Linde India judgement: Time to strengthen RPT oversight

SEBI has an opportunity and a responsibility to modernise its monitoring architecture and detect value transfers before they harm shareholders

The recent Securities Appellate Tribunal (SAT) ruling in the Linde India-Praxair case marks a defining moment for India’s corporate governance framework. It endorses SEBI’s interpretation of Related Party Transaction (RPT) norms while exposing the monitoring gaps that allow significant value transfers to remain undetected for years.

In an economy dominated by conglomerates with multi-layered subsidiaries, the risk of promoter influence is high. The RPT rules exist to prevent diversion of value from listed companies to group entities. The SAT’s December 5 judgement reinforces this objective and shows that regulatory systems still depend excessively on disclosures and shareholder complaints rather than real-time oversight.

In 2020, Linde India shifted its South and Central region businesses, including hydrogen and carbon dioxide product lines, to Praxair India, another subsidiary of the same global parent. This transfer effectively moved established customers, market access, and future earning potential to an unlisted group entity without valuation or shareholder approval. Although framed as internal business restructuring, it was a material transfer of commercial value.

The SAT rejected Linde’s argument that each contract should be assessed separately. It upheld SEBI’s view that all RPTs must be aggregated annually, so companies cannot fragment transactions to avoid scrutiny. It also dismissed the claim that potential future business cannot be valued. Courts and regulators routinely value projected cash flows in mergers, slump sales, and transfer-pricing matters. In this case, some profitable segments clearly moved out of the listed company.

The tribunal affirmed that this business allocation amounted to a material RPT, requiring prior shareholder approval, which Linde failed to obtain. The SAT reiterated a basic principle: what matters in RPTs is economic substance, not how transactions are described.

SEBI’s rules on paper are robust and aligned with global standards. The challenge lies in enforcement. The Linde case reached SEBI only because shareholders persisted; it was not caught through routine supervision. This reflects a deeper structural flaw.

India’s RPT environment has become more complex even as monitoring capacity has not kept pace. Listed companies operate through elaborate webs of subsidiaries and affiliates. The RPTs, today, range from service and cost-sharing agreements to customer transfers, shared infrastructure, and business allocations. Annual report disclosures are dispersed across lengthy documents, making manual analysis difficult. Quarterly disclosures remain skeletal and lack granularity.

Without deeper analytical capabilities, harmful RPTs can easily go unnoticed. When value is transferred from a profitable listed entity to an unlisted group company without valuation or approval, minority shareholders may lose while the promoter group may indirectly benefit. The SAT ruling underscores the need for SEBI to move from reactive to data-driven surveillance. 

Reform must, therefore, focus on strengthening institutional capacity.

First, SEBI and stock exchanges should create dedicated RPT-monitoring units equipped with forensic accountants, valuation specialists, and legal experts. These teams must actively scan disclosures, examine segmental shifts, triangulate group-level data, and detect anomalies. Just as insider-trading surveillance depends on specialised skill sets, monitoring complex RPTs requires its own analytical infrastructure. Without this, the regulator will continue to rely on complaints rather than early detection.

Second, quarterly RPT disclosures must become more granular. The current format does not enable early identification of unusual movements. Companies should report quarter-wise changes, RPTs as a proportion of turnover or assets, and details of business lines, customer relationships or facilities involved. Non-cash arrangements, such as customer transfers, shared infrastructure or business allocation, should be mandatorily disclosed. Significant RPTs should also be accompanied by independent arm’s-length pricing certification from a chartered accountant.

Third, the SEBI must establish tighter coordination with the income tax department. Transfer-pricing audits often uncover pricing discrepancies within corporate groups. Such information could greatly improve SEBI’s ability to assess the RPTs. Any mismatch between disclosures to tax authorities and those made to shareholders should trigger scrutiny.

Fourth, board committees—especially audit committees—need clearer responsibilities and firmer accountability. These committees are the first line of defence against questionable RPTs. Strengthening their mandate and enforcing consequences for lapses would enhance governance.

While the SEBI has progressively tightened the RPT norms over the past decade, expanding definitions and increasing transparency requirements, enforcement mechanisms have lagged behind the increasing complexity of corporate structures. When regulators rely heavily on disclosures, companies may comply formally while structuring transactions that defeat the spirit of the law. There is also a risk of policy dilution in the name of ease of doing business, which would undermine years of progress.

SAT’s ruling is, therefore, both an affirmation of SEBI’s interpretation and a reminder that the regulator must upgrade its systems. Investors now expect SEBI to ensure that value transfers do not remain undetected for long periods. Strengthening the RPT enforcement is essential to preserving trust in India’s expanding capital markets, especially as retail participation touches new highs.

India’s markets have made substantial progress, but credibility depends on effective oversight of transactions where promoter influence is strongest. Related-party dealings will always exist; what matters is transparency, fairness, and disciplined scrutiny.

The Linde judgement signals that India’s regulatory frameworks must evolve in step with the corporate groups they regulate. The SEBI now has both an opportunity and a responsibility to modernise its monitoring architecture and detect value transfers before they harm shareholders. A decisive upgrade of the RPT oversight will reinforce confidence in India’s corporate governance regime.