Promoters are known for their ingenuity in taking out money from their companies. Through the formal route, there are few ways in which this money can be withdrawn. One such move that is increasingly being used is charging ‘royalty’ for use of the promoters’ name. Royalties are supposed to be commissions or compensation for use of property, copyrighted works, patented inventions, or natural resources. Indian promoters, however, have found new ways of extracting royalties from their companies.
The Nusli Wadia group announced that it will be charging a royalty of 0.1 per cent from the current fiscal year, which will be increased to 0.25 per cent as the companies use the group’s brand equity, business promotion and shared services such as legal, finance, information technology, risk and treasury management. These royalties will be charged on revenues generated by the companies. While the use of shared services such as legal, finance etc may be charged, ideally it should be based on each company’s needs and not on a fixed royalty basis.
Among Indian promoters, the Tata group holding company, Tata Sons, too charges a royalty of 0.25 per cent of revenues. But this royalty is charged only from the group’s larger blue-chip companies.
Though the number of 0.25 per cent of revenues looks small at the revenue level, it is sizeable at the profit level. Take the case of Britannia. For financial year ended March 2012, the company posted revenues of Rs 4,974.19 crore and a net profit of Rs 186.74 (including other income of Rs 58.53 crore). The royalty at the rate of 0.25 per cent works out to Rs 12.43 crore which is 6.7 per cent of the profit. If we remove the other income component, which is generated largely from interest income, the royalty as a percentage of profit works out to be much higher.
This royalty figure has to be looked at in terms of the promoters’ holding in the company which stands at 50.96 per cent. On an equity capital of Rs 23.89 crore, the promoters would take Rs 10.21 for every share they hold by way of royalty in FY13, assuming the revenues would remain the same as last year, besides the Rs 8.5 dividend which every shareholder is entitled to.
In case of Bombay Dyeing, the company posted sales of Rs 2,230.81 crore and a profit of Rs 59.35 crore. The contribution of other income is Rs 54.55 crore which is largely due to subsidies and rentals. The royalty outgo would be Rs 5.58 crore which is 9.4 per cent of the profit which includes other income. It may be noted that in the previous two financial years, the company had a net profit margin of only 1 per cent. Before that it made a loss. While dividends are paid from post-tax profit, royalty is paid from revenues. Thus, in a bad year when the company makes a loss, ordinary shareholders may not be paid any dividend from the company, whereas the promoters would have walked away with their royalties. Coincidentally Bombay Dyeing announced their results on August 7, 2012 where it posted a loss of Rs 27.5 crore on a turnover of Rs 475.73 crore for the June 2012 quarter.
Bombay Burmah, a trading and plantation company, has financials which are similar to Bombay Dyeing’s. This brings us to the question: what are the Wadia charging a royalty for? There isn’t a substantial value-add that the Wadia family brings to its listed companies. Consumers do not buy Britannia biscuits because they are baked by Wadias. The same goes for Bombay Dyeing towels or bed-sheets. Further, there is nothing in the numbers that betrays the benefit that the group companies are enjoying on account of being part of the Wadia empire.
