Barter Deal By Indian Entities Of German MNC Linde Plc Under Sebi Scanner
Linde India, an arm of the USD 230 billion Nasdaq 100 Linde Plc, is being investigated by market regulator SEBI. To stall this probe, Linde India and its independent directors have filed a writ petition in the Bombay High Court (HC) against Sebi's summons and inquiries.
Documents show that Sebi believes Linde's disclosures of financial information and business transactions could be violating the laws. Especially, a barter deal between two of Linde Plc's Indian companies is under scrutiny.
Linde plc was formed in 2018 through the merger of Linde AG, Germany and Praxair Inc, US. By merger in the US, Linde Plc is the promoter of Praxair India (unlisted) and Linde India, a listed entity which has more than USD 9 billion market cap here. Linde Plc owns a 75 per cent stake in Linde India. Linde plc is a global multinational founded in Germany and, since 2018, domiciled in Ireland and headquartered in the UK. Indian origin Sanjiv Lamba is the CEO of Linde Plc.
Failed Open Offer And Merger Plan Of Indian Entities
In 2018, Linde Plc made an open offer to buy Linde India's shares at 328.21 per share, which was subsequently revised upwards to Rs 478.40. This offer was unsuccessful. In parallel, Linde India and Praxair India moved the Competition Commission of India (CCI), to merge their two businesses. The CCI gave its approval subject to the divestment of Linde India’s entire shareholding in Bellary Oxygen Company (Belloxy), a joint venture between Linde India and Inox Air Products, divestment of Linde’s on-site plant located at Bellary, a cylinder filling station at Hyderabad and one in Chennai, divestment of Praxair’s three on-site plants located in Jamshedpur, one cylinder filling station at Asansol and one in Kolkata.
The two Indian companies complied with these divestitures and CCI directions. But given Linde Plc's inability to delist Linde India, the two India entities have yet not been merged and their business has been divided between them. Investors believe that the group has since taken a series of steps that seem to capture a disproportionate amount of the value directly in the parent entity and the unlisted company, rather than the listed entity i.e. Linde India. All these bear regulatory scrutiny.
Proxy advisory firm IiAS is of the view that the arrangement related to the division of the business between Linde India and Praxair should be brought to Linde’s minority shareholders for a vote.
"The inter-se arrangement between Linde India and Praxair India is effectively a non-compete agreement. It curtails the market size for the listed company for the operational benefits of the Linde Group," IiAS says.
Inter-se Allocation Of Business Between Indian Entities
Linde India and Praxair India will handle new business based on a geographical split. Linde India will handle new business exclusively in Eastern India, Northern India and Western India (excluding industrial bulk business in Maharashtra) and Praxair India will handle new business in South India, Central India and in the Industrial Bulk Business in Maharashtra.
Linde India will pursue the project engineering business. Praxair India will pursue the CO2, HyCO and Green Energy business. Expansions and/or renewals of existing business will be guided by the principle of incumbency – an entity already having an existing business relationship will get to bid for any expansions and/or renewals related to such existing business.
IiAS believes that while a geographical split and principles of incumbency provide a framework for carving out the business without competing, the listed entity (Linde India) is left with a far smaller geographic footprint: Central India, South India and parts of Western India are excluded. Further, the rationale for carving out the CO2 and HyCO businesses and allowing Praxair to pursue these suggests that these businesses were unique to Praxair India. But in the past Linde India has repeatedly highlighted its presence and strengths in CO2 and HyCO, including winning a major contract with Reliance Industries, IiAS says.
Linde India sought shareholder approval in June 2021 to undertake related party transactions with Praxair and Linde South Asia Services. This resolution was defeated. Even so, the company has continued undertaking related party transactions stating that it is compliant with SEBI regulations. This is based on legal advice obtained by the company that individual transaction value and not the aggregate sum determines the need for shareholder approval under the 10 per cent materiality threshold. Consequently, the company believes none of these transactions require shareholder consent.
In October 2023, Sebi summoned the MD and secretary of Linde India to appear before its investigating authority and had also summoned the company to furnish certain information and documents. The market regulator believes the company violated provisions of Prevention of Fraudulent and Unfair Trading Practices and also Listing and Disclosure norms. This year, Sebi issued a summons to the Independent Directors of Linde India and sought their responses to certain queries and also additional documents and information. Both the company and its independent directors filed a writ in the Bombay HC seeking a stay or quashing of the Sebi proceedings.
Linde Plc Competing For Business In India With Linde India
Linde Plc group operates in India through Linde India Limited (75 per cent ownership by Linde plc), Praxair India (100 per cent), Linde Engineering India (100 per cent), Linde Global Support Services (100 per cent owned Global Captive Centre, GCC) and Linde South Asia Services (owned jointly by Linde India and Praxair India, to manage the operations and maintenance of the facilities set-up/owned by both entities).
At a recent global investor call of Linde Plc held on 26 October 2023, Linde Plc’s deal with Indian Oil Corporation for hydrogen and other gases was discussed. Linde Plc CEO, Sanjiv Lamba, highlighted its huge upside for the global entity. Under the inter-se agreement between Linde India and Praxair India, expansions and/or renewals of existing business are to be guided by the principle of incumbency: an entity already having an existing business relationship will get to bid for any expansions and/or renewals related to such existing business. Linde India has a history of hydrogen technology - its manufacturing and sales. And as Indian Oil Corporation has been a customer of Linde India, under the inter-se agreement, the business should have been undertaken by Linde India, IiAS says.
The commentary by Sanjiv Lamba at the Linde plc earnings call (and the absence of an announcement by Linde India), seems to suggest that the business will be undertaken by Linde plc directly or through its wholly owned subsidiaries. "This decision could well have been a likely fallout of the investor push-back on related party transactions. But rather than merge Praxair India and Linde India or go back to its investors, Linde plc has begun competing with its listed Indian subsidiaries. As a 75 per cent equity holder, Linde Plc is expected to transfer the latest technology to the listed Indian company and ensure that the Indian business remains competitive. Otherwise, there is a clear risk of steady leakage of revenue from the Indian entity, which will likely lead to value erosion.
In the view of IiAS, minority investors in India are resigned to global parents 'competing with their listed Indian subsidiary by operating two (or more) entities in the country. While the GCC and engineering business may not be viewed differently from the gas business as they do not directly compete, a multiplicity of entities enables MNCs to choose which entity will pursue the newer opportunities.
As the Indian business grows, and newer opportunities like chip manufacturing pick up in India, the additional and more complex gas requirements of the economy will need to be met. Which group entity gets to service the sector – the parent company directly, the wholly owned subsidiary or one in which the economics are shared with public investors, IiAS says.
"This, as already mentioned, will have a bearing on the entity’s profitability. Global companies struggle to deal with listed subsidiaries in India, given that in most markets they operate through wholly owned subsidiaries. They need not. The same governance framework that applies to businesses globally, should also apply to businesses in India. Loyalty to the parent is one thing, but it cannot be at the expense of ‘Duty of Care’ owed to public shareholders of a listed company," said IiAS.
