Asian Paints faces fire from proxy advisory firm. Here’s what the fuss is all about

Asian Paints has been a bellwether stock that has outperformed the stock markets in the worst of times. Moreover, it is one of the most technologically advanced companies in the country, credited with bringing one of the first supercomputers to India back in the 1970s when few knew of what such a device was. 

Yet, in the last couple of days, the counter, which has been a darling of retail investors, has come under pressure after shareholder advisory firm InGovern raised corporate governance issues and pointed out several related-party transactions among Asian Paints’ promoters. 

What has the advisory firm actually said?

A report by the Business Standard newspaper, citing InGovern, said that the advisory firm had observed several related-party transactions between Asian Paints and Paladin Paints & Chemicals, a private company owned by the Dani family, who are also promoters of Asian Paints.

The report has brought to light, what it claims, are the likely conflicts of interest involving entities controlled by the Danis, which also supply raw material to the paint manufacturer.

As per a report by The Hindu Business Line newspaper, the advisory firm has also sought the removal of promoters Ashwin Dani and his son Malav Dani from the board.

The report claims that the capital markets regulator Securities and Exchange Board of India is already probing transactions involving Paladin Paints.  

The InGovern note cited by news reports said that, on October 24, Asian Paints put out “an innocuous clarification” to a news report. “We dug deep. APL’s FY15-16 annual report lists PPCL (Paladin Paints and Chemicals) as a related party from April 22, 2015. But APL, unlike most other companies, ‘does not list out’ the value of RPTs (related party transactions). Only an aggregate value is given,” it said.

InGovern said that Asian Paints needs to present details of related-party transactions with each of the promoter-controlled entities, including PPCL, in terms of transaction value and nature of trade. “Promoter directors who ‘control’ entities supplying goods to APL should immediately resign,” InGovern added. 

The advisory firm also said that the board of Asian Paints “failed to act decisively” to mitigate the conflict of interest. “In the interest of good governance, the company needs to present details of the transactions – values, nature and logic - with Paladin and other related parties controlled by promoters,” said InGovern.

Did anyone else also flag these concerns?

Yes, a whistleblower reportedly flagged these concerns about related-party transactions about a month back. 

What has Asian Paints said on the whole issue?

In a filing to stock exchanges, Asian Paints said that there was “certain factually incorrect” information in the InGovern report. It said the claim that Paladin formed 7% of the value of goods purchased from promoter-controlled entities was factually incorrect.

“Out of Rs 553.88 crore of total purchases from related parties during FY2019-20, total purchase from Paladin was Rs 1.3 crores (which is lower than 0.2%) of total purchases from related parties,” the filing said.

Is InGovern buying Asian Paints’ defence?

Not really. Shriram Subramanian, founder and MD of InGovern, said in a report by Business Insider India the fact that Asian Paints has to point it out means it hasn’t put out the details of the related party transactions in the first place.

“We are stating a fact that Asian Paints hasn't given details of value, nature of, and logic for RPTs against each RPT,” he said.

How has the stock performed?

The company’s shares fell 0.47% on Thursday to close at Rs 3,143.70 apiece on the BSE, where the benchmark Sensex gained 0.78%. The shares have lost a tad more than 10% since hitting a high of Rs 3,504 in September but are still up around 50% from their one-year low touched in November last year.