Is Asian Paint Losing Sheen?
Is the paint peeling off in the drawing room?
The subject of corporate governance has its own way of throwing up surprises. And when the subject matter is a company of the credentials and glamour of Asian Paints it is more shock than surprise!
On 23rd March 2024 the company had filed the following with the stock exchanges.
Mrs. Pallavi Shroff was recommended for appointment for a second term as independent director by the board of Asian Paints on 17th January 2024 and a notice for the postal ballot was initiated on the very same day for the said purpose.
Strangely, this notice was communicated to the stock exchanges only on 27th February 2024 after about forty days. This aspect is not the subject of the present discussion.
The e-voting process was set in motion on 28th February and was to conclude on 28th March 2024. Just five days before the conclusion of the process, the candidate, Mrs. Pallavi Shroff had apparently communicated her intent to withdraw the nomination due to the enhanced professional commitments as the law firm she is the managing partner of is taking up many new projects!
This case must be one of its kind, for an independent director candidate to withdraw in this abrupt fashion for a reason that should have been obvious to her and the other board members much before, and definitely on 17th January when she was proposed for the second term.
Obviously, the reason to withdraw is not what is stated in the letter filed to the stock exchanges.
There is a mention in the press today that her appointment was adversely commented by the proxy advisory firms for possible reasons of procedural violations in the notice. Not having seen anything definitive on this, there is no further comment made in this regard.
There seem to be many lapses in this matter. The first and foremost is the lack of diligence of the NRC (nomination and remuneration committee) in figuring out if the candidate is suitably placed to continue the tenure for a second term.
The second is the failure of the board to purposefully discuss the matter and not take the NRC’ recommendation for granted.
The third is to not communicate the actual reason but merely find an alibi of some sudden commitments which could not have arisen in such an unanticipated manner in forty days’ time.
The independent directors on the board of the company represent the who is who of the corporate India and that, such a galaxy of experts can slip so badly is a grim reminder that eternal vigilance is the price to pay for good governance.
Mrs. Pallavi Shroff is the managing partner of the law practice, Shardul Amarchand Mangaldas. It is noticed that the said law firm provided professional service to the company and is paid a remuneration. This is disclosed in the related party transactions. It is also mentioned that the amounts paid do not constitute a significant part of the income of the law firm.
This practice followed by a company with the pedigree of Asian Paints is quite deplorable. The payments may be within the permissible extent under the law and the firm may be indifferent if the work comes from Asian Paints or does not.
Yet, such transactions clearly dim the sheen of the company. The impression such practices leave is that the company cannot find a firm other than Shardul Amarchand Mangaldas for getting legal services, and cannot find another woman independent director than Mrs. Pallavi Shroff!
For the record the remuneration paid to Shardul Amarchand Mangaldas in the three immediate years preceding were Rs1.52cr, Rs2.34cr and Rs1.21cr respectively in YE March 2023, March 2022 &March 2021.
The question is not about the payment. Assuming the law firm issues an opinion on a very critical matter, how independently would the board be able to critique it with its managing partner sitting alongside?
Mrs. Pallavi Shroff is also an independent director in PVR Inox Ltd and Interglobe Aviation Ltd. In both cases the firm Shardul Amarchand Mangaldas has professional relationship for which remuneration is received.
These practices were possible under the erstwhile law only with a special resolution passed under section 314. The liberalization is most welcome to remove such procedures but the boards of well-run companies should avoid such relationships.
Another interesting communication from the company on 19th March 2024, pursuant to a communication as below received from its cost auditor
The person holding the shares is the partner signing the report and it has come to his own notice that he was in possession of the shares of the company!
The communication doesn’t say since when the auditor is holding the shares. If the shares were held for many years what is the position of the reports singed by the firm?
While the company cannot be blamed in this case, it does cause a reputational damage on the face of it.
How should companies deal with such surprises? Should they keep the demat account number of all its auditors and make a quarterly check if any has purchased its shares?
The large audit firms which are affiliated to international networks neither allow their partners to become directors in companies nor purchase shares!!
Asian Paints certainly is in need of a fresh coat of paint for itself!
Will it choose its own product, or buy a competitor’s, to just stay clear of any conflict of interest?!!
Good joke that the cost auditor came to know that he was holding the shares of the co through some other source which resulted in his resignation. Big names in a board is just a farce and rarely they contribute anything for effective corporate Governance. If they do not toe the line of the promoters they may have to lose their position which in turn will affect their big revenue.