IndiGo Promoter Spat: Can SEBI Or MCA Intervene?

The ongoing blame game between promoters of InterGlobe Aviation Ltd. boils down to two questions—has there been any wrongdoing and if yes, who can rectify it?

On his part, Promoter Rakesh Gangwal has requested the Securities and Exchange Board of India to intervene on grounds that the regulator's corporate governance norms have been violated through decisions taken by Co-Promoter Rahul Bhatia. Questionable related party transactions between InterGlobe and Bhatia Group entities and unusual rights that give Bhatia control over the board have led to governance failures, Gangwal alleged. A copy of the complaint has also been sent to the Ministry of Corporate Affairs.

But lawyers BloombergQuint spoke with said that unless Gangwal can make a case before the market regulator that the interests of a larger set of public shareholders have been harmed, it may not intervene. Equally, unless a case of fraud can be made out, the MCA, too, may leave it to the board and public shareholders to address the issues raised by Gangwal.

RPTs: The Right Forum

One of the key disputes between Gangwal on one side and Bhatia and the company on the other revolves around related party transactions, or RPTs. InterGlobe transacts with several companies owned by or connected to Bhatia for services ranging from ticketing to crew accommodation to simulation training. Gangwal has alleged several irregularities in these RPTs, ranging from lack of competitive bidding to lack of audit committee approval in some cases and backdating of contracts in others.

Gangwal sought an extraordinary general meeting of InterGlobe shareholders to enforce a protocol regarding RPTs and to recommend new safeguards.

I believe that the issue of RPTs raised by Gangwal is serious enough to warrant an inquiry and should be looked into by SEBI, Tushad Cooper, an advocate at the Bombay High Court, told BloombergQuint. I don't buy into the argument of the Bhatia Group that the RPTs represent a very small percentage of the turnover of the company and that they are insignificant, he said.

The real test here is whether this is an issue that concerns only the internal management of the company or it impacts the interests of public shareholders at large, Vikram Nankani, senior advocate at Bombay High Court, told BloombergQuint.

The decisions can be in the interest of the company and a particular shareholder but may not be palatable to a set of shareholders—in such cases, the regulator won't intervene, he said. There is no bar under SEBI's regulations to enter into RPTs as long as they've been disclosed and it's not clearly made out in Gangwal's letter as to whether there's been a breach that SEBI should immediately clamp down upon, Nankani explained.

The extraordinary general meeting that Gangwal is seeking to suggest certain protocols for RPTs could be a strategy to get public shareholders on his side, Cooper said.

The resolution would have a persuasive effect and could perhaps restrain the Bhatia Group from disregarding those recommendations, Cooper added.

What About “Unusual Rights”?

The second contentious issues relates to shareholder rights that the Bhatia Group enjoys under the Articles of Association. At the time the airline was founded, Gangwal gave the Bhatia Group control of the board via several rights in the shareholders agreement that is embedded in the Articles of Association. These include:

• Right to appoint three of six directors on board.
• Chairman shall be appointed on nomination of Bhatia.
• Right to nominate and appoint managing director, chief executive officer and president.
• Voting arrangement that requires Gangwal and affiliates to vote alongside Bhatia group on appointment of directors.

Gangwal has claimed that these “unusual rights” are being allegedly abused to allow RPTs and governance failures. He wants SEBI to review them and has also asked the company to amend its Articles of Association.

This issue is beyond SEBI's jurisdiction, both the experts said.

In my view, such rights which are reserved under the shareholders' agreement and which have been embodied in the Articles of Association can and ought to be upheld, Cooper said. SEBI may not look into these rights because there's no infirmity with such preferential rights being awarded under the Articles of Association, he said.

Shareholders who subscribed to the public issue were aware that these rights have been given to the Bhatia Group and so, it's unlikely that SEBI will interfere with that, Cooper added.

The right forum is the NCLT; SEBI should not rush into entertaining such complaints and not convert itself into a body who is settling inter se disputes between shareholders, Nankani said. SEBI's role is to check fraudulent or unfair practices which affect the interests of investors and the integrity of the market and not decide inter se shareholder disputes which can be ventilated in a different forum, he said.

The Articles of Association can be amended only via a special resolution and if today the terms seem unfair, too bad, Nankani said. There is neither an allegation of coercion nor were the shareholders so placed that one of them had an uneven bargaining position, he pointed out.