Why did Indigo share prices fall today?

As news broke that Indigo co-founder Rakesh Gangwal sold some of his shares through a block deal on September 8, 2022, the share prices of Indigo fell by over 4% in the first couple of trading hours. Rakesh's stake sale worth Rs 2,000 crore comes 6 months after he resigned from the Board of Directors of Indigo, India's largest airline.

Indigo's previous day closing price (ie, on September 7) was Rs 1,977. But when trading began on September 8 at 9.15 am, share prices opened at a value of Rs 1,959 and in the next 5 minutes, the shares dipped to Rs 1,914. The share price has not crossed the Rs 1,959 level till now (at 12.40 pm).  

Why did co-founder Rakesh Gangwal sell his stake?  

Indigo co-founder Rakesh Gangwal has been planning his exit from the firm in a systematic manner, and he intends to sell the rest of his stake over the next 5 years. His resignation from the Board of Directors was the first indicator of his exit. 

A public spat: Gangwal leaving Indigo seems to come as the consequence of a public spat with Indigo Promoter and Managing Director Rahul Bhatia. 

Gangwal and Bhatia's spat began in 2019, when Gangwal wrote a letter to the Prime Minister’s office and SEBI, alleging “questionable related party transactions” between InterGlobe Aviation (ie, Indigo Airlines) and Bhatia's firms. Gangwal raised issues of corporate governance and also claimed to have little power when it came to running the company's affairs, which Bhatia denied.

As per agreements between Bhatia's firms and Indigo, Gangwal could only name only one director to the Board of Directors, whereas Bhatia could name five, and appoint Indigo's MD, CEO and President.  

Gangwal then approached the London Court of International Arbitration to remove a clause from the company's Articles of Association (AOA) that prevented the promoters from selling their holdings. He won the arbitration, removed the clause from the AOA, and began offloading his shares.

Now, who owns how much? Gangwal’s stake is worth Rs 27,900 crore, while Bhatia’s stake is worth Rs 28,800 crore.

Before the stake sale, Rakesh Gangwal and his family owned a 36.61% stake in Indigo, while Rahul Bhatia, the other co-founder, owned a 37.8% stake. Gangwal sold his 10.8 million shares (ie, 2.8%) via an approved block deal at a price of Rs 1,850 per share (a discount of 6.4% to yesterday’s closing price) and from today, his stake will be down to 33.81%.

Why do share prices fall when a founder sells his shares? Historically, a founder's investment in his company is a big influential factor that causes other investors to put their own money in the company. A founder's money in the business is directly proportional to the energy and trust he has in the company, and the market sentiments merely mirror that trust. The more the investment, the more the investors trust the company.  

Every time a co-founder sells his stake, the market sentiment is influenced and so are share prices. So, when a founder sells his own stake, investors usually focus on 'why' the investor is selling his stake. Is it because of an upcoming IPO where the founder needs funds to manage the business? Or is it because there is something wrong going on in the company which only the founder knows, who then wants to get his money out of the business quietly?

You might remember when shares of Policy Bazaar fell by about 10% in June 2022 when its founder Yashish Dahiya sold some of its shares. Or in February 2022, when share prices of PB Fintech fell by about 10% when its founder sold shares in a block deal.

Internationally, when Investor Ryan Cohen announced that he was going to sell shares of Bed Bath & Beyond, share prices tumbled. So, this is a trend.