What Rakesh Gangwal’s exit from IndiGo board means, and the future of the airline, explained

Why is Gangwal selling his stake?

Gangwal and Bhatia are no longer friends. Professionally, they remain courteous but their relationship became strained—and beyond repair— due to differences emanating from related party transactions (RPTs). Gangwal was upset with deals that IndiGo entered with enterprises such as lnterGlobe Hotels, lnterGlobe Real Estate Ventures, and lnterGlobe Air Transport, among others, that belong to Bhatia’s IGE Group.

To resolve the spat, InterGlobe agreed to Gangwal’s demand to expand its board to up to 10 members, including four independent directors, and a woman director. The RPTs too were reviewed to Gangwal’s satisfaction.

The difference that remained unresolved was a clause contained in the Articles of Association (AoA) of IndiGo that gave Gangwal and Bhatia the right to deny the sale of shares. That disagreement played out in an international arbitration court in London. The court sided with Gangwal, enforcing a meeting of shareholders that was held in December 2021 to amend the AoA and lift the restriction to sell shares.

Gangwal had his way but he had long distanced himself from the airline. In the interview three years ago, he told me he was no longer involved in IndiGo’s operations.

In any case, Bhatia had a greater say in all matters of IndiGo thanks to the shareholder agreement that gave the right to his IGE Group to appoint five of the 10 directors on the board as well as the managing director, CEO, and president. The agreement has since expired and certain elements were embedded in the AoA, including IGE's dominant rights as well Gangwal’s right to name only one director.

Despite his slender rights, Gangwal used to have a say in the 17-year-old airline, but that changed once the relationship between the two founders frayed.

Gangwal’s only skin in the game was to remain an investor and he does not want to commit in any other manner to an enterprise that he has little control over.

Bhatia and his group companies control about 38 percent of InterGlobe while Gangwal and affiliates own around 37 percent. A little above 25 percent is held by public shareholders, including global investors and funds.

Gangwal now plans to accelerate investments in other assets. A fiercely private individual, Gangwal has been quietly investing in American and European startups pursuing disruptive technologies. He has an affinity for disruption; he bet on IndiGo in the firm belief it could disrupt Indian aviation.

Why did Gangwal exit the board?

As outlined in the letter by Gangwal, this was to avoid charges of insider trading. At the heart of the airline business is forward bookings. IndiGo and other airlines allow customers to book tickets months before the actual travel dates. Directors and the top management know well in advance about earnings from weekly reports about bookings. As director, Gangwal would be privy to this information. For this very reason, he will not name a director in his place who could be accused of passing him critical information.

How much does Gangwal plan to sell?

Gangwal is likely to sell up to 90 percent of his stake in IndiGo beginning later this year and phased over the next five years. He will hang onto a small stake because he is entitled to a board seat under the Articles of Association if he stays invested. An amendment to the AoA to deny him this right can be enforced only with the approval of 75 percent of votes cast by shareholders.

Will Gangwal invest in IndiGo competitor Akasa?

Gangwal is now free to sell shares as he pleases. But he will be careful about settling on a buyer because he does not want the shares to land in the wrong hands. He will also not invest in the Rakesh Jhunjhunwala-funded Akasa Airlines.

Two reasons. One, he does not want to come across as vindictive. Two, he has made clear that he wants to benefit from a potential price rise in the IndiGo stock. Investing in a competitor is detrimental to that ambition.

Gangwal is an investor who thinks long-term. Indian aviation now has fundamentally changed with the purchase of Air India by the Tatas. The Tatas will have to sink billions of dollars to prop up Air India for at least three years. But to make profits, the Tatas will be forced to raise fares by up to 20%.

IndiGo stands to benefit because it too can raise prices to a level that would be cheaper than Air India’s and bump up profit margins. Add to this, the litany of troubles gnawing at competing low-cost airline SpiceJet.

Who stands to benefit the most? Rakesh Gangwal.

Is Gangwal’s resignation connected to Rahul Bhatia becoming managing director of IndiGo?

It is unusual for a promoter to take on a managerial role. Airline promoters typically rely on professionals to run operations. That said Gangwal’s decision to exit the board two weeks after Bhatia’s appointment as MD is merely a coincidence. Gangwal’s decision is an outcome of events set in motion three years ago when he complained to Sebi about IndiGo’s corporate governance issues.

Bhatia’s appointment means he is not entirely happy with the management. Bhatia believes IndiGo has lost a little bit of its mojo and has become complacent. He is a savvy businessman who is known to step in decisively before things begin to go astray.

What does Gangwal’s exit mean for IndiGo?

Gangwal is an aviation veteran of nearly 40 years. A former CEO of US Airways, he was instrumental in IndiGo’s muscular growth. He played a vital role in crafting IndiGo’s favourable engine contracts, massive plane orders and in network planning, all of which made it the largest airline in India. Today one in every second Indian who flies does in an IndiGo plane.

Craig Jenks, President of Airline/Aircraft Projects Inc, a New York-based air transport consultancy, said Gangwal reached a very senior position in the airline industry at a relatively young age. “This only happens in the US airline industry if the individual demonstrates strong managerial skills.”

Yet, Jenks said in the same breath that IndiGo is too big now to miss any one individual.

That is true. Few airlines in the world are as comfortably placed in a market as IndiGo is in Indian aviation. It has 283 planes as of December-end, roughly 40 percent of the total number of aircraft in India. IndiGo is due to take deliveries of 196 more Airbus A320neo planes and 342 A321neo planes in the coming years. The jumbo fleet powers IndiGo to muscle out competitors on routes by increasing the frequency of flights and undercutting prices.

What this means is IndiGo, the big daddy of short-haul routes, is also positioned to become the king of the long-haul route game from India. It will be difficult for foreign full-service airlines to compete with IndiGo on these routes because the Indian airline will keep costs low by abstaining from fancy airline stuff such as offering champagne in planes and making ticket prices affordable, the only factor that really matters for Indian passengers.

Jenks said IndiGo is an impressive airline that has long enjoyed a high growth rate. “This seems justified by the Indian market.”

Is the dispute between Gangwal and Bhatia truly over?

The relationship with Rahul Bhatia will never be the same again. Despite his Indian roots, Gangwal is essentially an American businessman, and Bhatia an Indian—make that Delhi—businessman. Viewed from this vantage, a clash was inevitable.

Professionally, their ties have been managed well despite the court battles. At board meetings, they have been civil despite the many disagreements. Gangwal’s exit from the board and Bhatia’s appointment as MD mean the roles of the co-founders are now clearly defined. That bodes well for IndiGo.