Why IndiGo’s Gangwal And Bhatia Find It Tough To Resolve A Dispute Over Their “Paan Ki Dukaan”

Rahul Bhatia, co-promoter of India’s most successful airline IndiGo, has reason to be miffed that his fellow co-founder, Rakesh Gangwal, has levelled charges of corporate misgovernance against him in a letter to market regulator Securities and Exchange Board of India (SEBI).

Gangwal has alleged that IndiGo has entered into several related-party transactions and that the company is essentially being run like a “paan ki dukaan” (a paan shop).

Bhatia’s Inter-Globe Aviation, the listed entity, has hit back with two statements, one asserting that the “paan ki dukaan” is doing quite well, thank you, and another alleging that Gangwal’s overall financial contribution to the airline’s capital was less than Rs 15 crore.

The problem, as Swarajya pointed out a few days ago, is that the criticisms levelled by both parties — by Gangwal against Bhatia, and vice-versa — are irrelevant. The real issue is not that Bhatia has run the airline badly, but that he has run it so well that its market value is now upwards of $7.6 billion (Rs 52,000 crore).

How much money which promoter put in at the start of operation is immaterial to the argument, since it is in the nature of successful companies that small equity contributions result in returns that multiply many times over several years. An investor may have put in only a few lakhs at the time of Infosys’s IPO in the early 1990s, but his holdings would be worth several crores now.

That kind of valuation burns a hole in the heart. Gangwal’s equity contribution may have been less than Rs 15 crore, but his 37 per cent share of the equity is now worth more than $2.8 billion. This kind of paper wealth can drive most relationships towards breakpoint.

A parallel is the Pallonji Mistry group’s 19 per cent stake in Tata Sons, the main holding company of the Tata Group, which includes the massively-valued Tata Consultancy Services (TCS). The feud between the Tatas and Cyrus Mistry, who was ousted as Tata Sons chairman in October 2016, has not ended even three years later because not only pride, but control of a whole lot of wealth embedded in the 19 per cent Mistry stake in Tata Sons is at stake.

Taking merely TCS’s current valuation into consideration, Mistry’s stake in Tata Sons is worth over Rs 108,000 crore, or more than $15.8 billion at current exchange rates.

Given the valuation, it is not easy for the Tatas to buy Mistry out or to even ask a new investor to buy them out, since it will bring on new promoter-related uncertainties. An investor who buys out Mistry will also wonder what he gets from his massive investments.

This is the real issue making the relations between Gangwal and Bhatia testy. Both know that Bhatia does not have the kind of money to buy out Gangwal outright, which makes exit difficult for Gangwal except through one of two ways: slow disinvestment in the markets, which will depress prices, or sale to a third party investor, which means Bhatia will have a heavyweight financial investor instead of Gangwal in his cockpit.

The problem is the same as that for the Tatas for Mistry. There is no easy way to get a sleeping partner out of your hair without denting your own wallet or creating waves in the market.

The logical way out is for Bhatia to buy a part of Gangwal’s equity, and let the latter offload the rest in stages in the secondary market.

But if Gangwal wants his money quickly, there are no easy options before Bhatia except to rope in another equity investor.