On Wednesday, IGAL’s share price tanked by almost 20% during trading hours, ending the day at ₹ 1.397.75 apiece, down 10.73% over the previous day’s close. Despite the ongoing battle between the airline’s promoters, brokerage firm ICICI Securities maintains a BUY rating on IGAL’s stock “considering [the] strong business fundamentals.”

“The core issue [between Bhatia and Gangwal] remains of overriding power of IGE in the board which, as per RG group [Gangwal], is leading to decadence of governance standards of IndiGo related to issues of RPTs,” read an analyst report by ICICI Securities. “IGE, on the other hand, claims that RPT allegations are baseless (with validations of EY audit report apart from being immaterial) and are veiled attempts to dilute the controlling rights of IGE as provided under the articles of association of IndiGo,” the report said.