Amid promoters' spat, IndiGo's Rakesh Gangwal calls for EGM on January 29

The duo, together holding 75 per cent stake, is credited with building a successful airline, which at present is worth about Rs 64,627 crore-many times more than the promoters' initial investment

The public battle between Rahul Bhatia and Rakesh Gangwal — co-founders of the country’s largest airline, IndiGo — has taken a new turn with Gangwal convening an Extraordinary General Meeting (EGM) of the company. The EGM, scheduled for January 29, will vote on changes in the Articles of Association (AoA) demanded by Gangwal. The changes are meant to scrap the AoA provisions that give the right of first refusal to both the promoters over each other’s shares in the company. 

The duo, together holding a 75 per cent stake, is credited with building a successful airline, which is worth about Rs 64,627 crore — many times more than the promoters’ initial investment. However, they publicly fell out last year after Gangwal wrote to the Securities and Exchange Board of India, alleging lack of corporate governance. Gangwal complained that Bhatia, who holds controlling power, used it to execute questionable related-party transactions between his  group company  Interglobe Enterprises (IGE) and IndiGo.

Gangwal felt the need for an EGM as that’s the only forum where removal of clauses is possible from the Articles of Association, which were part of the shareholders agreement that expired in November. Gangwal believes the agreement restricted his control and prevented him  from diluting his stake without Bhatia’s permission. However, it will be difficult to pass the resolutions as changes would require support from 75 per cent shareholders.

“Without Rahul Bhatia’s support, it’s impossible for Gangwal to pass the resolutions,’’ said Mohit Saraf, senior partner at law firm Luthra & Luthra. Any EGM resolution requires support of 75 per cent shareholders. When the AoA was being framed, Gangwal should have insisted that any change to the shareholders’ agreement must automatically reflect in the AoA, Saraf pointed out. Sources said Bhatia would also start communication with institutional shareholders seeking their vote against the resolutions.

Gangwal didn’t respond to multiple calls and text messages.

The shareholders’ agreement between Gangwal and Bhatia, according to clauses in the agreement, was valid for four years after the IPO in 2015. A clause in the agreement conferred on the founders the right of first refusal for each other’s shares in case one of them wanted to sell. The agreement also contains a ‘tag-along’ clause, which stipulates that the other promoter has the right to join any share-sale transaction and sell his stake along with the one who is exiting.

“The fourth anniversary of the IPO was on November 10. Therefore, the agreement has automatically expired. But as on date, the articles contain several provisions of the shareholders’ agreement that were incorporated into the Articles. As these provisions have now expired, RG Group seeks an amendment to the Articles to remove those expired provisions,” the Gangwal family said in the EGM notice.

However, IndiGo refused to amend the AoA saying that it has legal opinion that the agreement and the articles do not impose an obligation on the board and the management to approve the proposed amendments.

“The company has been advised that the shareholders’ agreement and the Articles do not impose an obligation on the board and the company’s management to approve the proposed amendments to the Articles,” IndiGo said.

Legal experts said it was mandatory for the AoA to be amended to reflect the expiry of the shareholders’ agreement. “Shareholders’ agreement is not binding on the company. The AoA has to be amended to reflect that the shareholder’s agreement has expired. The AoA overrides the shareholders’ agreement,” said Saraf.

Sources said the right of first refusal clause to Bhatia dilutes the value of Gangwal’s shares as he will not be able to sell his stake to any other buyer unless Bhatia agrees.

“First, he doesn’t have any control over the company. With the right of first refusal for Bhatia, it will be very difficult for Gangwal to attract buyers for his stake in the company. He knows the company is valuable, hence is now desperately trying to amend the clauses,’’ a person close to Bhatia pointed out. This also shows that the fight between the promoters was due to Gangwal’s intent to get Bhatia’s controlling rights diluted, he said, adding that raising issues such as related-party transactions and corporate governance at the airline was just a smokescreen.