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July 30, 2024
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”