Asian Paints, India’s largest paint company and one of the largest listed manufacturing companies in the country, today issued a detailed and point-by-point rebuttal of proxy advisory firm InGovern.
InGovern had, in a report brought out two weeks ago, alleged that Asian Paints was sourcing a considerable part of its raw material requirement from companies controlled by its key owners or promoters. InGovern flagged this as a sign of poor corporate practice and asked key directors of the company to step down taking moral responsibility for the situation.
It is “surprising to see that over 5.8 per cent of goods procured by Asian Paints is from related parties. The company does not disclose details of value and logic of procuring from related parties. For a company of Asian Paints’ standing, this is completely surprising,” the shareholder advisory firm alleged in its eight-page report.
Before attempting to rebut the point one-by-one, Asian Paints admitted that it sources around 4.5-6.0% of its external purchases from related parties, or companies owned or operated by its key shareholders or promoters.
Asian Paints then went on to clarify that this is not something new, and that it has been sourcing materials from promoter-related companies for more than three decades.
It then said such transactions, which form only around 5-6% of the total, are entered into for the benefit of Asian Paints itself, and not purely to benefit the promoters and their companies.
“These transactions primarily include transactions relating to purchase of raw materials, packing materials, intermediaries, and such other transactions permissible” under the law, it said today.
It listed three benefits arising out of its decision to secure such a chunk of its raw materials and packing materials from related parties:
These promoter companies “bring in advanced and innovative technology for the benefit of the company, customize their products to suit the company’s specific requirements, [and] help in enhancing the company’s purchase cycles and assure just in time supply with resultant benefits – notably on working capital”.
These factors make Asian Paints more competitive, “without compromising on the quality/service levels and based on sound commercial judgement,” the company claimed in its rebuttal.
It also added the following points in defense of related party contracts:
“By virtue of this association, the company is able to develop and deal with multiple vendors (both unrelated parties and related parties) and as per the company’s internal guidelines, for each product requirement at least 4–5 vendors (approx.) are dealt with to ensure (a) healthy competition and (b) avoid concentration risks or over dependence on a single source or a few vendors.
“To ensure transparency and arm’s length pricing for such supplies by related parties, the company seeks multiple quotes from related parties and unrelated parties of equal standing and appoints a related party only if such party offers competitive terms, including pricing, as compared to unrelated parties.
“Along with pricing, manufacturing capabilities to effectively serve Company’s requirements and quality parameters are primary factors taken into consideration. In rare cases of new product development and low volume purchases in absence of competitive quotes from unrelated parties, the process of price discovery is adopted typically based on cost plus model.”
Asian Paints also said that it gets the prior approval of its audit committee before entering into such agreements and documents the grounds on which the contract is awarded to a related party.
“The Audit Committee comprises majority of Independent Directors in accordance with the requirements of the law,” it added.
India’s largest paint brand also said all such related party deals of size are promptly disclosed before shareholders, and the only reason why it has not disclosed deals with a related party called Paladin Paints and Chemicals is because they do not meet the size threshold for disclosure.
It said the disclosed transactions “cover 85% of the transactions during that period with related parties (entities directly and/or indirectly controlled by members of the promoter(s)/promoter(s) group). Hence, the transactions with the entities which are not specifically disclosed (and not required to under law or applicable accounting standards), are infinitesimal in quantitative terms, which includes the transactions with Paladin. The company believes that any further disclosures beyond what is stated above would put the company at a competitive disadvantage,” it added.