SEBI penalises Linde India by getting it more money

Bad choices were made, money will be spent

Linde India didn’t burn its money I just like the facetious analogy

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If you own 75% of a company, and someone else owns 25%, you could refer to yourself as the owner of that company. The other person would be a partner, co-founder, shareholder, investor, or whatever else you want them to be, but they wouldn’t be an owner.

Now split the 25% into 10 pieces each and the decision is simpler. You own 75%, 10 others own 2.5% each. Of course, you’re the owner.

Now split each of the 2.5% chunks into 10 more pieces each. 100 people now own 0.25% each and you still own 75%. You’re the owner, no doubt.

Let’s keep going! Split the 0.25% by 10. Now there are a thousand others who own 0.025% of the company each. Are you still the owner?

The funny thing is that yes of course you own most of the company, and everyone else is way too small to have any meaningful say in how the company is run. But if there really is a scenario where thousands of others own shares in your company, you are no longer the owner. You’re a publicly listed company with public shareholders who come with minority shareholder rights.¹

Shareholder rights include things like “you must inform everyone about your financials every quarter” but also “you cannot withdraw the company cash, pile it up, and set it on fire”. If you were the owner of the company in its truest sense, which means that your company isn’t listed and you own 75%, you can literally create a mountain of cash and light it on fire and you’d be fine.² As long as your accountant manages the balance sheet correctly, of course.

Linde India and Praxair India are two companies that produce and sell industrial gases in India. Both are owned by Linde plc, a European multinational. Linde “owns” Linde India, but it really owns Praxair India. The difference being that Linde India is a publicly listed company with 25% of its shares with public shareholders, while Praxair India is private and fully owned by Linde plc.

Linde did not burn a pile of cash, but it did transfer some of Linde India’s assets to Praxair India. That’s a bad look! Linde India is public and some of its profits go to public shareholders. Praxair India is private, and all its profits go to its parent company. If Linde India happened to give away its best assets to Praxair, that’s bad for public shareholders. But this was back in 2020, and since then the company’s stock has gone up 10X, so presumably the asset transfer wasn’t too bad.

Regardless, SEBI investigated investor complaints against Linde India and issued two enforcement orders against it, both in 2024. Linde India challenged both orders, and last December SAT ruled that SEBI was right about being annoyed about Linde India’s asset transfer.

Split right down the middle

Until 2018, Linde India and Praxair India were separate, competing companies. In October 2018, their parent companies, both European multinationals, merged, and both of them became sister companies.

The rational thing for Linde plc to do, as it owned both companies, was to not have them compete against each other. From SEBI’s July 2024 order, this is how they achieved that:

a) 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 (“HyCO”)

Linde and Praxair split regions within the country between them, and decided to operate their main gas selling business within their own regions. They also split product lines between them. Linde India got something called “project engineering” while Praxair got carbon capture. (Carbon capture is the hip, new, cool stuff. Project engineering sounds like what your grandad used to do when he retired.)

The problem with this is that the region-splitting and product-splitting was largely arbitrary. Linde plc owned both companies, said “hey let’s do this”, and so it was done. Linde of course has a bit of an incentive to favour Praxair India at the cost of Linde India’s shareholders.

After the 2018 merger, Linde plc had three options:

1. Make Linde India private, that way it can split regions, product lines, employees, whatever else it likes and it’s nobody’s business.

2. Let the companies remain as they are, but take shareholder approval for the transaction. (SEBI’s rules state that if a transaction with a related party is above 10% of the company’s annual turnover, the company must take shareholder approval.³)

3. Ask for forgiveness rather than permission.

We know now that Linde India went with #3. But in all fairness, it tried both #1 and #2 first, even if half-heartedly.

Linde plc wanted to take Linde India private, but shareholders didn’t like the price it offered and refused. Linde also asked shareholders for a sort of “pre approval” of all transactions with its related parties. That permission was way too broad for shareholders, it would mean Linde India could literally do whatever it liked with any of Linde plc’s subsidiaries, and shareholders refused again. That’s when Linde India decided not to care.

Shareholders’ world

Intuitively, the way to sort out assets between the two companies would be by doing an equal barter. Linde India gives some regions, gets some regions. Gives some products, gets other products. The split should be out of convenience of operations, but the value of the assets with both the companies must remain the same.

In April 2024, SEBI issued its first order against Linde India. It asked for two things:

1. An independent valuer must value the assets Linde India gave away to Praxair and received in return.

2. If the value of the assets was more than 10% the turnover of the company, it must take shareholder approval.

These are both simple asks! No one’s being penalised. There isn’t necessarily any insinuation of the company shafting its public shareholders. And yet, Linde India didn’t like it. It challenged SEBI’s order in SAT. SEBI then reviewed its order, heard Linde’s arguments out, and issued another order, asking for the same things again.

Linde India challenged the second order in SAT again, and finally, last December, SAT decided that SEBI’s order was reasonable and Linde India must get the valuations done and take shareholder approval.

It’s been two months since this order, so I assume the independent valuer must be putting final touches? But how do things even work at this stage?

I think in all likelihood an independent valuation will find that Linde India gave away its assets for less than they were worth. If that were not the case, Linde wouldn’t have gone to the lengths that it did to challenge the independent valuations in the first place. But what happens then? It’s been 5 years since asset exchange happened, and it would be foolish to think that it can be reversed.

Here’s a funny possibility. At this point, Linde India has no choice but to ensure that the valuations are done and shareholders approve the transaction. That gives them power! Even if the valuations of the exchange aren’t too lopsided,⁴ Praxair India will need to throw in cash to sweeten the deal so that shareholders approve. The last time Linde India tried to get shareholder approval, 93.94% voted against it,⁵ so you can imagine the amount of cash it would take to get their approval this time around.

The more cash Praxair throws in, the more valuable Linde India gets. The more valuable Linde India gets, the higher its share price goes up. And it might be one of the few companies whose share price goes up directly as a result of SEBI orders against it.

Cover Photo by Pixabay

1. Of course, if the company has 1,000 shareholders, it doesn’t automatically become a publicly-listed company, I’m just making a point. At some point of a company’s existence, even if you “own” the company for all practical purposes, on a raw, technical level, you can’t really own it if you decide to list publicly.

2. Weeelll, not really, because burning legal tender is illegal in India? But you’d be fine from a corporate finance perspective, which is what I meant.

3. In SAT, Linde argued that it didn’t require shareholder approval for the transactions as the asset exchange was split across multiple transactions such that no single one of them was more than 10% of its turnover. If this argument had been accepted, it would’ve been pretty inane. A company could always split one transaction into many to skip shareholder approval!

4. Linde India’s CFO resigned a day before SAT’s order in December. So he knew what to expect! If the independent valuer’s valuation comes out saying that the transaction was heavily lopsided, there can be consequences for the CFO and other directors.

5. Company resolutions are mostly boring, procedural motions that nearly always pass. I have no idea how Linde India managed to get such interested shareholders who overwhelmingly knew what they didn’t want. I think another way of looking at this is that Linde’s public shareholders are actually public shareholders, not proxies of the company owner. (Definitely not referring to India’s darling coal-producing, airport-running, green-energy generating conglomerate here.)