Asian Paints’ related-party transactions: what’s worrying the whistleblower and the proxy advisor? – The Economic Times

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India’s largest paint manufacturer, Asian Paints, isn’t painting a pretty picture for its investors.

One of the promoter families of the seven-decade-old company — the Dani family — has come under fire over its related-party transactions with a Mumbai-based entity Paladin Paints & Chemicals (Paladin Paints) over supply of raw materials to the paint manufacturer.

To be clear, the Dani family is one of the three families that comprise the promoter group of Asian Paints. The other two families are: the Choksi family and the Vakil family.

The Dani family, which has the largest holding in the flagship with around 25% stake, has also directly controlled Paladin Paints since April 2015.

Whistleblower complaints highlighting the problems had reached Sebi earlier this year, and in October the complaints reached the media.

Add to that, a recent report from a Bengaluru-based proxy advisory firm, InGovern, pointing to a likely conflict of interest arising from transactions between the two entities.

InGovern’s report released on November 24, further stated that Asian Paints has not been transparent enough while disclosing their related-party transactions.

The proxy advisory firm has sought resignations of the company’s directors, Ashwin Dani and his son Malav and has also called upon Sebi’s intervention for a detailed enquiry into the matter.

The whistleblower complaints that we spoke of earlier had also highlighted the company’s transactions with Paladin Paints. The complainant had alleged that Paladin Paints was promoted by a former senior official of Asian Paints and the Dani family used funds from Asian Paints to buy a controlling stake in Paladin Paints and the said related-party transactions had been allegedly benefiting them at the cost of shareholders’ money.

Clearly, if the allegations are found to be true, the minority shareholders’ interests are being compromised. How is Asian Paints addressing these charges?

What Asian Paints has to say
Asian Paints has categorically denied all the charges of poor corporate governance standards pertaining to related-party transactions in a clarification issued in a stock exchange filing. The clarification stated that the information provided in the InGovern report is factually incorrect.

Here’s the statement:

Asian Paints Page1
Asian Paint Page 2

If everything is fine, as Asian Paints claims and there’s no wrongdoing, then why do the whistleblower and the proxy advisory firm believe that minority investors should be worried?

Where it all began
Whistleblower complaints first reached Sebi between May 2021 and July 2021. The first letter alleged Ashwin Dani’s involvement in insider trading and leaking financial results to a Mumbai-based broking firm.

The second letter highlighted the related-party transactions involving the Dani family. The complaints also alleged that Asian Paints’ money was used to buy a major stake in Paladin Paints and the said transaction benefited the Dani family, at the cost of minority shareholders.

According to one whistleblower complaint, Jayram Nadkarni, an Asian Paints veteran who has served as chief technology officer at Asian Paints for 56 years, received a special one-time amount and long-term monthly instalments.

ET Prime has seen the copy of the second letter of the whistleblower complaint but could not independently verify the claims made by the whistleblower.

“The special payment to Nadkarni was made under the guise of providing Asian Paints with technical advice on manufacturing process, design, improvement, usage and other such services with the object of reducing cost and improving the profitability and host of other technical know-how,” the whistleblower complaint says.

The whistleblower complaints not only questioned the rationale behind such a huge payment to Nadkarni, who had already turned 80 when appointed as an advisor, but also hinted that the said payment became the genesis of Paladin Paints.

“After money was paid from Asian Paints to Nadkarni, a huge chunk of stake in Paladin Paints was parked with Ravindra Shah, a close friend of Ashwin Dani,” the whistleblower complaint said.

“The name of Shah and his family members can be found in the large individual shareholder list of Asian Paints and they are mostly fronted for Ashwin and Malav Dani and also associated with their other companies,” the complaint said.

The whistleblower complaint first came to surface when a financial daily reported on the development on October 22, 2021.

A day after the news report was published, Asian Paints responded with a clarification in a stock exchange filing that, “The company had entered into a technical consultancy agreement with one Mr. Jayram Nadkarni (ex–employee of the company) and Paladin Paints and Chemicals during the financial year 2005–2006. Pursuant to this agreement, an upfront consultancy charge of INR1.20 crores and a monthly consultancy of INR12 lacs for a period of 21 months amounting to INR2.52 crores was paid to him for providing necessary technical consultancy, technology knowledge package and process for manufacturing of resins to the company with respect to the products governed by the agreement.”

“Inadequate disclosure of value of related-party transactions and rationale behind the transactions like with Paladin Paints leaves the issue a bit cloudy and thus questions like conflicts of interest crop up.”

— Shriram Subramanian, founder and managing director, InGovern
The filing read, “As he was an ex-employee, he provided this technical service exclusively to the company. There was no related party relationship existing at this point in time. Subsequently during 2015-16, the company was informed of the acquisition of interest by a promoter director in Paladin Paints & Chemicals and since then, all the transactions (purchase and processing of goods) undertaken with the said entity have been pursuant to necessary approvals from the audit committee of the board of directors of the company and in accordance with the applicable provisions of law.”

The proxy advisory firm InGovern got intrigued by the company’s clarification which was not completely dismissive of the news report and did admit to certain transactions including a one-time special payment to Nadkarni and existing related-party transactions with Paladin Paints.

However, unlike the whistleblower complaint, the InGovern report didn’t question the payment made to Nadkarni or whether Dani family used money from Asian Paints to fund Paladin Paints’ acquisition but it did press upon the fact that there is a conflict of interest by promoter directors who own Paladin Paints and other companies supplying goods to Asian Paints. It says the board of directors failed to act decisively to mitigate this conflict of interest.

The report further highlights that Asian Paints also failed to provide adequate disclosures of value of these related-party transactions and logic behind these transactions. The proxy firm also called upon Sebi’s intervention into this matter to investigate and insist on detailed disclosures of related party transactions by such a large listed-entity.

How Dani family got into the game
Paladin Paints & Chemicals is a Mumbai-based entity started off as a partnership firm and later converted into a company in March 2007. The initial shareholders of the company list Jayram Nadkarni and family as the majority shareholders of the company, according to their filings with the Registrar of Companies (RoC).

Nadkarni, the former Asian Paints’ executive named in the whistleblower report along with his wife Sandhya, son Prakash and daughter-in-law Radhika held 85% stake in the newly incorporated company as of March 2007.

Who owns how much in _Paladin Paints & Chemicals@2x

The rest of the stake was held by Dr. Nandkishore Shamrao Laud, a Mumbai-based orthopaedic surgeon and Padma Bhushan awardee along with mother-son duo Shubha and Gautam Chitnis. Laud and the mother-son duo each held a 5% stake in the company.

Just a few months after its incorporation, Paladin Paints issued three preference shares worth INR10 each to Sameer Ravindra Shah and family along with Devarsons Industries Private Limited, an entity owned by Shah.

The name of the Shah family also appeared in the whistleblower complaint. In 2011, the Shah family invested a huge chunk of money in Paladin Paints.

The family together got allotted convertible preference shares for an investment of INR3.93 crore. On the same day, the Nadkarni family also invested INR95 lakh in the company through convertible preference shares at INR10 apiece.

Four years later, Paladin Paints received another major investment worth INR10.27 crore.

This is where the Dani family enters the scheme of things.

In April 2015, Ria Enterprises, a partnership firm through its partners Rituh Holding & Trading Company Private Limited, Ashwin Dani, Ina Dani (wife of Ashwin Dani), Ramesh Shah, Deepak Shah bought 49% equity stake in Paladin Paints and also bought 100% of convertible preference shares from the existing investors, the Shah family, at INR47 per share as per RoC filings.

So, the Dani family brought in INR10.27 crore in the company while it must have shelled out over INR18 crore for buying the Shah family’s stake in the company at INR47 per share.

Dani family's ownership in Ria Enterprises@2x

Between 2015-2016 and 2019-2020, Ria Enterprises held a 49% stake in the company. However, the entity has now converted its preference shares in the company to the full extent and that stake has now increased to 93% as of March 2021, the remaining stake is held by Nadkarni family, Chitnis family and Laud.

Related-party transactions at Asian Paints
Asian Paints’ 2015-2016 annual report rightly lists Paladin Paints as a related-party with effect from April 22, 2015.

However, the company does not disclose the value of each related-party transaction against each related party, and only provides an aggregate value of all the related-party transactions clubbed together.

The company claims that there are no materially significant related-party transactions which have potential conflict with the interests of the company at large.

“The company only lists the related parties and the aggregate value of related-party transactions. The lack of detailed disclosure and intent of procuring such a high percentage from companies, including Paladin Paints, that are owned by promoters is strange,” the InGovern report said.

Sample this. During 2020-2021, Asian Paints procured around INR512 crore worth of goods from companies controlled by its directors, including Paladin Paints as one of the entities. This constitutes 6% of total raw material purchased by the company during the year. The share of raw materials purchased from related parties has been hovering around 6% at least since 2014-2015.

Raw material Asian Paints sources from _promoter-owned companies@2x

The company’s annual report for 2020-2021 lists 42 such entities where promoters, directors or their close relatives hold significant control. There is no detailed disclosure regarding how many of these companies are involved in related-party transactions and of what value.

Inadequate disclosures?
The proxy advisor sees cases like Paladin Paints as a clear conflict of interest on behalf of the promoter directors.

“Leave aside the value of the transactions of each of these entities. It is also not clear which one of these entities are controlled by which promoter family or director,” Shriram Subramanian, founder and managing director at InGovern told ET Prime.

“Inadequate disclosure of value of related-party transactions and rationale behind the transactions like with Paladin Paints leaves the issue a bit cloudy and thus questions like conflicts of interest crop up,” he added.

The InGovern report stated that Paladin Paints with a revenue of INR39 crore during 2019-2020 forms 7% of the total related-party purchases made by Asian Paints during the year.

However, the clarification issued by Asian Paints refutes the claim saying that Paladin Paints forming 7% of the value of goods purchased from promoter-controlled entities is factually incorrect.

“Out of INR554 crores of total purchases from related parties during the 2019-20, total purchase from Paladin was INR1.3 crores (which is lower than 0.2%) of total purchases from related parties,” the company statement, as seen above, states.

Asian Paints had also received email enquiries from Sebi and the NSE seeking details of the said transactions with Paladin Paints post whistleblower complaint in July 2021.

“Company has provided all necessary details and explanations sought by the said authorities, along with an overview of the processes followed for approval of related-party transactions,” the company statement maintained.

“Whether it is INR39 crore or INR1.3 crore, 7% or 0.2%. The fact is the nature of the transaction and the logic behind it has not been disclosed. Company needs to present details of the related party transactions with each of the promoter-controlled companies, including Paladin Paints,” Subramanian added.

“What’s the rupee value of the transactions? Why are these transactions necessary? Whether the goods procured from promoter-controlled companies are proprietary in nature or commodity in nature? Was the pricing at arm’s length? The company needs to disclose all these to its minority shareholders,” he adds.

Asian Paints declined to participate in the story.

In its clarification statement issued earlier it had said, “Company will be suitably responding to the same along with clarifying on certain factually incorrect information included in the report. We have nothing further to add or comment on this matter at this stage and we reserve our right to supplement our response based on a complete review of the quoted report of InGovern.”

(Graphics by Sadhana Saxena)

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