How IndiGo board can resolve Rakesh Gangwal-Rahul Bhatia dispute

Experts put the onus on the InterGlobe board to help resolve the Gangwal-Bhatia dispute over governance, control

The ongoing boardroom battle at InterGlobe Aviation could have been nipped in the bud had the market regulator, Securities and Exchange Board of India (Sebi), insisted on ironing out the differences in the controlling rights of the two promoters at the time of listing of the company in 2015.

Legal experts said questions around corporate governance practices may not have blown up to this extent, leading to differences between the two promoters, if at the time of listing all the shareholders had equal rights, mapped to the extent of their shareholding.

Sebi over the last couple of years has been reviewing the articles of association (AoAs) and the shareholders’ agreements (SHAs) of companies before giving them go-ahead for listing, said lawyers specialising in the securities market. There have been several instances of Sebi asking listing companies to rework their AoAs and SHAs if they find major differences in the controlling rights of shareholders, the lawyers noted.

“Once companies are listed, these differential voting rights should fall off and all shareholders — including promoters — must have rights equivalent to their shareholding,” said Hetal Dalal, chief operating officer, Institutional Investors Advisory Services (IIAS), a proxy advisory firm. Ideally, companies with such control rights should not be allowed to list, she added.

Mohit Saraf, senior partner at law firm L&L Partners, pointed out that Sebi reviews the summaries of AoAs and SHAs at the time of listing and insists on removing special rights. “Some special rights have been allowed over the years, though,” he said.

However, if the market regulator feels that the arrangement is prejudicial to the interest of the public, they ask the same to be removed at the time of IPO.

Experts said regulators have the power to ask promoters of a listed entity to rework SHAs or the AoA of a company. Under Section 210 of the Companies Act, the Ministry of Corporate Affairs could direct investigation into a company’s affairs if it is necessary for the public interest.  Similarly, under Section 212 of the Companies Act, the Serious Fraud Investigation Office (SFIO) could be directed to investigate the company affairs if it is necessary for the public interest. “In both cases, there is no specific parameter for identifying the benchmark of ‘public interest’. The MCA /SFIO shall determine on a case-to-case basis,” noted Pune-based company secretary Gaurav Pingle.

“In the past, we have never seen regulators making such request (of making a change in AoAs and SHAs) unless there is a clear breach of law,” said Saraf.

Experts said the National Company Law Tribunal (NCLT) also has powers to ask for amendment of the AoA or the Memorandum of Association of the company (under Section 241(2) of the Companies Act), if the firm’s conduct is found to be prejudicial or oppressive to any member or not in the company’s interest. However, the board room dispute among promoters in InterGlobe Aviation is yet to reach the NCLT.

Legal experts said such disputes as in InterGlobe Aviation are generally referred to as ‘oppression-mismanagement disputes’. In such cases, the aggrieved promoter has to substantially prove by sequence of events corporate governance lapses, which include weak approval process, lack of transparency, arbitrary decision making, rampant related-party transactions with ulterior objectives, and extensive misuse of the company’s assets.

Any such shareholders’ dispute must first be referred to the board of directors of the firm. Only if the board is unable to resolve the grievance, the issue should be raised with Sebi (in case of listed companies) or the NCLT.

According to Sumit Naib, associate director, Nangia Advisors, there is no specific Act to govern SHAs. “It is mainly guided by the Contract Act,” he said. In order to enforce the agreement under the Companies Act, it is necessary to have it included the Articles of Associations. “In case the articles are not in conformity with the Companies Act, it is termed invalid and the Act prevails over the AoA in such cases,” said Naib.

In case of InterGlobe Aviation, the SHA gives one of the promoter groups (Rahul Bhatia’s InterGlobe Enterprises) the power to appoint three of the six directors of InterGlobe Aviation, the company that runs IndiGo Airlines. Rahul Bhatia’s group — with around 38 per cent share in the company — has the power to nominate the chairman, as well appoint the managing director and the chief executive in the aviation company. Another clause in the SHA is that Rakesh Gangwal and his associates, the other founder group, has to vote alongside the IGE group on the appointment of directors.

Most legal experts said that to come out of the current situation, InterGlobe Aviation needs to expand the size of its board of directors. Also, the board needs to take ownership of the governance agenda. “Given the disproportionate voting rights afforded to one set of promoters, there needs to be enough checks and balances in the system, which the board needs to bring in,” said Dalal.

Illustration: Binay Sinha