There seems to be no end to the turbulence in Indian aviation.
An escalating feud between the promoters of India’s largest airline by market share, IndiGo, is the latest problem to grip the industry, months after the grounding of Jet Airways threw the sector into a tailspin.
Yesterday (July 9), Rakesh Gangwal, a promoter of InterGlobe Aviation, which runs IndiGo, wrote a letter to market regulator, Securities and Exchange Board of India (Sebi), alleging serious governance lapses (pdf) on part of the company’s co-founder and non-executive director Rahul Bhatia.
In the letter, Gangwal said:
IndiGo was founded with the objective of creating an airline to serve the people of India with a world class product and built on foundations of transparency, uncompromising values and principles…However, today, IndiGo is at a watershed moment. It has started veering off from the core principles and values of governance that made IndiGo what it is today.
Beyond just questionable related party transactions, various fundamental governance norms and laws are not being adhered to and this is inevitably going to lead to unfortunate outcomes unless effective measures are taken today.
Gangwal holds 37% stake in IndiGo, while co-promoter Bhatia holds 38%. The remaining 25% stake of the company is held by public shareholders. IndiGo declined to comment on the issue.
What’s the problem?
In his letter, Gangwal alleged that IndiGo had entered into various related-party transactions with the IGE Group, which is an “affiliate” of Bhatia, without seeking audit committee approval and without seeking competitive bids from third parties.
For instance, Gangwal said, IndiGo’s office spaces are always rented from IGE group companies. This year after the expiration of the lease, the company renewed the same, he said. “Instead of the lease rates logically increasing at renewal, the new lease rates going forward were lower by more than 25%,” Gangwal alleged. “To the best of our knowledge, such competitive bidding was not entered into when the original lease agreement was entered into with the IGE Group entities years ago.”
Besides Sebi, which has sought a response from IndiGo about the allegations, Gangwal has also sent the letter to prime minister Narendra Modi, finance minister Nirmala Sitharaman, commerce minister Piyush Goyal, aviation minister Hardeep Singh Puri, and civil aviation regulator Arun Kumar, a report in The Economic Times newspaper stated.
Market leadership in danger
This debacle can hurt IndiGo’s brand. The airline has a 49% share of India’s aviation market.
“It’s now to be seen how the regulator (Sebi) proceeds from here and what action it’ll take,” Ashish Nainan, analyst at ratings agency CARE, told Quartz. “The status-quo in the company will impact its growth for a while and put the airline in jeopardy as now the attention will be on issues that won’t help in making strategies to deal with the competition.”
Meanwhile, shares of InterGlobe Aviation fell around 19% to Rs1,264.85 ($18.44) apiece in intra-day trade on BSE, following news of the feud. The shares hit their lowest since March and are on course for their worst day since January 2016.