Captain Gopinath: How the IndiGo promoter feud can be used to clean up India’s corporate governance mess

They start throwing muck at each other publicly and it spills into a power struggle to wrest greater control of the company's resources through appointments of key management personnel as well as board members to obtain loyalty by one promoter over the other. Soon, accusations of unethical acts emerge — siphoning off funds through related party transactions, or charges of non disclosure while awarding lease contracts, be it planes or engines or machinery, the classic well- known ways through over-invoicing or layering the contracts — and if legal complaints are lodged with regulatory oversight authorities and even escalated to the Prime Minister of the country by one of the main promoters and shareholders, then the dangers to the fortunes of the airline are clear and present.

Gangwal has made quite a few allegations of misgovernance, which has raised eyebrows. Why was he silent all these years? There are counter-charges against Gangwal by Rahul Bhatia. And rumours abound.

Clearly, there is more to it than meets the eye. And if they press charges and turn whistleblowers against each other, it may pave way for investigations to look into acts of malfeasance. It will be tragic for the airline.

But the issues raised are so important that it goes beyond IndiGo. The points raised by Gangwal are lack of governance and he makes reference to them in his interview with CNBCTV18.com about, "Indian corporate history is littered with carcasses of companies roiled by bad governance. " He requested the PM to step in to restore the reputation of India in the eyes of foreign investors. 

What can the Prime Minister really do? It’s not his job to be an arbiter in an individual dispute between two owners of a 'dukaan’ —  the word used by Gangwal. That is the task of the respective regulators.

Though governments in the past are known to have intervened in family businesses which were unseemly and unbecoming, in the present case the PM should desist from intervening. He should only restrict himself to give directions to the authorities to enact laws that ensure compliance of governance and strengthen the autonomy of the regulators.

The heart of the matter is governance and not the resolution of friction between Gangwal and Bhatia. The issue is a conflict of interest between the promoters, which automatically impinges on the minority interests of the other shareholders and the well-being of the employees and other stakeholders of the company such as financial institutions, suppliers and vendors and most important customers if the allegations are true. Those principles are the crux of the Company Act and Sebi. It is more sacrosanct in a publicly listed company when the gullible public holds the common stock of a company.

When independent directors are appointed by the promoters in proportion to their shareholding under the Sebi guidelines, the board is only a showpiece and perfunctory. They are rarely known to perform their functions of upholding probity and protecting interests of the minority shareholders or employees as demanded of them.

Even eminent boards are shy of pulling up promoters. Most of them are there for prestige, post retirement sinecures in private companies after government service or after completion of corporate tenures. In most cases they are not even expected to discharge their duties by the promoters who appoint them. They are adhering to statutory compliance, and are also an ornamental appendage to boost the ego of promoters in large corporates and are appointed to regularly open doors of the government for speeding up clearances of flies or lobbying behind doors. In other words, they are there to largely serve the interest of promoters.

The moment the least mark of independence is shown by independent directors and the minute they raise any concern over impropriety, they are shown the door. When family-controlled businesses, which are listed, dip into the company coffers at will, transfer funds through their cross-holding companies, when they indulge in related party transactions, which is not uncommon in India, even the minority institutional shareholders with sizeable stake, and also  the public do not complain as long as they get attractive returns.

This is tacit understanding. It's only when the cookie crumbles everyone scrabbles and the witch-hunting begins to catch the culprit when it may already be too late to save the company.

India’s market regulator and other statutory bodies have not been known to deal with rigour with such delinquency as they do in the West. Reforms to make such misdemeanours punishable are still ongoing and more needs to be done.

The common shareholders treat such transgressions by the promoter approvingly, if the latter is ‘smart’ enough to ‘pay’ the right people to have bottlenecks removed.

The public who invest in stocks instinctively realises which promoter has those attributes and who excel in bending the rules to their advantage. Such promoters are actually looked up to as dashing entrepreneurs.

Some of those funds can also end up in the private pockets of promoters. All impropriety on the part of the promoters is forgiven by the public, the banks and authorities as long as the loans are paid, statutory dues are cleared, the company prospers and share prices zoom. Such a situation does not augur well for the health of the economy.

So in the background of Gangwal's complaint, what is the first task of Sebi, which is now seized of the matter? The independent directors, to be independent, must be appointed by the minority shareholders and not appointed by the promoters.

There are already rules, which say that the number of independent directors in a listed company must be 50 per cent of the board strength when the managing director of the company is a shareholder. A simple amendment that in such companies irrespective of the managing director/CEO being a shareholder and drawing remuneration or otherwise, that the strength of independent directors shall be 50 percent of the board and they will not be appointed by the majority shareholders but by the minority ones will cure the malaise to a great degree. Such action will go a long way in strengthening corporate governance.

While Sebi may usher new regulations and reforms which may take time, Gangwal and Bhatia must come to their senses quickly and realise that if they do not bury their differences, it may the beginning of the end of a great entrepreneurial adventure. That will result in unforgivable destruction of value.

Returning to IndiGo, the two promoters have built an extraordinarily successful company measured on almost all parameters in the most challenging industry in the world. More tombstones are erected for defunct airlines than probably in any other sector.

The promoters complemented each other. While one, based in the US, with outstanding abilities, ran a very professional airline with his great skills in securing aviation contracts and bringing the best people from the industry from around the world, and laid out a great vision to tap the inexhaustible customer base and executed it flawlessly to achieve dizzying growth combined with profitability, the other based out of Delhi, from behind the scenes, silently helped navigate the minefields laid by the government and cleared the runways across the country for deployment of aircraft, which was critical for scaling up and facilitating scorching pace of growth.  Working together, without getting into each other's crosshairs, they built a great airline. Now they are about to wreck it.

The best way forward would be, in case differences persist, for both the promoters to completely step back from all day-to-day activities and appoint a truly independent professional board of directors acceptable to both sides, of which they both can also be part of, and run the airline through a CEO, taking cue from many successful companies around the world, be it Walmart or Southwest Airlines or Coca Cola or IBM, all of which have passed on from the original promoters. They both can take pride that they have already created robust management systems, which is in place at IndiGo for such professional management to take over.

As CK Prahlad said, "If you want to be really rich and build enduring companies, follow good corporate governance."