Disclosures on royalty paid to related parties lacking, many don't even give the reason: SEBI study

The SEBI study also found that disclosures with respect to these payments are non-uniform across companies.

Disclosures on royalty payments made to related parties by listed companies lack significant details such as the reason for these payments, according to a SEBI study.

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 Indian context, listed companies make royalty payments to their holding companies or fellow subsidiaries.

The Securities and Exchange Board of India (SEBI) published the results of a study it had done on listed companies making royalty payments to its RPs. The SEBI study analysed data of ten years, between FY14 and FY23, of 233 listed companies across sectors in India.

The study stated, "It has been observed that many of the companies are disclosing the royalty payment just as an item under the statement of transactions with RPs in the Annual Report, with no details being provided with respect to the rationale and rate of such royalty paid."

"Further, it is observed that classification of royalty payment made towards the purposes of brand usage, technology know-how etc. is not being disclosed by many companies."

It also found that disclosures with respect to these payments are non-uniform across companies.

The study also noted that companies specifying the duration for these payments, when they are approaching shareholders for approval. These could result the approval being used to perpetuity.

The study stated, "It is observed at times, that the companies seeking approval of shareholders with respect to royalty payments, are not disclosing period or tenure of approval of such transactions. This is suggestive of the company seeking a perpetual approval for transactions."

It added, "Once the resolution seeking royalty payment transaction to RPs is approved by shareholders, such recurring transactions for any indefinite period would not be placed for shareholders' approval again (notwithstanding the periodic approval required from Audit Committee). Any such transaction would require approval of shareholders, only if there is any upward revision in rate of such royalty or if there is a prospective regulation prescribing periodicity of such approval".