Will Linde India really benefit from semiconductor business?

Despite Linde India’s stock surging around 50% over the past two months in anticipation of a windfall from the potential business prospects, clarity on the allocation of such opportunities remains elusive, especially following the release of a proxy advisory report. On Monday, shares of the company were at ₹8,370.65, up 1.08% on the BSE.

Questions also linger regarding the execution of a deal announced by Linde last year with Indian Oil to supply hydrogen, nitrogen, and compressed dry air to its Panipat facility. Although the deal was announced by parent Linde plc, there has been no confirmation from Linde India on its involvement in the project.

Earlier, these questions were raised by proxy advisory firm IiAS in a report dated 28 March. IiAS alleged that Linde plc had started competing with its India-listed unit in which public shareholders own 25%.

“As the India business grows, and newer opportunities like chip manufacture pick up in India, the additional and more complex gas requirements of the economy, will need to be met. Which group entity gets to service the sector – the parent company directly, the wholly owned subsidiary or one in which the economics are shared with public investors?” the proxy advisor asked in its report.

In a rebuttal to the IiAS report, Linde India pointed out multiple factual inaccuracies in the report. However, it did not clarify its position on the underlying key allegations of competition within the group for new business in India and on related party transactions.

When contacted for this story, a spokesperson for Linde India directed Mint towards its rebuttal to IiAS without any additional commentary.

At the heart of the matter lies a global merger between Germany’s Linde AG and American Praxair Inc to form Linde plc in 2018. While Linde was present in India through listed Linde India, Praxair operated as a privately held unit in the country.

The merger led to an indirect takeover of Linde India by Linde plc, triggering an open offer for the company’s publicly held shares in India. Linde made an initial offer with a floor price of ₹276.09 per share to delist the company. 

The open offer led to a price discovery of ₹2,025 per share, which the company rejected. Later, Linde plc made an offer of ₹328.21 per share and revised it upwards to ₹478.4 but failed to delist the company.

Its inability to delist Linde India left the newly formed parent entity Linde plc with a motley of entities in India including listed Linde India Ltd as well as privately held Praxair India Private Ltd, among others.

The global parent has divided the Indian market among these entities to prevent competition. Existing business will be divided on the principle of incumbency, while new businesses will be split geographically among the entities.

“The inter-se arrangement between Linde India and Praxair India is effectively a non-compete agreement. It curtails the market size for the listed company for the operational benefits of the Linde group. We believe this arrangement should be brought to Linde’s minority shareholders for a vote,” IiAS noted in its report.

In its rebuttal to the IiAS report, Linde India said that since the global merger and the subsequent allocation of business in India between group companies, its sales have grown as a compounded annual rate of 30% and earnings per share at a rate of 72%, which “amply demonstrates the value these measures have created for the Company’s shareholders.”

“In conclusion, the Company’s financial performance and manifold increase in market capitalization are indicative of the trust reposed by the shareholders in the Company and also the synergies which have been realized as a result of the global merger,” Linde India said.

However, the company did not clarify who will benefit from the deal signed with Indian Oil. 

Listed Linde India had handled a similar transaction with the Panipat facility of Indian Oil just last year, satisfying the principle of incumbency based on which business has been divided with the Linde Group in India. Linde India has yet to make any stock market disclosures regarding the deal. 

The industrial gases major has also found itself under fire for its related party transactions with various group entities post the global merger between Linde AG and Praxair INC.

Last week, market regulator Securities and Exchange Board of India (Sebi) directed Linde India to comply with the norms of materiality thresholds for future related-party transactions based on the aggregate value of the transactions. 

This, was after Linde India continued to engage in related party transactions with other group companies that in aggregate breached the limits beyond which shareholder approval is required. 

However, the company continued to engage in these transactions arguing that each transaction individually was well below the prescribed threshold.

The company has disclosed that over a 15-month period between 1 January, 2022, and 31 March, 2023, related party transactions contributed to 27% of its total revenue and 35% of the profit.

The company had earlier put to shareholder vote its related party transactions with Praxair in June 2021, but the resolution was rejected by shareholders.

“The fundamentals of Linde India are robust and the expectations of incremental business from gas supply to the semiconductor industry resulted in the price rally that we have seen,” said Hemang Jani, director at Finazenn, a German finance site and trading platform.

“At this point, it is not very clear if the semiconductor opportunity will come to the listed company or another unlisted group company. But the company has mentioned semiconductors as an application technology in their presentation themselves, so it is safe to assume that the listed entity will be the one which will benefit from it,” he added.