SEBI Reaffirms Its Linde Order: Non-Cash Deal Terms Must Be Valued

• SEBI reiterates its order against Linde India; finds the company in violation of related party provisions under the Listing Regulations
• Linde had entered into a joint venture with Praxair, its unlisted associate. They also carved up products and geographies to avoid competition
• Linde, after shareholders rejected these transactions, went ahead with only audit committee approval (staffed by majority independent directors)
• Company took a view that only transactions in a common contract are to be considered to determine materiality thresholds (to trigger shareholder approval requirement). In other words, if there are multiple contracts, then their value should not be clubbed together
• Linde’s audit committee potentially failed to value the exclusivity provisions while determining materiality of the transactions
• In May 2024, SEBI passed an interim order saying (a) club together all transactions with a related party to determine the “materiality” threshold; and (b) have the exclusivity provisions valued and included for the materiality threshold
• SAT set aside SEBI’s order on procedural grounds; allowed Linde to respond before any further action

• SEBI reiterates its previous order: (a) all transactions with a related party must be clubbed to determine materiality (even if in a separate contract); (b) Exclusivity provisions have a direct financial impact (a transfer of resources), and so they must be valued
• SEBI also pulls up policies of other listed companies (which have Linde’s Independent Directors in common) to show market understanding of the requirement to club unrelated contracts
• While an appeal is available to Linde, difficult to appreciate any substantial grounds given SEBI’s well-reasoned order, which was based on a plain reading of the law
• Independent Directors must play an active role in questioning transactions with related parties. Boards and companies must adhere to corporate governance in letter and spirit
• Exclusivity provisions are a mainstay of JVs/ hive offs. So far, largely, valuation exercise does not seem to have been carried out for exclusivity provisions
• Now, independent directors will have to go over related party transactions with a fine toothcomb, such that non-price factors are also valued

For a detailed overview refer to “Public M&A: JV’s with exclusivity under SEBI’s scanner – The Linde Case”