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Royalty payments made by listed companies to their related parties more than doubled in magnitude over the last decade
The study is based on annual, company-level information, in respect of 233 listed companies across sectors in the country. (Representative image)
Royalty payments made by listed companies to their related parties (RPs) more than doubled in magnitude over the last decade with 233 firms shelling out Rs 10,779 crore in FY23 from Rs 4,955 crore in FY14, a study conducted by Sebi revealed on Thursday.
High Royalty Payments to Related Parties (RPs)
The study found that in one out of four instances, listed companies paid royalty to RPs exceeding 20 per cent of their net profits.
Dividend vs. Royalty Payments
Further, one out of two times, listed firms that paid royalty, did not pay dividend or paid more royalty to RPs than dividend paid to non-RP shareholders.
Scope and Data of the Study
The study is based on annual, company-level information, in respect of 233 listed companies across sectors in the country. These companies have made royalty payments, amounting to less than 5 per cent of turnover to their RPs, during the 10-year period from FY 2013-14 to FY 2022-23.
Definition and Context of Royalty Payments
Royalty payment generally refers to consideration paid by a company towards technology transfer agreements or collaborations entered into with another company, or towards the use of trademarks/ brand names of the other company.
In the Indian context, listed companies make royalty payments to their holding companies or fellow subsidiaries towards the purposes of brand usage, transfer of technology know-how etc.
Frequency of Royalty Payments Within the Study Period
During the period (2013-14 to 2022-23), there were 1,538 instances of royalty payments within 5 per cent of turnover of the company — not requiring majority of minority shareholder approval — by 233 listed companies.
Profitability and Royalty Payments
Of these, 1,353 instances of royalty payments were by listed companies that made net profits and 185 instances of royalty payments were by companies that made net losses.
During FY14-23, there were 185 instances of royalty payments by 63 companies that made net losses. Such companies made royalty payment of Rs 1,355 crore to their RPs.
Chronic Loss-Making Companies Paying Royalty
Moreover, 10 companies incurred net losses at least for five years while paying royalty amounting to Rs 228 crore to their RPs.
Concerns Over Inadequate Disclosures
In its study, Sebi has also flagged concerns over the lack of disclosures as well as non-uniform disclosure across the companies to royalty payments made to related parties.
“Appropriate disclosures with respect to the rationale and rate of royalty payments are not being provided by listed companies in their annual reports. Besides, classification of royalty payment made towards the purposes of brand usage, technology know-how etc. is not being disclosed,” Sebi said.
Consistent Royalty Payments
Further, 79 companies consistently paid royalty to their RPs during all the 10 years under study. While aggregate royalty payment by these companies kept pace with growth in turnover and net profits till FY19, royalty payments tempered post FY19.
Royalty Outpacing Turnover and Profits
In the case of 18 companies, royalty payments outpaced both turnover and net profits throughout the period. Further, 11 out of 79 companies consistently paid royalty exceeding 20 per cent of net profits during all 10 years.
Doubling of Royalty Payments Over the Decade
Over the last decade, royalty payments by listed companies to their RPs more than doubled in magnitude. While the royalty payments grew substantially until financial year (FY) 2018-19, such payments tempered briefly post FY 2018-19, when these payments were brought under regulatory ambit by requiring majority of minority shareholder approval for royalty exceeding 5 per cent of consolidated turnover of the listed entities.
Issues Flagged by Proxy Advisory Firms
Additionally, Sebi has listed the issues flagged by proxy advisory firms on royalty-related matters. These include a little correlation to the revenue or profits of companies that made royalty payments. Further, the performance of royalty-paying companies is not of a higher order compared to their peers, including those who are not paying royalty.
Concerns Over Fairness in Valuation
“Independent fairness opinions by different agencies on royalty payments vary significantly in terms of valuation. This suggests a high degree of subjectivity surrounding the valuation, and the fairness of royalty rates arrived upon,” the study said.
Limited Transparency in MNC Subsidiaries
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, it added.
