The market regulator has asked the National Stock Exchange (NSE) to appoint an valuer to get a measure of the business foregone by Linde India Ltd (LIL) and received by related-party Praxair India (PIPL) by the execution of a joint-venture and shareholders agreement (JV&SHA).
Linde AG, parent of LIL, and Praxair AG, parent of PIPL, merged in 2018 to form NASDAQ-listed Linde Plc.
The regulator held, through an interim order, that the listed LIL allocating business opportunities to a related party needs to be scrutinised in the same way as traditional RPTs--which involves direct exchange of assets/services--are assessed. It asked LIL to reimburse expenses incurred by NSE in the valuation exercise.
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The Securities and Exchange Board of India (Sebi) the order on April 29.
The JV&SHA was entered into to set up Linde South Asia Services (LSASPL), in which both LIL and PIPL held 50 percent each. LSASPL was meant to provide administrative and support services to LIL and PIPL.
But, the agreement also contained a clause which allocated products and geographies to LIL and PIPL. It gave PIPL got exclusivity in HyCO, Hydrogen, Carbon Monoxide, Green Energy, gasification and CO2 including carbon capture businesses (“HyCO”).
LIL's shareholders raised issue with this, saying that the agreement essentially promised future business to PIPL at the expense of LIL.
LIL countered that business allocation did not mean exchange of services or assets to PIPL and therefore did not need to approval of LIL's shareholders.
But the order stated that transfer of business opportunities should also be scrutinised.
It stated that "the business allocation, although termed as a split of future business rather than a current transaction, effectively alters how business opportunities are allocated between the related parties.. Such arrangements can lead to a redistribution of corporate business and opportunities that would otherwise have benefited the company. This seemingly benign and arbitrary reallocation of business presents a potential risk to the future growth prospects of LIL which may not be in the best interests of the public shareholders.
Sebi's whole-time member Ashwani Bhatia noted, while passing the order, that transactions of this nature need to be subjected to the same scrutiny and require similar approvals as traditional RPTs to ensure that investor interests are safeguarded.
The order read, "The business allocation between LIL and PIPL prima facie tantamounts to a transfer of resources by a listed company to a related party. Such a transfer, I note, should have been preceded by a valuation exercise or financial impact analysis to enable the Board of LIL to make an informed decision. In the current case, even as per LIL’s own assessment, the activities relating to Hydrogen had significant future potential and, therefore, a proper valuation should have been made before the Board decision. Further, valuation would have thrown light on whether the decision required approval of just the Audit Committee or whether shareholder approval was also required."
It said that the business allocation was "vitiated" because a valuation exercise was not carried out before the Board granted sanction for the transaction.
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