Holcim’s plan to charge two per cent of revenues as royalty from subsidiaries ACC and Ambuja Cement has hit a roadblock, as independent directors of Ambuja Cement have sought details of the technology transfer involved. The proposal was taken up by the board at its quarterly-results meeting last week but a decision was postponed till an independent consultant gave its report, a source close to the development said.
Holcim, which owns close to 50 per cent stake in both ACC and Ambuja Cement, has proposed to raise the royalty for technology transfer from 0.5 per cent of revenues to two per cent. If implemented, the payout from Ambuja Cement and ACC would be Rs 500 crore a year.
However, Holcim’s higher royalty plan failed to pass muster at the Ambuja Cement board meeting, as independent directors led by veteran corporate lawyer M L Bhakta and economist Omkar Goswami asked for more details on the exact nature of the technology being transferred by Holcim to its subsidiary. Both Goswami and Bhakta declined to comment on the issue.
| THE ROYALTY DEBATE Investors have often felt short-changed when a company has had to pay an amount perceived too high as royalty to its parent |
| In July 2010, Maruti Suzuki announced it paid 5.1% of its sales for the quarter ended June 30, 2010 as royalty to its parent Suzuki. Thus, while sales increased 27% year-on-year for the quarter, that was accompanied by a 20% fall in net profit year-on-year. The royalty amounted to almost 64% of the company’s pre-tax profit or 88% of its post-tax profit. Maruti Suzuki’s stock fell as investors did not like the royalty surprise |
| Nowrosjee Wadia & Co, promoter company of the Wadia group, has asked its listed group companies — Bombay Dyeing, Bombay Burmah and Britannia — to pay 0.1% of revenues from this financial year onwards as brand royalty fee and shared services fee. Investors say this goes against sound corporate governance practices |
| Just before their split, Hero and Honda’s joint venture was paying three per cent of sales and almost 25 per cent of profit after tax as royalty for technology transfer to the Japanese company. This was one of the bones of contention between the two partners, as the Indian partner was of the opinion the royalty payments were too high |
Holcim and Ambuja Cement did not reply to email queries. An ACC spokesperson declined to comment.
“This isn’t in the right spirit of governance. When the promoter is hoping to benefit from the company at the cost of other shareholders, it should at least be put up for voting as a special resolution requiring 75 per cent approval,” said Shriram Subramanian, founder and managing director of InGovern Research Services.
“As a majority of these (royalty payments) are related-party transactions and need proper justification, we recommend such payouts be subject to shareholder voting requiring special resolution,” he said about the rising cases of companies seeking higher royalty from subsidiaries. There is no legal bar on paying royalty to foreign parent companies.
On Wednesday, a day before the board met, foreign brokerage Macquarie had questioned Holcim’s plan, saying the cement industry did not require high technology. Besides, ACC had already paid Rs 57.3 crore in the name of training, technical know-how, market survey and management fees to Holcim, almost 0.5 per cent of its revenues. “This (royalty) will have an impact of 9-19 per cent on the earnings of both companies,” said Rakesh Arora, analyst with Macquarie, adding that ACC would be impacted more than Ambuja Cement.
Mumbai-based ACC is the largest producer of cement in India, with a capacity of 30 million tonnes a year. In 2004, Holcim took management control of the company. The company reported Rs 2,473 crore in revenues in the quarter ended September. The net profit for the quarter was Rs 248 crore. Ambuja Cement reported revenues of Rs 2,175 crore and Rs 304 crore in net profit in the quarter ended September.
