IndiGo crisis: My independence never questioned before, says M Damodaran

The independence of the board doesn't depend on numbers, says M Damodaran

M Damodaran, who sits on the board of several blue-chip companies and is chairman of IndiGo, tells Arindam Majumder & Nivedita Mookerji in an interview that the airline co-promoter Rakesh Gangwal’s allegations were unfounded and that the highest standards of corporate governance were followed. Gangwal had questioned the independence of Damodaran, former chairman of the Securities and Exchange Board of India (Sebi), during the bitter public fight with the other promoter Rahul Bhatia. Edited excerpts:  

Was this fight about fixing corporate governance or seeking more control?

Where is the corporate governance issue? Mr Gangwal has been saying that there are a bunch of related-party transactions (RPTs), which is incorrect — he has not cited evidence either to the regulator or to the media. All the transactions have been approved by the board of which he has been a part. Independent director Anupam Khanna has been a member of the audit committee and all RPTs were approved by it.

The stated problem was that one of the directors had issues with RPTs. There are only two tests for RPTs — ordinary course of business and arm’s length. For all the noise that has been made, not one specific transaction has been mentioned as non-compliant.
 

For a short while the audit committee couldn’t be properly constituted as one of the independent directors had passed away. But the committee had to give short-term approval to urgent proposals like hotels for crew. If the contract had expired, you had to renew it as hotels for crew are a necessity.

After I joined, I went through all audit committee reports and found nothing wrong. But since one of the independent directors was raising the issue, I formed a committee with four senior-most executives of the company — CEO, CFO, Company Secretary and the General Counsel. All four of them went through all the transactions and then they were cleared by the board.

With Gangwal questioning your role as chairman, has it dented your image?

Gangwal in his letter says that the chairman is not independent because he has been appointed by the IGE group. However, in the same sentence, he says that he is not of the view that the chairman is not acting independently. My appointment was through the Remuneration Committee, headed by Khanna. I was unanimously cleared by the board, which Khanna and Gangwal were part of. 

Because the article states that I have to be nominated by a group doesn’t make me non-independent. The previous chairman was also selected in a similar way.

I am part of multiple boards of companies. If anything, my independence has never been questioned. 

Is it a healthy structure which gives IGE the power to nominate chairman, CEO & president?
 

The structure has been approved by Sebi. It has been filed with the RoC. The RoC didn’t have a problem all these years. What needs to be looked at is the provision being misused.

This is my man, I want him on the board is different from this is whom I am nominating but put it through a process. The process all companies follow is the remuneration committee looks at a name; clears it if it’s suitable.

Gangwal and independent director Khanna said there would be a large loophole in future with the way the board was being constituted. Your view?

First the independence of the board doesn’t depend on numbers. Even if you have one good independent director, things will be perfect. In IndiGo, two members of the board said we should have a safeguard for conditions when the ten-member board is not at full strength. Their fear is what will happen if one independent director is not there- that the IGE members will push through all kind of deals.

This fear fails in multiple counts.

First, IGE holds 37 per cent stake and is the largest shareholder in the company. Why would a majority owner destroy value of his own company?

Second, three out of six directors currently belong to IGE. There has been no evidence of any wrongdoing.

Third, it’s illogical and an insult to the independent directors to think that when there are four independent directors, you can resist move of the promoter but when there are three, you suddenly become helpless. Aren’t you passing a judgment on the capability of those three directors?

If one director opposes a decision and leaves the board and writes to the regulators that he was unhappy with the functioning of the board, is that something the company can endure? The hit on its reputation will be huge. So, I think this is a fear completely without basis.

Even if intentions are good, don’t you think related party transactions some time stand on a slippery ground and can go wrong?

No. If a related party is providing service cheaper than other providers, it’s in the company’s interest to get that deal. All that it needs to be ensured is if this was at arm’s length price. Not having RPT is shutting out the possibility that a related party might offer you.

I will give an example. If for the hotel contract, a related party company submits the lowest bid and you just shut it out because it’s RPT, then who is losing? The company is losing. One just had to ensure that related party is not getting any extra benefit.

I can assure you that the arm’s length condition was satisfied in all RPTs that IndiGo has. I can tell you this because I have been involved in corporate governance for last 37 years. That is why I mentioned that in substance there is nothing wrong with any of the transactions. We can definitely improve the process and for that we now have a new policy which exists nowhere else. 

Do you think Bhatia and Ganwgal can work together in future?

It’s a close friendship of 30 years. But let me not underplay the serious differences.
 

Why should we rule out the possibility that they can get together? On the other hand, let’s assume they can’t get together. I don’t expect that they should be best friends going forward. So long the functions of the company are not disturbed due to personal problems between them, I am not bothered. On strategy, there are absolutely no differences. There is complete alignment about this in the boardroom. Otherwise the company wouldn’t have reached the position where it is now.

The EY report was not shared with the board. That certainly gave rise to suspicion that some of the decisions were not in the best spirit of the company.

As soon as I was appointed, I got a request for an extraordinary general meeting (EGM). In fact, I joked that it would be the first time in history that I will have to attend an EGM before a board meeting. So when I heard about complaints on RPT, I appointed EY to look at the RPTs of last five years. I didn’t share the report because the report contained confidential information like bid rates by third party which cannot be made public. It is not an audit report. It was an assessment report.

But it could have been shared with board members. Right?

Not necessarily. If there is situation where I believe it can fall into wrong hands, I can choose not to share it. This is my decision. That’s neither the board’s decision, nor Rahul Bhatia’s. I commissioned the report. I apprised the board about the findings of the report and thought that was enough. I have seen the report and I believe for good reasons that it should not be shared.

Do you think there will be financial implications on the company due to this dispute?

The last quarter was the best in IndiGo’s history. But there are seasonal factors. Next quarter may not replicate the success. But market share is robust. So it’s not that differences have impacted the functioning of the company. The market has sensed that there is nothing wrong with the functioning of the company and hence share price is close to the highest ever level. 

Any overhang of the Sebi and Ministry of Corporate Affairs (MCA) investigations?

There are no investigations. A complaint has reached Sebi and MCA. Whenever a complaint is made to authority, they will ask the company to send comments. We have gone through that. 

They have called for a few documents. The company has sent those. It’s been close to a month now and we have heard nothing thereafter. MCA secretary publicly said that if there is no violation of company law, the ministry is not bothered. However, I was worried that it may take away focus of the management. But that’s behind us.

Is it behind the company in a true sense?

RPT as an issue does not exist anymore. If you notice, the discussions on the RPT have moved from transactions to a policy. And as we speak, there is a new policy. So what is left that is simmering?

You have a stronger RPT policy and a larger board. So has this been an ugly but healthy quarrel?

The new policy was anyway coming. Not one person, but everybody on the board wants a good RPT policy. The board expansion was necessitated because after Aditya Ghosh, we didn’t have an executive member on the board. We needed a woman director too. So the expansion was anyway necessary. It didn’t happen just because someone wanted it.