Proxy advisory firms that advise institutional investors are irked by the decision by consumer goods major Hindustan Unilever to hike the royalty payments to its parent. The firms said the move enriches the foreign promoters disproportionately while harming the local minority investors. They have also demanded various protection measures such as approval of minority investors, review by independent directors and even provision for clawback of the payout. Reflecting similar sentiments, HUL shares fell 2.88% to Rs 481.55
The company's board approved the royalty of 3.15% of turnover effective from February, 2013. Currently, royalty payment stands at 1.4% of turnover. HUL plans to increase the royalty from 1.4% to 3.15% in a phased manner till March, 2018. Taking this into account, the royalty for the coming financial year or 2013-14 would stand at 1.9%, up 50 basis points from the current levels.
According to a recent report by Institutional Investors Advisory Services (IIAS), HUL was the fourth largest royalty payer among Indian companies having paid Rs 300.9 crore for the year 2011-12. Assuming some growth, IIAS estimates the royalty to be as high as Rs 900- Rs 1000 crore.
“It is a monstrous amount of royalty,” JN Gupta, founder and managing director, Stakeholders Empowerment Services, “Nobody knows what the deliverables are and what the impact on growth is. We would like independent directors to give a review on the hike.”
According to Amit Tandon, MD, IIAS, mutinationals have been rampantly abusing this provision. “There is very little to justify this increase. We believe these decisions should come to minority investors for vote.”
Tandon said, “When we looked at the data, the top line growth of companies which did not pay royalty was better than the ones which paid over a period of time. Therefore, what are you paying royalty for?”
He demanded that there should be a claw-back provision, where the parent is made to pay back the royalty amount, “if there is no comparable improvement in top line or bottom line growth.”
Maruti Suzuki (Rs 1803 crore), ABB ( Rs 374.9 crore) and Nestle ( Rs 316 crore) are the top royalty paying subsidiaries of multinationals, according to the IIAS report.
With Indian subsidiaries now having easier access to technology, know-how, use of brand names and trademarks, the revenues for these companies should have shown higher growth in comparison to the restricted-royalty era.
However, IIAS found that year on year net sales have grown by just 1%, EBITDA growth has dipped by a considerable 9.3%, indicating that transfer of technology has not brought either more efficient manufacturing or higher realisations for the brand.
