The study is based on annual, company-level data with respect to 233 listed companies across all sectors of the country. (Representative Image)
Royalty payments made by listed companies to their related parties (RPs) have more than doubled over the past decade with 233 companies paying Rs. 10,779 crore was spent which in FY14 was Rs. 4,955 crore, a study conducted by Sebi revealed on Thursday.
Higher royalty payments to related parties (RPs).
The study found that in one in four cases listed companies paid royalties to RPs of more than 20 percent of their net profits.
Dividend Vs. Royalty payments
Furthermore, one in two times, listed companies that paid royalties, paid no dividends or paid more royalties to RPs than dividends paid to non-RP shareholders.
Scope and data of the study
The study is based on annual, company-level data with respect to 233 listed companies across all sectors of the country. These companies have paid 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 the consideration paid by a company towards technology transfer agreements or collaborations entered into with another company or the use of trademarks/brand names of another company.
In the Indian context, listed companies pay royalties to their holding companies or fellow subsidiaries for 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 cases of royalty payments by 233 listed companies – within 5 per cent of the company’s turnover – without requiring the approval of a majority of minority shareholders.
Profitability and royalty payments
Of these, 1,353 cases of royalty payments were by listed companies making net profits and 185 cases of royalty payments were by companies making net losses.
During FY14-23, there were 185 cases of royalty payment by 63 net loss making companies. Such companies have increased their RP to Rs. 1,355 crore in royalty payments.
Chronic loss-making companies paying royalties
Further, 10 companies increased their RP by Rs. 228 crore while making net losses for at least five years while paying royalties.
Concerns about inadequate disclosures
In its study, SEBI has also raised concerns about lack of disclosure as well as non-uniform disclosure across companies for royalty payments made to related parties.
“Proper disclosures have not been made by the listed companies in their annual reports regarding the rationale and rate of royalty payments. Further, the classification of royalty payments made for the purposes of brand use, know-how, etc. has not been disclosed,” Sebi said.
Continuous royalty payments
In addition, 79 companies paid royalties to their RPs continuously during all the 10 years under study. While total royalty payments by these companies kept pace with growth in turnover and net profit till FY19, royalty payments picked up after FY19.
Royalty outpacing turnover and profit
In the case of 18 companies, royalty payments exceeded both turnover and net profit throughout the period. In addition, 11 of the 79 companies consistently paid royalties of more than 20 percent of net profits over all 10 years.
A doubling of royalty payments over the decade
Over the past decade, royalty payments by listed companies to their RPs have more than doubled. While royalty payments increased significantly till the financial year (FY) 2018-19, such payments declined briefly after FY 2018-19, when these payments were brought under the regulatory ambit by requiring the approval of a majority of minority shareholders for royalties exceeding 5 percent of consolidated turnover. came of listed entities.
Issues flagged by proxy advisory firms
Further, SEBI has listed issues flagged by proxy advisory firms on royalty-related matters. This bears little correlation to the revenues or profits of the companies paying the royalties. Furthermore, the performance of royalty-paying firms is not as high as that of their peers, including non-royalty-paying firms.
Concerns about fairness in assessment
“Independent fairness opinions by different agencies on royalty payments vary considerably with respect to valuation. This suggests a high degree of subjectivity around valuation, and the fairness of royalty rates has come to that,” the study said.
Limited transparency in MNC subsidiaries
In the case of MNCs, shareholders of Indian subsidiaries have little information about the royalty rates charged to fellow subsidiaries in other geographies.