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This article has been written by Tejas Geetey, pursuing the Diploma in Business Laws for In-House Counsels from LawSikho.

Introduction

A corporation is managed by the Board of Directors which oversees the day-to-day functioning of the business activities. The activities performed involve many stakeholders, including promoters, shareholders, employees, consumers, and any other community impacted by the actions of a corporation.  A corporation is obligated to protect the rights of every stakeholder. But, in reality, are the rights and choices of the other stakeholders considered? In a promoter-centric corporation often the rights of other stakeholders are ignored if the same affect the interest of the promoter & majority shareholders.

Corporate Governance is needed to create an effective framework within a corporation so that the rights of other stakeholders are not disregarded. After Satyam’s failure, many provisions and amendments were introduced in the Companies Act and SEBI Regulations. Despite many amendments, corporations have failed in one of the most fundamental issues which is the Independence of the Board. In this article, the case study of Jet Airways shall be provided which faced similar governance issues. Jet Airways was one of the top companies in the aviation sector which later became bankrupt. Jet Airways’ failure can be attributed to the mismanagement and irregularities that occurred in a promoter-centric company. The purpose of the article is to provide insight into what led to the downfall of Jet Airways and how it is trying to recover from that stage.

Overview of Jet Airways

Jet Airways was considered one of India’s leading companies in the aviation sector. The company was incorporated by the Founder & Promoter Naresh Goyal and commenced its business operations in 1993. The initial investment in Jet airways was around $20 million. In respect of the ownership structure, the promoter Naresh Goyal owned 60% and Gulf Air and Kuwait Airways held the remaining 40%. 

Having the first-mover advantage, post-liberalization, Jet Airways built a strong and reputed image in the aviation market and was a preferred airline in the country.  The company dealt with all the major activities in the aviation sector which include carriage of passengers & transportation of goods and other related services. Thereafter, the company became a public company & issued its IPO in 2005. With the aim to increase its brand value and become the top private airline in the country, Jet Airways acquired Air Sahara. The acquisition took place in 2006, which many experts termed as the start of the downfall of Jet Airways.

After a few years, Jet Airways started facing huge losses as various other low-cost carriers such as SpiceJet started entering the aviation market.  Jet Airways tried to incorporate low-cost and customer-friendly airlines through Jet Lite but the same stopped its operations after some time as the other competitors had already captured the market.  In order to revive the losses of the company, Tata Group had offered to acquire a stake in Jet Airways. Even after the suggestions of the Independent directors and other board members, the company did not consider the offer made by Tata’s relating to the infusion of capital in Jet Airways. In April 2019, due to lack of funds, carriers were grounded & the services of Jet Airways came to a halt.  

What led to the downfall of Jet Airways?

From one of the most successful airlines in the country to being bankrupt, the fall of Jet Airways can be attributed to the mismanagement and unfettered powers which were given to the promoters. Reasons for the governance failure are provided below:

  1. Unfettered Powers are given to the Promoters: The Board of Directors (BOD) are formed to oversee the day-to-day functioning of the company. But many times, the Board’s independence is questioned as the Board is acting in the interests of the promoter-led board. In the family business of Jet Airways, the Promoter held more than 50% of the shareholding in the company thereby having dominant power in the decision making. The promoter disregarding the interest of the other shareholders has taken decisions for the company and has violated. Regulation 4(2)(c) of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015, provides that the company shall ensure equitable treatment of all shareholders, including minority and foreign shareholders. In the acquisition of Air Sahara in 2006, experts had suggested acquiring a loss-making Sahara is not a viable decision but the same was not considered by the promoters. 
  2.  The plight of Independent Directors: Independent Directors assist a company in implementing corporate governance policies. As per Section 149 of the Companies Act, 2013, every listed company should have at least one-third of the total number of directors as independent directors (ID). The position of Independent directors is filled in the company in accordance with provisions of the Companies Act, 2013 and SEBI Regulations, but in a promoter-led company, the suggestive measures of the Independent Directors are side-lined.  Schedule IV of the Companies Act, 2013 defines the Code to be followed by Independent Directors. As per the Code, Independent Directors perform a crucial role in overseeing the affairs of the company. In 2018-19, Jet Airways was facing severe losses, and to overcome the same Tata had offered a deal to acquire Jet Airways. The Independent Directors had suggested that the deal was essential for the revival of Jet Airways but the Board did not consider the same. Many independent directors resigned over the approach followed by the company as the deal did not reach its conclusion stage.
  3.  Protection of other stakeholders: A corporation consists of various stakeholders which aid in the business activities and impact its overall growth.  The stakeholders can be in the form of suppliers who aid in the process of sales of the products or employees who provide services to the company’s clients. The Board and majority shareholders of the company are therefore responsible to protect the interest of other stakeholders. The promoter-led board by Mr. Goyal did not consider the interests of other stakeholders involved in the business operations of Jet Airways. Even when Jet Airways was near bankruptcy and the board had the chance to revive Jet Airways, the same was ignored. Due to lack of funds in 2019, services of the airlines were stopped & the services of many employees were terminated. 

The Board violated the rights of stakeholders given under Regulation 4(2) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015, and failed to give effective redress to them. The failure to protect the employees and other stakeholders could have been stopped if the promoter instead of protecting his interests & the Board instead of being “Yes Sir” considered the collective interests of all the other stakeholders.

Revival of the airlines

Due to poor management and bad financial decisions, Jet Airways worsened its financial position and officially shut down its services in April 2019 due to a lack of funds. With the aim to change this position of the company, the board tried approaching various investors for reviving the company. The Government also assisted in attracting investors so as to protect the company from completely shutting down its operations. The creditors thereafter to recover their dues approached National Company Law Tribunal (NCLT). In order to reduce debts and revive the company, the creditors ratified the revival plan by UK-based Kalrock Capital and UAE-based Murari Jalan Consortium which has been recently approved by NCLT. It is important to note here that the National Company Law Tribunal (NCLT) has provided that the slots relating to the passenger carriage shall be based on the discretion of the Directorate General of Civil Aviation (DGCA). Under the revival plan, the ownership of Jet Airways shall be under the ownership of the Kalrock-Jalan Consortium.

Conclusion  

Jet Airways is one of the oldest private airlines in the country. The mismanagement that occurred in Jet Airways is a lesson for all the big corporations that in the pursuit of achieving new heights, the corporation should not leave behind the stakeholders who helped in reaching those heights. A corporation in which a promoter is holding the majority of shares often affects the rights of other stakeholders in order to increase the market value of the products & services. Promoters should understand that the governance of companies should be given to the Board of Directors so that they have the power to make the decisions for the company.

A Promoter-led company shall lead to mismanagement and irregularities if it does not consider the advice of experts and the board members of the company.  In the case of Jet Airways, the promoter-led Board did not have independence of its own due to which many bad decisions were taken by the company. Though the company has learned from its past failures and is hoping for a revival, the execution of the same will be far from easy. It is believed that the revival of the company is difficult considering the current economic situation posed by the pandemic. Also, the company shall have to face a lot of hindrances such as the availability of premium slots and stiff competition from other low-cost carriers. 

References

  1. https://www.thehindu.com/business/Industry/explained-what-are-the-challenges-jet-airways-faces-before-it-can-take-off-again/article34993417.ece.
  2. https://www.hindustantimes.com/cities/mumbai-news/jet-airways-2-0-boarding-cleared-take-off-to-be-scheduled-101625598496454.html.
  3. https://www.livemint.com/companies/news/tatas-may-be-waiting-in-the-wings-to-buy-jet-airways-1555874536921.html.
  4. https://www.business-standard.com/article/opinion/misgovernance-of-family-business-119051200748_1.html.
  5. https://economictimes.indiatimes.com/jet-airways-india-ltd/infocompanyhistory/companyid-4374.cms.

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