'Dishonest, Misleading': SEBI Rejects Defence And Mandates Disclosure, Shareholder Approval For Material Related Party Transactions
Rajesh Kumar
25 July 2024 3:30 AM GMT
The Securities and Exchange Board of India (SEBI) has issued a final order concerning Linde India Limited (LIL) and its related party transactions (RPTs) with Praxair India Pvt Ltd (PIPL) and Linde South Asia Services Pvt Ltd (LSASPL). The decision follows exchange between SEBI and LIL which began after SEBI's interim order on April 29, 2024 that questioned the legitimacy of these transactions.
The matter revolves around transactions entered into by LIL with PIPL and LSASPL. SEBI's investigation was triggered by complaints from LIL's shareholders who alleged that these RPTs were conducted without proper shareholder approval and were potentially detrimental to the interests of LIL.
LIL had argued that SEBI's interim order contained "bald innuendos" and its subsequent defense was dismissed by SEBI as "dishonest and misleading." SEBI's final order demands that the National Stock Exchange (NSE) appoint an independent valuer to assess these RPTs. Additionally, LIL is required to cover the valuation expenses and comply with future RPT materiality thresholds as set under Regulation 23(1) of the Listing Obligations and Disclosure Requirements (LODR) Regulations.
The controversy began with the joint venture and shareholders' agreement (JV&SHA) between LIL and PIPL which led to the formation of LSASPL. According to this agreement, both parties held equal stakes in LSASPL, which was designated to provide administrative support to both companies. However, the agreement also included clauses for the allocation of products and geographic territories. PIPL was given exclusivity in certain business areas, including HyCO, Hydrogen, and Carbon Monoxide while LIL retained other business areas.
Shareholders raised concerns that this allocation promised future business opportunities to PIPL at the expense of LIL. SEBI's interim order noted that LIL's proposal to seek shareholder approval for these RPTs was rejected by 93.94 percent of the votes cast at the company's 85th Annual General Meeting (AGM) held on June 24, 2021.
SEBI's investigation focused on the materiality of these RPTs under Regulation 23 of the LODR Regulations. This regulation defines a "related party" and outlines the materiality thresholds for RPTs. According to Regulation 23(1), a transaction is deemed material if it exceeds one thousand crore rupees or ten percent of the annual consolidated turnover whichever is lower. It states that all material RPTs must be disclosed and approved by the shareholders.
Section 2(zb) of the LODR Regulations incorporates the definition of "related party" from Section 2(76) of the Companies Act, 2013. This section defines related parties as entities or individuals who have significant influence over the decision-making of a company. It includes directors, key managerial personnel, and entities in which these individuals or their relatives have a substantial interest.
LIL contended that the valuation of these transactions should be restricted to contracts of a similar nature while SEBI held that all transactions, regardless of their contractual grouping should be aggregated to determine materiality.
SEBI's final order mandates that NSE appoint an independent valuer to review the RPTs between LIL and PIPL, as well as LIL and LSASPL. The company is also required to reimburse NSE for the costs incurred in this valuation process. Further, LIL must ensure that future RPTs comply with the materiality thresholds established under Regulation 23(1) of the LODR Regulations.
