"Dishonest, misleading, elaborate effort to cover up, self repudiation of written record and fundamentally flawed," this is how India's market regulator SEBI termed Linde's corporate governance practices in India. In a recent order, Sebi also linked serious violations by Linde India Ltd. (LIL) to the representatives from parent Linde PLC, which is a USD 230 billion Nasdaq 100 listed company. Linde has challenged the July 24 order of SEBI in the Securities Appellate Tribunal (SAT).
The crux of the Sebi investigation is that business allocation between Linde India and Praxair India was not done in a transparent manner without the valuation of products and regions of Linde India being restricted/reduced. The Company was of the view that the business allocation did not provide for or contemplate the transfer of any existing assets to PIPL and, therefore, did not require the approval of its shareholders.
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). 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 is a global multinational founded in Germany and, since 2018, domiciled in Ireland and headquartered in the UK.
Linde India had 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 it said was 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 came to the conclusion that none of these transactions require shareholder consent.
Sebi issued its order after probing Linde India's related party transactions with Praxair India and Linde South Asia Services. Indian origin Sanjiv Lamba is the CEO of Linde Plc, who was the Chairman of Linde India till May 2019, when this structure was being planned. In point number 49 of its order, SEBI observed that the discussion at the board meeting pertaining to the potential integration between LIL and PIPL was led by the representative of Linde Plc, who was a special invitee to the board meeting. Moloy Banerjee, Head – South Asia Linde Group PLC, attended the meeting as a special invitee.
He informed the Board that various options were explored for the potential integration between LIL and PIPL and out of four options the most cost-efficient method was suggested - a clear case of the global company driving the affairs. Geographic Allocation (north, east and west 2 regions were allotted to Linde whereas south, central and west 1 regions were allotted to PIPL), and b) Product Allocation [Linde got exclusivity with respect to the Project Engineering Business and PIPL got exclusivity in HyCO, Hydrogen, Carbon Monoxide and CO2 including carbon capture businesses. In the order SEBI also spoke about the role and Culpability of Directors and officers of Linde India for issues covered under the order.
The independent directors (IDs) of the Company, it is noted from the minutes, raised questions regarding the impact on the future growth prospects of LIL due to the split of business between LIL and PIPL. But SEBI found that the same IDs who are on the board of Linde India and also other listed companies were behaving in a different manner as they were in violation of SEBI rules when it came to Linde and in compliance when it came to other companies on the issue of related party transactions.
Legal Opinions dated 7 September 2021, 22 December 2022 and 27 December 2022, based on which Linde favoured the related party transactions were obtained from SEBI lawyer Sandeep Parekh, Abhishek Manu Singhvi, Senior Advocate, and Justice B.N. Srikrishna, former Judge, Supreme Court of India, respectively.
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.
According to Sebi, all the three Legal Opinions essentially adopt the same approach to arrive at the interpretation adopted by Linde. Their reading relied heavily on the words “in a contract” appearing in the definition of RPT. The opinions argue that the use of the words “in a contract” denotes that the only transactions under a common contract fall within the definition of RPTs and, consequently, while computing the materiality threshold only such transactions, which come within the definition of RPT, can be considered. In support of this position, the Legal Opinions rely on a Guidance Note issued by the Institute of Company Secretaries of India (“ICSI”) dated March 20, 2019. But according to SEBI, the validity of relying on a Guidance Note issued by ICSI in respect of provision of the LODR, where there is no apparent ambiguity, is itself questionable, however for the purpose of this examination.
"The intention behind this allocation was to ensure that within any given geographic area, only one company would operate in each vertical, thereby preventing competition between LIL and PIPL. 54. It is noted that the Board took the decision to demarcate business between LIL and PIPL without the benefit of a Valuation Report," SEBI has observed.
The business allocation between LIL and PIPL prima facie constitutes a transfer of resources by a listed company to a related party. This transfer should have been preceded by a valuation exercise or financial impact analysis to enable the Board of LIL to make an informed decision. Even LIL’s own assessment indicated that activities relating to Hydrogen had significant future potential, underscoring the necessity for a proper valuation before the Board’s decision, SEBI has observed.
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