Why is an infringement of intellectual property acceptable but not royalty payments?

The disdain shown by a large majority of the population to intellectual property rights discourages innovation at the domestic level, motivates the innovators to immigrate to foreign shores and register their innovations there. (Representative image)

The total apathy of common Indians towards the intellectual property rights (IPR) of the originators is appalling. The use of pirated software, photocopied books, spurious books sold on traffic signals and footpaths, unauthorised copies of branded clothes and so on is unapologetically common. Propriety and ethics are not taught in schools. It is common to see parents encouraging their wards to buy the “cheaper” alternative regardless of its legality and authenticity. Many cities have infamous “markets” for pirated software and duplicate merchandise.
The disdain shown by a large majority of the population could easily be listed as one of the major inhibitors of faster growth in India. It discourages innovation at the domestic level, motivates the innovators to immigrate to foreign shores and register their innovations there, and adversely impacts the transfer of critical technology by the foreign innovators to their Indian collaborators and entities.

Driving out from Delhi NCR region to nearby Uttar Pradesh and Haryana towns, one comes across “Bhatura King”, a fast-food joint chain. The name and logo used by this chain are cannily similar to that of the global chain of quick service restaurants, “Burger King”. On a 25 km stretch from Hapur to Garh Mukteshwar, there are at least 50 Shiva Dhabas, each claiming to be the “original”. There are over 50 Gulshan Dhabas, each claiming to be “original” between Mathura and Palwal. Panchhi Petha is a world-famous brand of Agra. In Agra city itself, there are over 500 shops claiming to be the original Panchhi Petha store. Similar is the story with Bikaner Sweets and Aggarwal Sweets.

Hullabaloo Over Royalty Payment

Given this background, the reaction of investors to the news of Unilever Plc hiking royalty to be charged from its Indian subsidiary Hindustan Unilever Limited (HUL) is understandable.

On January 19, 2023, the board of HUL approved a hike of royalty from 2.65 percent of net sales to 3.45 percent. The hike of 80bps is to be implemented in a phased manner over three years from 2023 to 2025. The stock of HUL corrected over 6 percent on  January 19-20 with very high volumes.

Many investors, analysts and other commentators criticised this hike in royalty as unfair. I do not support this criticism and find the transaction transparent and reasonable. It is pertinent to note, in this context, that:

• The present agreement of royalty payment was signed between Unilever Plc and HUL in 2013 and is subject to revision every ten years.
• The royalty payment is on two counts – (i) technology collaboration agreement (TCA); and (ii) trademark licence agreement (TMLA). The TCA provides for payment of royalty on net sales of specific products manufactured by HUL, with technical know-how provided by Unilever. The TMLA provides for the payment of trademark royalty as a percentage of net sales on specific brands where Unilever owns the trademark in India including the use of the Unilever corporate logo.
• Unilever Plc runs a strong R&D programme focused on product innovation, climate control and operational efficiencies. In the past 10 years, Unilever Plc has been able to reduce its carbon dioxide (CO₂) emission from over 100 kg per tonne of production to less than 40 kg/tonne. It has reduced the total waste sent for disposal from 4 kg per tonne of production to less than 1kg/tonne. Using the technology and methods developed by Unilever Plc, HUL has also become coal-free across its operations, has reduced CO₂ emission by 94 percent since 2008, and cut waste generation by 54 percent. It aims to attain zero-emission status by 2030. Obviously, these developments do not come for free.
• In FY22, HUL paid a total of Rs 8.39 billion in royalties to its parent Unilever Plc when its total net sales were Rs 525 billion. This comprised Rs 6.52 billion on account of technology and Rs 1.87 billion on account of brand licensing. The brand royalty (TMLA) thus was about 0.35 percent of the total FY22 net turnover of HUL.
• Unilever Plc spent 847 million pound sterling on R&D activity (1.61 percent of turnover) and 6.9 billion pound sterling (13.1 percent of turnover) on brand and marketing activities in the calendar year 2021.

Vijay Kumar Gaba is Director, Equal India Foundation. Views are personal, and do not represent the stand of this publication.