Sebi flags need for tighter regulations as royalty payments increase

India's markets regulator on Thursday published a study that showed a jump in payment of royalty by listed companies and flagged the need for tighter regulations.

The study, conducted between fiscal year 2014 and 2023 and comprised 233 companies, showed that one out of four times listed companies paid royalty to their so-called related parties (RPs) exceeding 20per cent of their net profits.

Securities and Exchange Board of India (Sebi) said one out of two times listed companies that paid royalty, did not pay dividend or paid more royalty to RPs than dividend paid to other shareholders.

In India, listed companies make royalty payments to their holding companies or fellow subsidiaries - usually referred to as related parties - towards purposes like brand usage and transfer of technology.

The study showed that during FY14-23 there were 185 instances of royalty payments by 63 companies that made net losses. Their total royalty payment amounted to Rs 1,355 crore ($160.48 million).

Sebi said that though the royalty payments made by companies were within the stipulated threshold of 5per cent of their turnover, such payments were unjustifiably high in terms of their profitability.

The study raises questions such as whether there was a need for tighter regulations and if companies that skip dividend payments but pay royalty, or pay more royalty than dividends be subjected to enhanced shareholder scrutiny, Sebi said.

While the market regulator's study does not amount to a change in policy, it often uses such studies to signal the direction of policy.