Proxy firm IiAS faults Rahul Bhatia’s leadership as IndiGo faces turbulence

While Bhatia, who founded IndiGo with his friend Rakesh Gangwal in 2006, owns 35.7% of the shares, the airline’s top executives, including CEO Pieter Elbers, faced a nationwide backlash over flight cancellations, stalling the country’s booming aviation sector in the first week of December.

“[A]“Rahul Bhatia was expected to lead from the front rather than the sidelines, as he is the sole executive director on the board and a promoter of the company,” IiAS said in a note on Friday.

IiAS also faulted the composition of the current board, stating that according to the airline’s Articles of Association, the InterGlobe Enterprises (IGE) Group, led by Bhatia, had the power to nominate five non-executive, non-independent directors, resulting in the nomination of half the board.

IGE Group also retains the right to appoint the airline’s chief executive, CEO and chairman, regardless of ownership level. Mumbai-based IiAS pointed out that these rights will continue even if the share of IGE, which currently owns 35.7%, falls below 5%.

“This creates a scenario where a shareholder with just over a third of the shares exercises board control disproportionate to his or her stake,” the consulting firm said in a report.

An email sent to IndiGo seeking comment went unanswered.

Board independence

Interglobe Aviation Ltd, which runs IndiGo, has nine board members. Promoter Rahul Bhatia, who also serves as managing director, is the sole executive member. The four non-independent and non-executive members include Anil Parashar, CEO of Interglobe Technology Quotient Pvt. Ltd; Gregg Albert Saretsky, former president and CEO of WestJet, Calgary, Alberta; M. Damodaran, former chairman of Securities and Exchange Board of India (Sebi) and Amitabh Kant, former CEO of Niti Aayog.

Pallavi Shroff, managing partner, law firm Shardul Amarchand Mangaldas & Co., is classified as an independent member by IndiGo. But the IiAS describes Shroff as an independent non-executive person and notes that his law firm did business with the airline and received professional fees from it.

IndiGo chairman Vikram Singh Mehta, former CEO of Shell India, former Indian Air Force air chief marshal Birendra Singh Dhanoa and former US Federal Aviation Administration administrator Michael Whitaker are independent directors.

IndiGo CEO Elbers is not a board member.

“A systematic review of the board structure is essential for IndiGo to emerge stronger from this crisis and position itself as a leading global airline,” IiAS said in its note.

“IndiGo’s board structure has been a concern for years,” said independent governance expert Sharmila Gopinath. “The imbalance between executive and non-executive directors and the limited presence of truly independent voices have repeatedly raised red flags for the investment community,” he said.

Failure to audit

Amit Tandon, founder and managing director of IiAS, said IndiGo is a well-run airline. “Apparently Indigo was effective to a fault; miss a step and the entire program collapses. It seems Rakesh Gangwal and Rahul Bhatia complemented each other. Rahul Bhatia may have lost his sounding board as Rakesh Gangwal is no longer on the board. And in a successful business, neither the analysts nor the Board may have asked the tough questions,” he added.

“We need to remember that those on the board who understand aviation are less familiar with Indian processes; the board’s ability to step back may have been weakened,” he said.

Rakesh Gangwal-led RG Group’s stake, which holds 37% stake, fell to 5.85% as of September 30. However, the AoA still gives the group the right to appoint a non-executive director, an option the group has not exercised to date. As a result, IndiGo’s board now has nine members instead of 10.

In the first week of December, IndiGo had to cancel more than 4,500 flights due to not having enough pilots to comply with the directorate general of civil aviation’s new norms that limit pilots’ flying time from midnight to 6 am. The nationwide uproar led the aviation ministry to launch an investigation, IndiGo to reduce its daily flights by 10% and seek an explanation from CEO Elbers and its chief operating officer for the debacle.

Nervous investors sold shares as IndiGo’s shares fell 15% between December 1 and 12.

To allay concerns, IndiGo’s top leaders, including Elbers and Chairman Mehta, repeatedly apologized and assured people that they would resolve the issues. On Friday, the airline appointed Chief Aviation Advisors, LLC, a US-based aviation consulting firm, to evaluate how an airline that prides itself on being always on time went wrong.

Supporter dominance

“For a company of IndiGo’s size and dominance, the board’s inability to anticipate and manage the risks associated with the new pilot rest rules is extremely worrying. This was not a surprise regulation, but a known deadline,” Gopinath said, adding that although the board’s role was oversight, this was missing in IndiGo’s case.

“If the board was aware of this, why wasn’t management forced to prepare? If the board wasn’t aware, that’s an even deeper management failure,” he said.

Gangwal and Bhatia’s friendship soured after the airline went public in 2015, with Gangwal accusing Bhatia of corporate governance lapses in late 2019. After much bickering, the two resolved their differences. Gangwal resigned from the board in 2022 and has since sold most of his shares, reducing his stake from 37% to 5.85%.

While Indian regulations require one-third of board members to be independent, IiAS believes that companies with heavy constituency influence should have at least 50% independent directors to balance control and oversight.

“I’m not saying this problem won’t happen if half the board is independent. Just as they address operational issues, the board also needs to address governance structures,” said Tandon of IiAS.