The proposed changes in the Companies Bill, 2012, has led to a rush among companies to increase royalty payments to their foreign parents. Under the new Bill, if approved, promoters will have to take approval of 75 per cent of the non-promoter shareholders on any such proposal. The new regulations will make it harder for the promoters to charge such fees from the company as royalty payments or technology transfer fee, say legal experts.
The most recent examples of companies that have planned to raise royalty fee to their parent are Gujarat Ambuja, ACC and Hindustan Unilever Ltd (HUL). Gujarat Ambuja and ACC will pay one per cent royalty against the current 0.5 per cent to Swiss cement major Holcim for providing technology know-how. HUL has more than doubled the royalty to the Anglo–Dutch multinational consumer goods parent, Unilever, to 3.5 per cent.
The new Companies Bill, passed by the Lok Sabha and pending approval of the Rajya Sabha, has tightened the norms for related party transactions, such as introducing the requirement of a special resolution to be passed in favour of the transaction by shareholders. If the resolution pertains to a transaction with a shareholder, such entity or entities with an interest in the outcome have to abstain from voting. Effectively, it means issues like royalty payments cannot be decided by a resolution passed with the support of promoters alone and companies will require a majority consent from minority stakeholders, too.
While this proposal empowers shareholders, an exception has been carved out. If the transaction is in the ordinary course of the business and is at an arm's length, no such resolution is required. The term ‘arm's length’ has been defined in the Bill to mean a transaction between related parties, conducted as if they were unrelated so that there is no conflict of interest.
Legal experts say cases like that of Gujarat Ambuja, ACC and HUL would fall under the category of related party transactions and might not be able to take the benefit of the exception. “Since Holcim is the holding company of ACC and Ambuja, any transaction between them would be considered a related party transaction,” said proxy advisory firm SES.
SES believes the size of both ACC and Ambuja are sufficiently large and it is most likely that these companies would be covered and be required to comply with the provisions.
| PAYOUTS OF CONTENTION In the recent past, many MNCs have raised royalty payments from local arms | |
| Company | Royalty as % of sales (2012) |
| Maruti Suzuki | 5.20 |
| Colgate Palmolive (India) | 5.14 |
| ABB | 5.03 |
| Procter & Gamble | 4.70 |
| Voith Paper Fabrics India | 4.35 |
| Nestle India | 4.21 |
| Timken India | 2.50 |
| Alstom T&D India | 1.74 |
| Bosch India | 1.58 |
| Hindustan Unilever | 1.40 |
| Whirlpool India | 1.34 |
| Asahi India Glass | 1.21 |
| BASF India | 0.87 |
| 3M India | 0.85 |
| ACC | 0.50 |
| Ambuja Cements | 0.50 |
Manoj Kumar, assistant vice-president, Corporate Professionals, said, “In the new Bill, they have inserted a clause where related party transactions beyond a limit, which will be prescribed in the rules, will require shareholder approval. Further, the concept paper issued by Sebi recently on the corporate governance framework also prescribes stringent conditions in this regard. Both regulations are likely to take effect simultaneously. That is probably the reason behind the rush.”
Through Holcim (India) Pvt Ltd and Holderind Investments Ltd, Holcim holds 50.3 per cent stake in ACC and 50.6 per cent in Ambuja Cements. The company stated it had decided to seek members’ approval in this regard by way of good corporate governance practices. However, instead of moving a special resolution (as mandated by the soon-to-be-implemented Bill), the companies have moved an ordinary resolution.
“An ordinary resolution requires only majority approval. Holcim has sufficient shareholding at both companies to approve an ordinary resolution, even if all other shareholders vote against. Therefore, by proposing it as an ordinary resolution and stating that even though the matter is within the powers of the board, the same is being done as a measure of good corporate governance, the promoters are doing so only on paper and not in spirit,” said J N Gupta, founder director of SES and former executive director at the Securities and Exchange Board of India.
If the companies were really intending to adopt good corporate governance practices, they would have kept the proposed law in mind and moved a special resolution, which would have required an approval from 75 per cent of the voting members. Further, being a related party in this transaction, Holcim should abstain from voting on the resolution and the companies should take approval from non-interested members only, says SES.
HUL paid Rs 300.9 crore in royalty for FY12. Assuming some growth, it is estimated the company will now pay royalty as high as Rs 900-1,000 crore. After 2009, Indian companies were allowed to pay whatever royalties they liked to multinational promoters. This has meant a 140 per cent aggregate increase in royalties paid by the 25 companies in our analysis since FY08, with no commensurate improvement in growth or margins, says foreign broking house Espirito Santo. In all, 59 of the BSE 500 companies have a foreign MNC promoter with a stake of 26 per cent or more.
