SEBI Directs Linde India To Assess Related-Party Transactions
The move follows SEBI receiving complaints of LIL's transactions with Praxair India Pvt. and Linde South Asia Services Pvt.
The Securities and Exchange Board of India on Monday directed Linde India Ltd. to assess how important its transactions with related parties are based on a specific limit set by the rules.
If these transactions exceed the limit, Linde India needs special approvals. Additionally, the National Stock Exchange will hire someone to check how these transactions affect the company's business.
According to the directions, Linde India will have to pay the NSE for the costs of such a valuation. The management and the auditors of the company have also been directed to help with appointing the valuer. The NSE will then give the valuation report from the valuer to both Linde India and SEBI.
Background
SEBI received several complaints regarding Linde India concerning its transactions with related parties, namely Praxair India Pvt. and Linde South Asia Services Pvt., also known as LSASPL. Due to the nature of these complaints, SEBI launched an investigation to determine if these transactions complied with regulatory provisions.
Initially, LIL was a subsidiary of UK-based BOC Group Ltd., until it was acquired by German company Linde AG in 2006. Subsequently, LIL changed its name to Linde India Ltd. in February 2013.
In 2018, Linde AG merged with Praxair Inc., forming Linde Plc., a Nasdaq-listed entity. As a result, Linde Plc. had two subsidiaries in India: LIL, in which it held 75% beneficial ownership, and PIPL, a 100% step-down subsidiary of Praxair Inc.
LIL and PIPL entered into a joint venture and shareholders' agreement, establishing LSASPL to provide administrative and support services to both entities.
Following the announcement of the agreement, SEBI received investor complaints, alleging that the business allocation between LIL and PIPL was not favourable to LIL's public shareholders.
SEBI initiated an investigation, and although the company and its key management personnel and independent directors sought a stay on the investigation, the Bombay High Court has not granted it.
Considering the connections between LIL, PIPL, and LSASPL, SEBI proceeded to examine the major allegations, which can be grouped into two categories:
1) Failure to obtain shareholder approvals for significant related-party transactions with PIPL.
2) Irregularities in a business agreement between LIL and PIPL regarding product and geographic allocations.
SEBI's Observations
LIL argued that these transactions were approved by its audit committee and didn't need shareholder approval as they were not considered significant related-party transactions .
LIL believed that for a transaction to be "material," consolidation of transactions with a related party was required, but only if they were connected to a common objective. To support this, LIL provided legal opinions from legal experts.
However, SEBI observed that LIL had previously sought shareholders' approval for RPTs with PIPL at its 85th annual general meeting, but it was rejected by shareholders.
Despite this, LIL proceeded with the transactions. Subsequently, at a meeting of the audit committee, it was discussed that legal opinions were needed regarding the transactions after the shareholders' rejection.
The legal opinion obtained suggested that transactions needed to be consolidated only if they dealt with similar subject matters.
SEBI, however, noted that the regulations clearly state that transactions with a related party must be considered along with previous transactions during the financial year with the same related party to determine materiality, regardless of whether they are under a common contract.
Regarding the joint venture agreement between LIL and PIPL and the business allocation between them, it is observed that LIL decided to split the businesses between the two entities without obtaining a valuation report or shareholders' approval.
This decision raised concerns among shareholders, as it potentially favoured PIPL. Despite LIL's argument that the allocation didn't involve a direct exchange of assets or services, it's considered a related-party transaction because of its potential impact on future revenue streams.
This decision may have disadvantaged LIL's shareholders, especially considering the significant future growth prospects in the hydrogen business, SEBI observed in its order.
