The feud between IndiGo founders Rakesh Gangwal and Rahul Bhatia is an outcome of the related party transactions (RPTs) that have been entered by the company with the IGE group, which represents Bhatia and his affiliates.

Rakesh Gangwal, co-founder InterGlobe Aviation, who along with his affiliates hold 37 per cent in the firm, have questioned these transactions. He alleged the deals were executed without seeking approval of the audit committee. Neither was competitive bids taken from other parties.

Gangwal said various such transactions had even been signed with retrospective effect.

Bhatia has countered Bhatia saying IndiGo had received the most favoured treatment in each RPT. Besides, under new chairman M. Damodaran, extensive discussions have been held on the policy for RPTs and steps identified, which are under implementation even today.

Reports of the differences between the two promoters have been doing the rounds for some time now. Market circles said that it could have an adverse impact on the IndiGo stock when trading resumes on Wednesday. IndiGo in post market hours disclosed that Gangwal had sought Sebi’s intervention in addressing his grievances and that the market regulator had asked it to submit its response by July 19.

Analysts point out the rift between the promoters could turn out to be a major distraction for the carrier. It comes at a time the domestic aviation sector is passing through a challenging phase, with one full service airline — Jet Airways — suspending operations.

In his letter to the market regulator, Gangwal said Bhatia had built an “ecosystem” of other companies that entered into dozens of RPTs with IndiGo.“We are not against RPTs as long as proper checks and balances exist and such RPTs are in the best interest of the company,” he said.

In a separate communication, which he intended to make to the shareholders of IndiGo, the Gangwal group claimed that he had been trying to persuade the company, the board and the IGE group to put in place certain protocols for RPTs. However, through various technical and legal maneuverings, the IGE group continued to thwart all such attempts.

He cited one example of an RPT with the IGE group which concerned IndiGo’s office space in Gurgaon, which has been over the years been rented from IGE group entities. With the lease rental agreements set to expire this year, Gangwal said IndiGo entered into extensive negotiations with other third parties for office space — all on account of the intense scrutiny on RPTs.

The company finally did enter into an agreement with IGE Group entities, but at a lower rate of as much as 25 per cent. Gangwal claimed the transparency was lacking in the previous lease agreement with IGE Group.

Gangwal also questioned a report from Ernst & Young (EY) which was appointed to conduct a review of the RPTs. The report did not seem to point to any substantive irregularity regarding the transactions. But certain procedural irregularities were noticed — some agreements with related parties had been put in place without seeking the approval of the audit committee. some were executed before the approval of the audit committee.

“Such competitive bidding was not entered into when the original lease agreement was entered into with the IGE Group entities years ago,” he claimed.

``In spite of the inherent shortcomings of the EY report….the company continues to use the report and characterise the RPT issues as merely procedural irregularities’, Gangwal said in a letter that he intended to write to shareholders of the listed company.