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Read full text of IndiGo promoter Rahul Bhatia's letter to board against Rakesh Gangwal

Read full text of IndiGo promoter Rahul Bhatia's letter to board against Rakesh Gangwal

Read full text of IndiGo promoter Rahul Bhatia's letter to board against Rakesh Gangwal
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By CNBC-TV18 Jul 9, 2019 9:12:09 PM IST (Updated)

Read the full text of IndiGo promoter Rahul Bhatia's letter to board against Rakesh Gangwal.

Dear Members of the Board:

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1.
I, as a Director of the Company and as a representative of the IGE Group, object to the unlawful and misplaced Requisition.
2. For the sake of brevity, I do not intend to respond sentence by sentence to the Requisition and reserve my rights to do so if the need arises. While | will in the ensuing paragraphs counter the false, frivolous, and misleading stand of the RG Group concerning related party transactions (RPTs) entered into between the Company and the IGE Group, I would like to however emphasize that the RPTs’ issue have an underlying context. And that is the real motivation and intent of the RG Group. It has now more clearly emerged that the real agenda of the RG Group is to dilute and diminish the controlling rights of the IGE Group and to relieve itself from its obligations under the Shareholders’ Agreement (“SHA”) and the Articles of Association (“AoA”) which ensure implementation and enforcement of the IGE Group’s controlling rights. And in that campaign, the red herring issue of RPTs is nothing more than a publicity seeking device to attempt to tarnish the reputation of the IGE Group and to position the RG Group as a saviour of the Company against alleged pillaging by the IGE Group.
3. I have highlighted in previous correspondence that the genesis of Mr. Gangwal’s angst lies elsewhere — the refusal of the IGE Group to succumb to his unreasonable demands to dilute the IGE Group’s controlling rights; and the hurt ego of Mr. Gangwal on realizing that upon his refusal to lend his hand in the Company’s ongoing negotiations with Original Equipment Manufacturers (OEMs), the Company had proceeded to make alternate arrangements for the purpose. In hindsight however, the Company will remain eternally grateful to Mr. Gangwal for having attempted to hold the Company’s business to ransom (by purposely delaying the ongoing negotiations with OEMs), as this paved the way for the Company to institutionalize an area of operations which Mr. Gangwal had kept as his exclusive preserve (to serve his far-sighted motive which has now become abundantly evident). After the flop show of his first similar requisition made in January 2019, Mr. Gangwal comes back with the second act of his theatrical production. The script of the play stands exposed even more starkly as Mr. Gangwal makes innocent fig leaf statements of standing by and honouring the SHA and being a crusader of corporate governance. Forget the volumes of earlier correspondence. Just look at the two emails, both dated May 29, 2019, of Mr. Gangwal addressed to each of the Board members and the senior management of the Company. He unabashedly and shamefully sets out his agenda “package”. He makes it clear that his offer to expand the Board to eight members — necessitated by regulations requiring a Woman Independent Director — and one additional nominee of the IGE Group, will be subject to the RG Group being relieved of its obligations under the SHA (which he says will expire in October 2019 anyway) but also under the AoA by en masse deletion of Articles deemed inconvenient by him. And the policy on RPTs — which Mr. Gangwal pretends to be a precious principled issue for him — also finds a place in his “proposal package”. The IGE Group nominee Directors were constructively engaged in discussing the policy and processes on RPTs without being influenced by any other considerations in the belief that such policy should be reviewed irrespective of any other matters. It was Mr. Gangwal who created the “package” of sweeping changes to the founding principles of the Company and other conditionalities around the RPTs’ policy discussion (including a silly proposal for US Tax Filing Information Agreement), which led to the IGE Group nominee Directors to desist from further deliberations.
4. The irony is that in the Board Meeting of March 4, 2019 (the first meeting under the chairmanship of Mr. Damodaran, Independent Director appointed in January 2019), extensive discussions were held on the policy for RPTs, as recorded in the minutes of the meeting. This included a determination by the Board, in the context of award of RPTs, that “unavoidable” meant “being in the best interest of the Company”. Next steps were identified which, even as of today, are under implementation. Four months’ time was given to the Management to come up with detailed procedures for consideration of the Board. The newly constituted Audit Committee met on April 11, 2019 and the minutes of that meeting record detailed deliberations of the Committee on each of the RPTs brought before it including the arm’s length nature of the transactions and Management’s belief that these RPTs were in the best interest of the Company. The Audit Committee at its meeting unanimously approved all RPTs brought before it (except one item on Flight Training Services Agreement which was also subsequently approved on May 27, 2019). In the Board Meeting of May 27, 2019, the minutes of the Audit Committee were presented and noted with no comments or observations being made by Mr. Gangwal on either the credibility of the procedure followed by the Management and the Audit Committee or its decisions. And this in the scenario where five days earlier Mr. Gangwal had issued the Requisition. The Requisition is redundant in view of the steps already undertaken and the practices already adopted by the Company.
5. I would have liked to rest my case here. However, it is imperative that the Members of the Board appreciate the sequence of events that followed the withdrawal by Mr. Gangwal of his first notice of requisition to lift the veil and expose his machinations, motivation, and intent. 10.
6. In the Board meeting held on March 4, 2019, the Chairman informed the Board that he had sometime back requested the Management to engage one of the Big Four Firms to conduct an independent review of RPTs. Ernst & Young (EY) were appointed to review the RPTs in force for the past five years. The Chairman noted from the EY report that there are no substantive irregularities regarding the transactions themselves, but only certain procedural irregularities were noticed. Had EY’s review disclosed that any RPTs were not at arm's lengthor not in the ordinary course of business, that would have been highlighted. From the IGE Group’s perspective, it is imperative that no contracting entity from its Group should take undue advantage and the pricing and other terms and conditions must be completely on an‘arm’s length basis. The fact is that the Company has received the most favored treatment in each RPT. As to procedural matters, the Company should comply with requisite procedures - and that is an internal matter for the Secretarial and Finance functions of the Company. The IGE Group does not have a role to play in those.
7. Nonetheless, the Chairman proposed a methodology for the review of such transactions which included constitution of an internal committee comprising the CEO, the CFO, the Company Secretary and the General Counsel to examine RPTs and make its recommendations to the Audit Committee within a period of four months. The Board further accepted a shorter time frame suggested by Mr. Gangwal and advised the Management to place a draft of the process for dealing with current and future RPTs before the Board around April 15, 2019.
8. On March 4, 2019, immediately after the Board meeting, Mr. Gangwal circulated a proposed process flow chart as a recommendation to the management committee for the approval process of RPTs.
9. On April 4, 2019, the Management submitted to the Board its version of the process flow for review by the Board. Mr. Gangwal, in his email of April 10, 2019 addressed to the Chairman of the Board, to provide his suggestions, acknowledged that the Board and the Audit Committee are working towards putting in place robust procedures for RPTs. It must be noted that the proposed process flow chart covered all the points mentioned in clauses (a) to (i) of Mr. Gangwal’s current version of the Requisition (showing that the Board members and the Management were giving due consideration to the suggestions made by Mr. Gangwal}. Three directors, Mr. Gangwal, Dr. Anupam Khanna and Mr. Anil Parashar provided their comments to the process flow. I also separately provided my comments expressing concerns that (a) the appointment of independent firms should be the Audit Committee’s option; and (b) that it is not correct to have a unanimous vote to amend the RPT Policy because that gives veto rights to a Director, thereby usurping the basic right of the Board of Directors to act independently.
10. As the Board is aware, on May 15, 2019 and May 16, 2019, various press reports appeared in newspapers and news channel regarding potential disagreement between the two promoters. The CEO, in order to dispel these speculations, released a press statement on May 18, 2019. It was in this press release that the CEO with the authority of Mr. Gangwal made the following statement on his behalf:
"l am categorically and clearly stating that there is in no interest or desire whatsoever on the part of the RG Group to take control of the company. Also, to put to rest the messaging on the fact that the RG Group is attempting to renegotiate the Shareholders’ Agreement. | am placing on record that the RG Group stands by the current SHA which, in any case, expires this October.” (sic) 
11. Therefore, Mr. Gangwal clearly stated his position to stand by the current SHA. Although Mr. Gangwal said that the SHA expires in October 2019, he is well aware that certain residual provisions of the SHA, as embedded in the AoA, continue to bind the RG Group even after the expiry of the SHA.
Mr. Gangwal made an emphatic public assertion that he does not want to take control of the Company. This public assertion was a clever strategy to create a false impression that his only agenda was to have “robust procedures” for RPTs. It should though be remembered that at no stage has Mr. Gangwal cited a single instance where any undue advantage has been shown to have been taken by any IGE Group entity in any RPT. Not a whisper. EY’s review did not reveal any such instance. The CEO, in his email of May 18, 2019 to Mr. Gangwal had also pointed out “1 have to tell you | have looked high and low on RPTs and there is no smoking gun”. That Mr. Gangwal’s only purported concern was RPTs, was emphasised by him in response to an e-mail of the CEO, where he said “Again, we are all well aware of the issues around the RPTs that the Company enters into with the IGE Group.”
12. When the CEO sought an Executive Session to seek guidance of the Board so that he is well equipped to handle any possible questions, surrounding the controversy between the promoters, from the investors in the earnings call (scheduled for May 27, 2019), Mr. Gangwal’s advice (in his email of May 21, 2019) was:
“One option for your and all our consideration could be that in your scripted remarks of the call, you could say something to the effect:
"As we are all well aware, there has been a lot of speculation in the press about differences between the promoters. We have issued an extensive press release on this issue and are not planning to address any questions on this issue in this investor call.”
Wanted to put this thought out there for us to think about prior to our meeting.”
13. Subsequent events demonstrate that it was Mr. Gangwal’s attempt that other than only his version, no other version on the issue of RPTs should get conveyed. His advice was aimed to dissuade the CEO from disclosing any information about the Company’s stand on RPTs which could be contrary to Mr. Gangwal’s contorted version of facts that he intended to make in the Requisition which, unbeknownst to the CEO, was to follow the very next day. The Chairman and the CEO disagreed with Mr. Gangwal’s advice.
14. As is evident from the facts and events, it is the Board and the Management of the Company that have been constructively engaged in improving the procedures for RPTs. However, as said before, Mr. Gangwal has derailed that process by coming out with his hidden agenda. In the Board meeting on May 28, 2019, upon the suggestion that Mr. Gangwal and | meet to resolve issues relating to RPTs, SHA and AoA, Mr. Gangwal stated that all the issues were inter-related and should be resolved together. He further said that Article 16.16 (which contains the voting rights agreement between the promoters) should be removed or suitably amended as there should be no binding obligation on each group to exercise their voting rights and each group should be free to exercise their voting rights. Later that day, Mr. Gangwal met with me and the IGE Group’s lawyers. In that meeting, Mr. Gangwal was clear in his statements — that in retrospect he had made a mistake in agreeing to support the IGE Group through voting rights agreement embedded in the SHA and the AoA, and his desire was to have all those provisions deleted (he mentioned not only Article 16.16 but added Article 17.3 as well}; that he should not be obliged to vote with the IGE Group; and if the “package” was accepted and changes made in the AoA, he would vote for the IGE nominees at least in the upcoming General Meeting (and he grandly offered to give a letter of support to that effect); he raised an inane demand for some sort of tax filing support to be provided to him by the Company, free of cost, for all times to come. These demands are stated in his e-mails of May 29, 2019. He has made a “package” proposal, which means he is now not willing to discuss the RPT issue in isolation. His “package” includes him walking away from critical obligations embedded in the AoA including:
a) Article 17.3 which specifically says that each Group shall ensure that its nominee Directors cause the appointment of Directors and the alternate Directors to be made in accordance with the provisions of the Articles and that each Group and its nominee Directors(s) shall vote at the General Meeting and the Board meetings, as the case may be, to ensure such appointments.
b) Article 16.16 which provides that each Group shall at all times exercise their voting rights at the meetings of the Shareholders, and shall cause their nominees on the Board to vote, in order to ensure the implementation of the terms of these Articles — which would include the rights of the IGE Group to nominate the senior management listed in Article 17.4.
15. So, here is a man who: (i) took full advantage of the situation and the opportunity offered to him 14 years ago, when he was generously allotted 50% equity; (ii) 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 INR 1100 crores (almost six folds the IGE Group’s contractual obligation of INR 200 crores in the understanding with Mr. Gangwal); (iii) happily agreed to the fundamental proposition that the IGE Group will have control; {iv} obliged himself to support the IGE Group in maintaining control through a voting rights agreement embedded in the SHA and in the AoA of the Company; (v) with great delight (since he was going to make a ton of money) he actively participated in the IPO — at which stage he once again agreed that the IGE Group would retain control — a disclosure made in the prospectus; (vi) did not raise for 13 years a whisper against any RPTs; (vii) year after year, signed and approved annual accounts without raising any objections; (vii) now at his conveniences dismisses as “unusual” the controlling rights of the IGE Group which are part of the fundamental architecture on which the Company was founded; (viii) shied away from taking a position on the Board of a start-up being scared of liability in a highly regulated sector; (ix) now claims to be a guardian of corporate governance. Alternate facts are easy to construct. Truth hurts.
16. Mr. Gangwal states “we are a publicly listed Company and the IGE Group should not use materiality thresholds as boundaries or a “Lakshman Rekha” to seek sanctuary as well as justify and potentially seek any unfair advantage for any amount whatsoever and at the expense of the other shareholders”. Materiality matters in more ways than one. And by no means is the IGE Group suggesting that stealing in small bits is okay! | repeat that at no stage has Mr. Gangwal cited a single instance where a RPT was not at arm’s length or where any undue advantage has been shown to have been taken by any IGE Group entity in any RPT. Had EY’s review revealed any such instance, that would have been highlighted. Neither the Companies Act nor the SEBI Regulations ban RPTs. They prescribe a process and set limits within which the Audit Committee and the Board can operate and set thresholds where the Shareholders (the audience that is now preferred by Mr. Gangwal) must participate. The relatively miniscule numbers — RPTs account for less than 0.7% (and continuing to decline) of the turnover of the Company - are relevant to negate Mr. Gangwal’s story line that RPTs are commonplace and a daily affair and thereby the unsaid piece that these are a big source of leakage.
17. Not only is the RG Group’s Requisition mala fide that must be rejected outright, but it also suffers from illegality. This Requisition is beyond the scope of powers of the Shareholders. Section 179 of the Companies Act provides that the power to decide on polices of a company vests with the Board and not its Shareholders. Further, Regulation 23 of the SEB! Regulations provides that it is the Board that formulates the policy and not the Shareholders. It is apparent that the RG Group is seeking to wrongly and abusively invoke Section 100 for a matter which falls only within the domain of the Board.
18. Moreover, the resolution proposed by the RG Group relates to the RPT policy, and it is not a resolution with respect to any particular related party contract / arrangement to be approved by the Shareholders of the Company under relevant provisions of the Companies Act. Admittedly, there is no contract or arrangement with any related party requiring Shareholders’ approval that has been brought under this Requisition.
19. The IGE Group is not in the business of holding out threats. It should be understood by Mr. Gangwal that he and his group will bear responsibility for their actions and for losses caused to the Company and its Shareholders. In that regard, the IGE Group and the Company will be entitled to take action against the RG Group and its members.
20. The real objective of the RG Group is neither to investigate RPTs nor to seriously think about developing “robust procedures”. It is to dilute the control of the IGE Group and to absolve the RG Group of its obligations under the AoA, and indeed to malign the image and reputation of the IGE Group.
21. I urge the Board to not fall into this trap of the RG Group, which is nothing but an attempt to cause damage to the Company and the IGE Group. The RG Group attempts to hold the Company and its Shareholders to ransom by placing its personal agenda of diluting control of the IGE Group under the guise of RPTs. The Board must advise the RG Group to withdraw its ill-advised, unlawful, and oppressive Requisition.
22. However, if Mr. Gangwal were to proceed with the Requisition, the IGE Group will be left with no option but to publish this letter and its earlier letter to the Board dated January 30, 2019 (with its attachments) so that the public at large, and, in particular, the Shareholders of the Company are made aware of the facts.
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