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AirAsia executives alerted board, Tatas about lapses in business practices
Senior executives of AirAsia India, the Tata joint venture airline that was severely critiqued by ex-Tata Sons chairman Cyrus Mistry and which is now conducting an internal investigation, had repeatedly complained to the company board and the Tata group about serious lapses in business practices. But no action was taken by any major stakeholder. Mistry was also directly informed.
Two major complaints highlighted to the board and the Tata group were that AirAsia India was being “run” by Malaysian parent AirAsia Bhd, in contravention of FDI rules, and that the Indian venture was being “overcharged” by the Malaysian company.
Indian rules allow foreign airlines to own up to 49% in domestic airlines but effective management control must remain with the Indian partner. Tata Sons, the holding company of the Tata group, and AirAsia Bhd of Malaysia own 49% each in AirAsia India.
AirAsia India chairman S Ramadorai and director R Venkataramanan own the remaining 2%.
Tony Fernandes, chief of AirAsia group, and Venkatramanan, a former executive assistant to Tata Sons interim chairman Ratan Tata, have been on the board of AirAsia India since inception. Bo Lingam, deputy CEO of AirAsia Bhd, joined the board as a nominee director on March 31, 2016. Ramadorai has been chairing the board since June 11, 2013.
PK Ghose, a Tata veteran, replaced ? Bharat Vasani, chief legal counsel of the Tata group, as nominee director on November 24, 2015. The board also consists of Ashok Sinha and Maya Swaminathan Sinha, who joined on August 11, 2016.
ET has reviewed nearly 100 pages of company records and email correspondence between executives and directors. Five people familiar with the matter spoke to ET. They did not want to be identified. AirAsia India executives warned board chairman Ramadorai and director Vasani about potential losses, and the way the airline was being run. Some executives had questioned Fernandes about entering into what they termed as costly financial deals with associate companies of AirAsia Bhd. Email correspondence between February 2014 and July 2015 highlights these complaints.
All deals mentioned in these exchanges continue to exist. Fernandes, Tata Sons, Ramadorai, Venkatramanan, Vasani, former AirAsia India CEO Mittu Chandilya and ex-CFO of AirAsia India Vijay Gopalan did not respond to emailed questions seeking comment.
MISTRY RESPONSE
Mistry “promptly reacted” to indications of wrongdoing and “also escalated the matter to the Tata Sons board”, a person close to Mistry told ET. “A thorough investigation was sought. The details of fraudulent transactions were discovered through an audit. It was taken to its logical conclusion and an FIR was filed against the resistance that has been discussed in the media in recent days,” the person said.Gopalan had warned about the breach of FDI law in an email to Ramadorai, copying Chandilya, on February 14, 2015. This mail also highlighted other issues. He had said, for example, that “revenue management has to be real time and handled by persons familiar with the Indian marketplace and its behaviour”, but the entire process is in Kuala Lumpur (the headquarters of AirAsia Bhd). “This is a significant issue from an effective management control perspective also,” he had written.
ET had reported on December 17, 2015 (“Dark Clouds over AirAsia India”) that AirAsia India was facing problems related to feuding shareholders, mounting losses, a severe cash crunch and top-level exits. Cofounder Arun Bhatia, then a junior partner who eventually exited the venture, had told ET then that the management control of the airline was in Kuala Lumpur.
ISSUE OF OVERCHARGING
Other issues brought to Ramadorai’s attention included allegations that the Malaysian parent was overcharging the Indian airline. One mail from the ex-CFO referred to AirAsia Global Shared Services (AGSS), a wholly-owned subsidiary of AirAsia Bhd. “We have been mandated to use AGSS for outsourcing aspects of finance and accounting, HR functions, procurement and IT,” Gopalan wrote. He added that the budgeted payment to AGSS for 2015 at Rs 9.5 crore is “significantly higher than what it would have been if we were to in-house the entire operations”. There was also a warning that using Tune Insurance, another associate company of the AirAsia group, would reduce AirAsia India’s earnings by 50%.There was also a dispute over selecting an advertising agency. “We have decided not to go with PHAR, which is an AA (AirAsia) Group Company. This could lead to lesser rates as well,” Gopalan noted. AirAsia India picked a public relations firm, Buzz PR.
Fernandes was able to push these deals to AirAsia associate companies thanks to a brand licensing agreement (BLA) between AirAsia Bhd and AirAsia India. BLA exists alongside the shareholders agreement and became a key instrument of control, according to people familiar with the matter. BLA and the shareholders agreement were signed on April 17, 2013. Fernandes signed on behalf of AirAsia India and Lingam on behalf of the Malaysian airline.BLA directed that “The licensee (AirAsia India) shall observe and comply strictly with the following operating requirements which are to be determined in AirAsia’s sole discretion”. This provision was to apply to in-flight services, engineering, finance, flight operations, network planning, sales and distribution, among other matters. “The BLA superseded the shareholders agreement on every aspect of AirAsia India’s operations,” said aperson familiar with the matter. Another person familiar with the matter said knowledge of the BLA was limited to the board and senior executives. “It was not shown to the rest of the organisation. And nobody, not even the board, questioned or debated the financial arrangements.”
CLEARING PAYMENTS
Another complaint from AirAsia India executives to directors related to authority over clearing payments and expenses. Companies typically assign the responsibility of approving payments over a specified limit to the board and payments related to the day to day expenses to the management.In AirAsia India’s case, day to day approvals on key payments, travel, initial offer letters to employees etc came from Fernandes, said a person familiar with the matter. “This process was followed because the authority of this director (Fernandes) was agreed by the board,” said this person. “Every agreement and contract that AirAsia India executed with an Indian or foreign agency and related party followed exactly the same process.”
Another person said the management often did not know who to approach for clearing payments. “But since everything was already being controlled from Kuala Lumpur, it (the authority of Fernandes) became a logical extension of processes.” On June 23, 2015, Gopalan raised the matter in an email to Ramadorai and Vasani, copying Chandilya. He wrote that the “delegation of authority matrix for CEO, CFO and the board is awaited from Mr Vasani in consultation with Mr Pete”.
“Mr Pete” is Pete Chareonwongsak, a senior employee of the AirAsia group who started attending the board meetings as the alternate director of Fernandes. Day to day expenses of Vistara, another airline that the Tatas launched in January 2015 partnering Singapore Airlines, are approved by a management committee.
Only capital expenditure is approved by the board, said a person familiar with that airline’s operations. Vistara does not have a brand licensing agreement with Singapore Airlines.
“It is unusual for a non-executive director to have management power,” said Sandeep Parekh, Managing Partner, Finsec Law Advisors. The second person quoted above said AirAsia India’s financials were submitted to the board on a monthly basis along with a detailed monthly management report. Gopalan and several colleagues — such as Gaurav Rathore, commercial director; Amit Singh, director of flight operations; and Najam Rao, head of security — quit AirAsia India in 2015. Chandilya’s contract expired in March 2016.
AirAsia India named Amar Abrol as Chandilya’s replacement and Ankur Khanna in place of Gopalan, eight months after he quit, with effect from April 1, 2016. The airline, which began operations in June 2014, is yet to make a profit.Gopalan had, in a mail to Ramadorai on July 30, 2015, sought a meeting with Mistry. “I brought out (facts) to you so that the (Tata) group is not blindsided…This meeting is requested solely with the intent of protecting the Tata group and to enable me to discharge my duties honestly towards the position I was appointed for,” he wrote. That meeting never happened. Carnell Lake Authentic Jersey
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