The bitter public spat between the promoters of IndiGo, India’s largest airline, took a new turn on Friday when co-founder Rakesh Gangwal requested an extraordinary general meeting (EGM) on January 29 seeking to change the rules on the sale and purchase of shares by its main stakeholders.

Gangwal wants to delete rules in IndiGo holding company InterGlobe Aviation's articles of association that give his partner Rahul Bhatia — with whom he developed sharp differences — the right of first refusal should Gangwal choose to sell his shares, a stock exchange filing showed.

Gangwal and Bhatia each control stakes of a little less than 40 percent in InterGlobe along with their families. Their simmering differences became public in July after Gangwal, an aviation veteran, alleged that corporate governance rules are regularly violated at InterGlobe.

Gangwal also wants to remove an article that restricts either of the co-founders from purchasing publicly listed shares in InterGlobe. While these changes could potentially trigger an open offer for the rest of the company, more importantly, they would allow Gangwal or Bhatia to increase or reduce their shareholding in InterGlobe.

The need of the hour

Shares of InterGlobe rose after the exchange filing, possibly because the market anticipated a resolution to the feud in the form of an exit by either of the two promoters, according to analysts. But the passing of this resolution will require votes from least two-thirds of the shareholders.

In other words, Gangwal will need the support of Bhatia and his family. Bhatia and his family own 38.3 percent, Gangwal and family 36.6 percent in IndiGo. The remaining 25 percent of stake is held by the public.

Gangwal, who spends most of his days in the US, has withdrawn completely from IndiGo’s operations, giving the mantle of running the airline to Bhatia in India. Both men told CNBC-TV18 last year that they still talk to each other but are no longer friendly as they were in the past.

On Friday, Gangwal also sought shareholders’ approval to delete a so-called tag along right.

Under the right of first refusal, a potential seller must give a partner a chance to match a price at which a third party agrees to buy an asset. A ‘tag along’ right entitles a minority shareholder to participate in the sale of shares by a majority shareholder at the same price set by the latter.

From Gangwal's vantage, there seems to be poor drafting of the shareholders agreement and the Articles of Association or clever negotiation on part of the Bhatia group, according to Mohit Saraf, senior partner at law firm L&L Partners.

"In such a situation, there should have been an obligation on the shareholder to vote in the shareholders meeting and get the articles amended to reflect the shareholders agreement. Unfortunately, that has been missed by Gangwal’s side,” he said.

An expired agreement and existing clauses

The shareholders agreement between Gangwal and Bhatia expired on November 10, 2019. But some clauses such as the right of first refusal and tag along right, among others, remained and became part of InterGlobe’s articles of association.

Saraf said as the clauses have not eclipsed from the article, Gangwal needs 75 percent of vote to get the articles amended. “I don’t understand Gangwal’s strategy ... if this issue is raised in the shareholder meeting and eventually a resolution is not passed, nobody can help. Even the courts will be reluctant to intervene," he said.

Almost immediately after the shareholder agreement expired, Gangwal launched efforts to get the clauses he saw as detrimental to his interests changed.

On November 13, 2019, Gangwal group wrote a letter to IndiGo to delete articles 1.6 to 1.15 (transfer of equity Shares), 1.16 to 1.20 (acquisition of shares) and 2A (other provisions on equity shares) from the articles. InterGlobe chairman M Damodaran, who previously headed market regulator Sebi, directed the company to obtain a legal opinion on Gangwal’s letter. It was confirmed that Gangwal and family had the right to request a meeting of shareholders to decide whether the articles need to be amended, in light of the expiry of the shareholders agreement.

In October, Bhatia filed a lawsuit against Gangwal in US courts to reach a resolution in their feud.

A person familiar with the ongoing spat between the IndiGo co-founders said the larger point here is the removal of these clauses creates an easier way for a shareholder to exit the company. “But both parties continue to fight the legal battle overseas. And so far, the Bhatia group has showed that it is not keen on supporting the resolution," he said, asking not to be named.

Holding an EGM was one of the primary demands made by Gangwal in the letter written to Sebi on July 8. While there have been a series of acerbic statements from both sides post the public spat, the annual general meeting held on August 27 had indicated that the two sides were working towards a settlement.

But that possibility vanished after Gangwal's legal counsel wrote another letter to Sebi on August 30, asking it to take action with respect to the rights of Bhatia's InterGlobe Enterprises group and the alleged non-independence of Damodaran, among other issues.

Middle East carrier Qatar Airways has shown a continued interest in buying stake in IndiGo.

IndiGo has a market share of 47.5 percent. The low-cost airline has more than 250 planes and offers 1,500 daily flights and connects 62 domestic destinations and 23 international destinations.

First Published:Jan 4, 2020 10:41 AM IST