LG Electronics IPO: InGovern flags Rs 4,717-crore contingent liabilities, royalty payments, related-party transactions as key risks

The risks flagged come even as LG Electronics India’s IPO was fully subscribed on the first day of bidding, underscoring strong investor appetite

Proxy advisory firm InGovern Research Services has cautioned that contingent liabilities, leeway to increase royalty payments, and related-party transactions pose material risks for investors in LG Electronics India Ltd.’s initial public offering.

“The company has disclosed contingent liabilities aggregating Rs 4,717 crores, constituting 73% of its net worth,” InGovern noted, citing disputed tax claims under litigation. “A negative outcome in those proceedings could significantly erode future earnings or require provisions.”

The risks flagged come even as LG Electronics India’s IPO was fully subscribed on the first day of bidding, underscoring strong investor appetite. On Day 2 it was subscribed three times. Offer closes today. The offer is a pure offer-for-sale, meaning no fresh capital will flow into the company.

Tax Disputes and Contingent Liabilities

According to the red herring prospectus (RHP), the bulk of the Rs 4,717 crore contingent liabilities relate to disputed income tax, excise, and service tax demands. A significant portion involves transfer pricing adjustments tied to royalty and technical service payments to the South Korean parent. “The company has not made provisions for these pending proceedings, citing legal advice and ongoing appeals before appellate forums,” InGovern said, adding that the material quantum of disputes and lack of detailed timelines introduce uncertainty for investors.

Royalty Payments Under Scrutiny

The RHP discloses a fixed royalty rate of 2.3% of net sales for most products and 2.4% for LCD TVs and monitors. Royalty outflow as a share of revenue has ranged between 1.63% and 1.9% over FY23–FY25.

InGovern highlighted that the promoter retains scope to raise royalty charges further. “The promoter can increase royalty fees up to 5% of annual consolidated turnover of domestically manufactured products (including OEM output) without requiring shareholder approval under SEBI Listing Regulations,” the proxy advisor said. “This provision could affect margins without minority investor oversight.”

The firm also warned of potential cross-border scrutiny as the company had a contingent liability of Rs 315 crore in respect of royalty payments to the Promoter. “There is no assurance that such observations will not be raised by South Korean tax authorities in respect of future periods, which could then have an adverse impact on results of operations,” it said.

Promoter Control Risk

Post listing, LG Electronics will continue to hold 85% of its Indian subsidiary. The RHP notes that the promoter “may consider the interests of its subsidiaries and affiliates” that may not align with those of minority shareholders. InGovern flagged that such concentration of ownership leaves limited space for minority investor influence on board decisions, including approval of related-party transactions.

Financial Performance

Despite the risk disclosures, LG Electronics India has demonstrated strong operating metrics. For FY25, it reported consolidated revenue of Rs 24,367 crore and net profit of Rs 2,203 crore. Revenue has grown at a CAGR of 10.9% in recent years, with FY25 EBITDA margins at 12.8%. The company operates a debt-free balance sheet, while return on capital employed and return on net worth indicate robust profitability.

Still, InGovern said investors should weigh these positives against the structural risks. “Capital efficiency and earnings growth could be compromised if adverse outcomes arise from the contingent liabilities, or if royalty escalations are pursued without adequate checks,” it cautioned.