Sebi study uncovers alarming trends in royalty payments at listed companies

In one out of four times, listed entities paid royalties exceeding 20% of their net profits to related parties. And 185 instances of royalty payments were by companies that made losses

A study conducted by the Securities and Exchange Board of India (Sebi) has uncovered some alarming trends in royalty payments made by listed companies, with some of them doling out more than 20 per cent of their net profits as royalty to related parties.

 

Sebi’s study analysed 233 listed companies over a period of ten years, starting from financial year 2014 (FY14).

 

It found that in one out of four times, listed firms paid more than 20 per cent of their net profits as royalty to related parties.

 

The study found 1,538 instances of royalty payments (RPs) below the approval requirement threshold, which is set at 5 per cent of the turnover. Royalty payments of more than 5 per cent of the turnover must be ratified by majority of minority shareholders.

 

 

While a significant 1,353 instances of royalty payments were by profit-making companies, about 185 instances were by companies that made losses. The cumulative 185 royalty payments by 63 loss-making companies amounted to Rs 1,355 crore.

 

Further, one out of two times, listed companies that paid royalty, did not pay dividend or paid more royalty to RPs than dividend paid to non-RP shareholders, the study revealed.

 

Sebi’s study throws a light on poor disclosure levels, unfair payouts and unjustified payments for brand usage and technology know-how by these companies.

 

It also points out lack of proper justification around the rationale adding that the rates of royalty payments are not provided by listed companies in their annual reports.

 

Proxy advisors have also pointed out the concerns on “uncomfortably large” royalty payments.

 

“Poor disclosure levels continue to keep a veil on royalty and related payments. Listed companies do not provide adequate justification or rationale for royalty payments, and details of benefits derived in return for such royalty paid,” the study stated as one of the issues flagged by proxy advisory firms.

 

The study has also noted that companies often make significant payments towards brand usage spending considerable amounts on advertisement and brand promotion.

 

“In case of MNCs, shareholders of the Indian subsidiary have little information on the rates of royalty being charged from fellow subsidiaries in other geographies,” Sebi study said.