Dec 20, 2012, 08.25 AM IST | Source: Moneycontrol.com

MNCs pay out huge royalty at minority shareholders expense

Removal of cap on technology and royalty fees has led to a gradual increase in such payments by Indian arms of multinational firms since 2009, without a commensurate increase in either sales or margins.

Moneycontrol Bureau

Removal of cap on technology and royalty fees has led to a gradual increase in such payments by Indian arms of multinational firms since 2009, without a commensurate increase in either sales or margins. This is the finding of a study of 25 companies by proxy advisory firm Institutional Investor Advisory Services (IIAS). The payments made to the foreign partners include royalty, know-how fees, technical fees, license fees and IT charges.

According to the IIAS study, top 20 royalty paying companies now remit Rs 3601 crore as royalty payments, up from Rs 1196 crore, five years ago. While royalty amounts have more than doubled, sales have grown by just over 70%. Also, four of the companies--3M India, Timken India, Whirlpool of India and Asahi India--have not paid any dividends in the last five years, but have paid royalty of Rs.385 crore since 2007-2008.

The top five highest royalty paying Indian companies [ In Rs. Cr)]

Royalty paid  2007-08  2011-12 
Maruti Suzuki 493.1 1,803.10
ABB  146.9 374.9
Nestle  144.4 316.7
Hindustan Unilever  77.2 300.9
Bosch  28.6 129.1

 

 

 

The 25 companies on an average, paid about 25% of profits as royalty to foreign sponsors in FY12. Asahi India Glass paid Rs 20.5 crore as royalty payments though it incurred a loss of Rs 58.7 crore in FY12.

Royalty vs. PAT Name of the company Royalty/ PAT (%) 
ABB  203.20%
Maruti Suzuki  110.30%
Alstom T+D  44.50%
Proctor and Gamble  31.40%
Nestle India  32.90%
BASF India  30.20%

 

 

 

 

 

 

"BSE 100 companies have, by far, performed much better than the 25 companies under our analysis. Not only has the broad index companies outperformed these 25 companies in growth over the past 5 years, they have also reported better EBITDA margins. This raises the question, what are company’s paying for if their local competitors are growing faster and earning higher margins," questions IIAS.

According to IIAS, royalty payments being commercial arrangements, they do not come to shareholders to vote. The solution according to the advisory firm, is that such payments should be put to vote with either the majority of minority investors signing off on the arrangement or through a special resolution requiring 75 percent approval from all shareholders voting.

Also read:

ACC under pressure on 1% royalty payment concern
HUL may face higher royalty payments to Unilever

READ MORE ON  IIAS study

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