Sebi defers implementation of new royalty payment corporate code

Starting April 1, cos where such payments exceeded 2% of turnover had to obtain shareholder nod

Market regulator Securities Exchange Board of India (Sebi) has deferred implementation of a key corporate governance measure relating to royalty payments at India Inc.

Starting April 1, any company where brand usage or royalty payments exceeded 2 per cent of their annual consolidated turnover required to obtain minority shareholder nod.

Sebi on Wednesday said that its “board (has) decided to defer the implementation of this provision for three months till June 30, 2019.”

While the market regulator didn’t cite a specific rationale for the deferment, it said it has received “representations received on the subject” which it is analyzing.

The proposal on greater scrutiny of royalty payments was made by the Uday Kotak-committee on corporate governance. The expert panel, however, had prescribed a limit of 5 per cent and had said anything higher should be put to shareholder vote.

Sebi had enacted a stricter framework by saying any payments made to related parties towards brand usage or royalty will be considered material if it exceeds 2 per cent of the annual consolidated turnover of the listed entity during a financial year. Such resolutions, Sebi had said, will require require approval of the shareholders, with no related party having a vote.

Sebi’s move was hailed by corporate governance experts saying that it will bring more transparency and accountability. The move, however, was supposed by certain corporates who feared that minority shareholders might arm-twist them into paying less royalty.

Among top listed companies, where royalty payments as a percentage of their topline is high include Maruti Suzuki, Hindustan Unilever, ABB, Colgate-Palmolive and Page Industries.

Industry watchers fear the market regulator could dilute the provisions of the regulation.

High royalty payments has always been a contention issue between companies and minority shareholders, particularly in case of multi-national companies (MNCs) listed in India.

According to an analysis done by corporate governance firm IiAS, 31 MNCs had paid an aggregate of Rs 7,780 crore, accounting for almost 20 per cent of their pre-royalty pre-tax profits, in FY17.

Some believe royalty payouts are legitimate expenses required to be paid by an MNC to their parent for giving access to brand and technology. However, companies should be able to convince their shareholders the basis of payments.

Separately, Sebi said its board has approved the proposal to undertake public consultation on setting up self-regulatory organizations (SRO). The move is being donw with an “objective of defining SRO, rationalising the process of recognition and strengthening the role of SROs in the securities market,” Sebi said.

The Sebi board, which met on Wednesday, also approved the budget for the financial year 2019-20.