High royalty payment a concern for investors: IiAS report

Says new Companies Act empowers minority shareholders to act against royaly payments but it lacks clarity

Last financial year, the rise in royalties paid by the Indian subsidiaries of foreign companies was much more than the rise in their revenues or profits.

 

In its latest report, proxy advisory and corporate governance firm Institutional Investor Advisory Services India Ltd (IiAS) said increased royalty and related payments by multinational companies continued to be a concern for investors.

 

“For the 25 highest royalty-paying listed companies (excluding Gulf Oil and P&G), royalty and related payments increased 23.8 per cent to Rs 4,952 crore in 2012-13 from Rs 3,999 crore in 2011-12. This wasn’t in line with the growth in their earnings, as net sales and profits grew at a slower pace---at an average 15 per cent and 13.1 per cent, respectively---in comparison to FY12,” the report says.

 

The top five royalty-paying companies---Maruti Suzuki, Hindustan Unilever, Nestle India, Bosch and ABB India---remitted Rs 3,979 crore in 2012-13, 27.4 per cent more compared with Rs 3,124 crore in 2011-12.

 

IiAS said despite protests from local investors, multinational companies continued to push royalty increases. Hindustan Unilever has proposed to increase royalty from 1.4 per cent of the turnover to 3.15 per cent between February 2013 and March 2018, in a phased manner, while, Nestle has proposed to raise it from 3.5 per cent to 4.5 per cent of sales through five years starting 2014.

 

Though the finance ministry had introduced a higher taxation rate on royalty, given the bilateral tax treaties, this was likely to have little material impact, IiAS said.

 

In Budget 2013-14, the rate of taxation on royalty was raised from 10 per cent to 20 per cent.

 

IiAS said though the Companies Act, 2013, empowered minority shareholders to act against related party transactions such as royalty payments, it lacked clarity. “…whether royalty and related arrangements would fall under ‘ordinary course of business’ for companies….if this holds, only transactions that are not at an arm’s length would require 75 per cent public shareholder approval, thereby limiting the number of cases for such approvals,” it said.