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This article is written by Rajeev Awasthi, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Here he discusses Indigo dispute: How can shareholders agreement clauses create a rift between founders?.



As per the IATA data, Aviation in India is broadly divided into civil and military aviation and is the fastest-growing aviation market in the world. One such airline carrier in the civil aviation space is Indigo airlines which through its cheap carrier cost is the most loved airline in India. The aviation industry data testifies to the fact that Indigo commands almost half of India’s domestic market especially after the Jet airways saga and with which most customers forego their jet miles program Indigo became their most preferable option both because of the rates on offer and complemented by its services.

Indigo Airlines was founded by Mr. Rahul Bhatia, the Promoter and a Non-Executive Director of Indigo and also the Group Managing Director of InterGlobe Enterprises along with Mr. Rakesh Gangwal, Promoter and Non-Executive Director of Indigo.

Shareholders’ Agreement

For the non-lawyers like me and who have had no experience getting into one such arrangement:

What exactly is a shareholder’s agreement (“SHA”)?

SHA is an arrangement in which a company’s shareholders get into prior to the inception of the business. It sketches out and outlines the way their day to day business should be operated and outlines shareholders‘ rights and obligations. It is the SHA which ensures that shareholders are treated fairly and that their rights are protected. However, it is of utmost importance that the parties getting into this arrangement or any such Agreement for that matter take legal opinion and make an able decision as an Agreement becomes a Legal obligation which is binding upon you. Further down we’ll see how the terms covered under the SHA entered between the two partners who started Indigo Airlines became a bone of contention and soured a long time-tested relationship.

“Multiple promoters in an enterprise may have structural dissonance built into their gene”

According to Harvard Business School professor and author of The Founder’s Dilemma Noam Wasserman, data suggests that there is a 65% chance of failure of high-potential startups due to co-founders falling out. 

This could be due to a plethora of reasons which range from business strategy, differences over money, and leadership style. There is a good probability of such differences to get compounded by the very nature of such partnerships. As stated above while getting into such partnership arrangements it is imperative that we understand clearly the very construct of the agreement and if any terms and conditions or clauses confer upon any special rights to any parties involved within the arrangement even if both parties hold same control over the underlying company or security. This could well sow the seeds of future discord.

It is a story which we’ve seen so often in the past. The recent first of its kind hostile takeover of Mindtree Ltd by L&T in India is an area we witnessed this dilemma. Café Coffee Day founder Late V.G. Siddhartha, who invested $8 million in Mindtree Ltd as an investment venue when the company was formed in 1999. A happily invested promoter and minding his own business he let other promoters call the shots. The Mindtree board and promoters never in their worst nightmares envisaged a scenario where one of their own would bail out on them. Ignorant about what the future held they never provisioned for the kind of share structure that would have enabled them to save their company.

Companies being run by siblings as partners are no exception to such fierce internecine ‘Game of Thrones’. The Singh brothers of Ranbaxy are a mishap most close to thoughts. Why leave alone the most messed up tussle between Raymond’s founder Mr. Vijaypat Singhania and his son the group chairman Gautam Singhania. The above incidents lament that a blood relationship leaves no guarantee when it comes to assessing the reins and control of the business. Even in Yes Bank, even though the two founding partners Late Yash Kapoor and Rana Kapoor who had family ties, yet upon the former’s tragic death the feud over the board seat is a memory not lost.

The above examples indicate that enterprises with multiple promoters may have structural dissonance built into their framework.

Like any other relationship, constant working upon, trust and constant communication fuels the dynamics between the co-founder’s relationship. There needs to be a clear definition of the roles of each of the co-founders and the decision-making must rest with the one who’s been given that responsibility. Which is why a shareholders’ agreement laying down the ground rules of this relationship must govern the responsibilities and liabilities of individual partners, along with a mechanism for dispute resolution in case of discord needs to be agreed upon by both the parties upfront.
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The beginning

In 2006 Mr Bhatia and Mr Gangwal, two highly savvy gentlemen each a pioneer in their Industry decide to embark upon a journey together in the Indian aviation Industry. This is when IndiGo, a low-cost carrier, which is India’s largest airline today with a fleet of 225 aircraft is born.

An arrangement is reached with each holding around 37 per cent in the company. Interglobe Aviation (“IGE”) in its statement said that the arrangement between the IGE Group and Mr Gangwal has been transparent right from its inception. The agreement was that IGE Group would be taking financial risk considering its history of having a positive approach to undertake riskier transaction which emanates through its entrepreneurial DNA. However, both Mr. Gangwal and IGE would share equal ownership structure in the company.

Fast forward, the company saw a period of more ups than downs and decided to go public launching its IPO in 2015. With this decision to go public a new shareholders’ agreement was entered into between Rakesh Gangwal and Rahul Bhatia which was to remain valid for four years until 2019. 

The recipe is the clauses within the Agreement

The agreement so entered in 2015 conferred on the founders:

  • Right of First Refusal (RoFR) for each other’s shares in case one of them wanted to sell- The RoFR confers upon the non-selling shareholders the right to accept or refuse an offer by a selling shareholder with a third party buyer. Both the selling and the non-selling shareholders receive the same terms from the third-party buyer. The right also allows the non-selling shareholders to control the process of adding a new shareholder.
  • The agreement also contained a ‘tag-along’ clause for the parties in the transaction- This clause provides a provision to the minor shareholders in the arrangement to ‘tag along‘ with a larger shareholder or group of shareholders if they find a buyer of their shares under the same offer price and arrangements as the major shareholder. The main aim of this provision is to ensure that the minor shareholders are not left behind if a major shareholder decides to exit the venture.
  • Above everything else the SHA grants IGE power to appoint three out of the six directors of IndiGo:
  1. appoint a managing director, 
  2. chief executive, and
  3. to nominate a chairman as they see fit. 
  • The agreement also binds Gangwal and his affiliates to vote with the IGE Group on the appointment of directors.

Like every other agreement, the Shareholding Agreement entered in this case between Mr. Gangwal and Mr. Bhatia too had an expiry date which was due to expire on the fourth anniversary of the (company’s IPO) launch i.e., in 2019. 

It is worth mentioning here that the provisions of ‘tag-along’ and RoFR clauses are also enshrined in the company’s constitutional document which is the Articles of Association (AoA). The binding terms within the SHA will cease in 2019 however, the clauses which provide the controlling rights in the operations of the business won’t as they are a part of the AoA. Under such circumstances, the AoA will override the SHA once it expires and the terms in the AoA will bind the two parties to the terms so entered unless they’re amended or have an expiry right in the AoA. Under the terms in the AoA the exiting promoter is obliged to notify the shareholders about a sale. The non-selling shareholders will have to exercise the ‘tag-along’ or the RoFR right within three business days of the receipt of the transfer notice.

The only way out here from providing such undue advantages to a party in the contract is to amend the constitutional document upon the expiry of the Agreement or, the AoA should specify such terms that upon the expiry of the SHA some of the provisions covered under AoA and SHA will be revised if required in the presence and agreement of all the parties who are part of the agreement. However, the articles can only be amended by a vote of shareholders who hold more than 75% shares.

The fiasco

Multiple contentious issues between the promoters, majorly pertaining to the growth strategy of the airline carrier have gradually built up over a span of time. Albeit, it was Bhatia’s last nail into the coffin decision to overrule Gangwal’s objections to around 600 engines purchased from CFM International, a French-US engine maker, which drew a line.

These differences unearthed to the public when Mr. Gangwal wrote to the Securities and Exchange Board of India (SEBI), raising concerns over corporate governance issues at Inter-globe Aviation (“IGA”) and related-party transactions (hereinafter, “RPT”) between the company and Mr. Bhatia owned Inter-globe Enterprise (“IGE”). 

The allegations made by Mr. Gangwal to SEBI in July, 2019 was followed by a written complain stating that the agreement between him and IGA and Mr. Bhatia is highly skewed towards Mr. Bhatia and it confers upon him the power to choose and appointment the chairman, most board directors and the top management executives.

The ministry U/s 206 (4) of the Companies Act, 2013 is evaluating whether the special privileges that is conferred upon Bhatia’s InterGlobe Enterprises Pvt. Ltd (IGE) through the terms under the shareholder agreement has ever led to any kind of deviation from corporate governance standards, especially on the independence of the audit committee. Section 26 provides powers for the ministry to call for information to inspect books and conduct inquiries. The MCA has ordered IGA for its comments on the charges of corporate governance lapse as indicated in Gangwal’s allegations to SEBI. The Registrar of Companies (RoC) which is in charge of Companies Act compliance wants to probe if the allegations of governance failure are true. Moreover, if such allegations are made by a major shareholder in the company it can’t be neglected by the regulatory authorities.

The allegations have been two-sided just like in any other bad-blood. Mr. Bhatia’s IGE claim that Mr. Gangwal’s only intent is to dilute the controlling rights of Mr. Bhatia through the baseless allegations. IGE further adds that raising the issues of RPT and corporate governance at the airline now is mere ‘smokescreen’ to hide his real intent.

Neither of the promoters intends to sell their stakes in the company as they foresee a substantial growth potential in a developing economy. IGA, however, have alleged that there is a possibility that Mr. Gangwal wants to dilute Mr. Bhatia’s controlling rights as that would help him fetch better value at a later date whence he wants to monetize his shareholding. The current holding pattern suggests that Mr. Bhatia and IGE together hold 38.23% stake in the company while, Mr. Gangwal along with his wife and a trust hold 36.65%.

Mr. Gangwal’s Allegations

Amongst many others the key concerns raised by Mr. Rakesh Gangwal are: 

  1. The RPT between InterGlobe and Bhatia group entities which he sees as providing undue favours. The best-fit way to define it is as a corruption allegation. These entities in question offer a variety of services from ticketing to simulation training and crew accommodation to name a few. The value of these related-party transactions has increased from Rs 31 crore in FY2010 to almost 10 times in FY18, citing the company’s annual reports.
  2. Unusual rights that give Bhatia control over the board and that have led to governance failures.

Gangwal alleges that a plethora of reasons for this corporate governance failure which includes but is not limited to providing retrospective approvals to contracts in some cases, lack to audit committee’s independence and lack of competitive bidding to procure suppliers for competitive pricing. 

The IGA board Chairman, M Damodaran, consulted EY for commissioning a review of RPTs. Gangwal has further questioned the scope of the review performed by EY and its independence and thoroughness. He also questioned why the EY report was not shared with the rest of the board but stayed only with the Chairman. Gangwal further claims EY found procedural irregularities in the RPTs which includes: 

  1. RPTs which might have not been approved by the audit committee;
  2. RPTs which might have been extended without audit committee approval;
  3. RPTs that might have been executed before audit committee approval.

Gangwal’s letter to SEBI mentions that his group had proposed a different EGM resolution — which mandated the board to adopt new protocols for related party transactions. However, Mr. Bhatia’s group (InterGlobe Enterprises or IGE Group) countered that such resolution would have to be a special resolution requiring a 3/4th per cent vote to pass. Bhatia’s groups which hold 38 per cent shareholding could have blocked such a resolution.

Hence Gangwal is proposing that shareholders recommend to the board to adopt certain new protocols for RPTS.

The company’s Code of Conduct is enforceable upon all directors and senior management who need to adhere to it. IGA’s code states, among other things, that they should avoid transacting business with relatives or related parties and under circumstances that such business is unavoidable then it should be done with proper and full disclosure.

Mr. Bhatia’s Responses to Allegations

In response to Mr. Gangwal’s allegation addressing the board Mr. Bhatia said:

(i) Mr. Gangwal was generously allotted 50% equity 14 years ago and has since enjoyed full opportunity and advantaged from the situation;

(ii) He did not mind that the IGE Group was taking the entire economic risk, which at peak exposure (between redeemable preference shares, unsecured loans, and personal guarantees) was in excess of Rs 1,100 crore (almost six ) times the IGE Group’s contractual obligation of Rs 200 crore in the agreement with Mr. Gangwal);

(iii) Gangwal readily agreed to the fundamental proposition that the IGE Group will have control and make pragmatic risk-based decisions;

(iv) Gangwal further obliged himself to support the IGE Group in controlling the group through a voting rights agreement embedded in the AoA and SHA and of the Company which Gangwal was fully aware of the moment he signed the agreement;

(v) Overjoyed and opportunistically Mr. Gangwal (since he was aware of the business model and knew that he was going to make a ton of money) he actively participated in the IPO. In this stage he once again agreed that the IGE Group would retain control – a disclosure made in the prospectus;

(vi) Preferred to stay silent about any RPT issues for the past 13 years;

(vii) Did not raise any objections while signing and approving annual accounts;

(vii) now is when he chooses to dismiss the controlling rights and position of IGE group which were a part of agreement and company’s constitutional documents, terming them as “unusual”;

(viii) shied away from taking a position on the Board of a start-up being scared of liability in a highly regulated sector;

(ix) He then now claims to be a guardian of corporate governance.

Mr. Bhatia further clarified that the SHA was negotiated in 2006 and amended twice in 2015 as a precursor to the IPO to comply with statutory requirements. The IGE issued a statement in response to the allegations made by Mr. Gangwal stressing that he has failed to evidence a single instance where there was misuse of any rights in the SHA. IGE dismissed his allegations on accounts that they’re based on “whistleblowers who chose not to use the whistleblower mechanisms and procedures established by IndiGo”.


CEO of IGA, Mr. Ronojoy Dutta through his email addressing the Indigo employees on September 2, expressed relief that the long-standing feud between Indigo promoters Rahul Bhatia and Rakesh Gangwal has been “satisfactorily sorted out” and the procedural changes were made to the policy to regulate the RPT, which has been approved unanimously by the board.

Reportedly, the issue was resolved at the Annual General Meeting held on August 27, which was followed by a subsequent board meeting on August 30. 

In the AGM it was also decided to expand the board to 10 members with four of its directors independent including a woman director.

Now then the Investors and market has its sigh of relief and we all expect the two promoters to show sagacity in ensuring the airline’s interests are protected.

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