The SEBI logo in Mumbai. (Photograph: BloombergQuint)

Did SEBI Leave A Window For Easier Shareholder Nod On Royalty Payouts?

The market regulator’s move to defer tougher shareholder approval rules on royalty payments to overseas parent has triggered fears that it may lead to a rush of such resolutions during the three-month window. Heads of shareholder advisory firms don’t think so.

Amit Tandon, managing director of proxy advisory firm IiAS, however, expects the impact to be marginal. Most companies to adhere to the spirit of the regulations when they to approach shareholders even before the revised dates, he said.

If royalty to an overseas parent exceeds 2 percent of the consolidated revenue, it will require approval from the majority of small shareholders, according to Securities and Exchange Board of India’s new rules. A related party is not allowed to vote. As of now, the resolution only requires the majority of all shareholders.

SEBI’s changed norms stem from suggestions of a committee on corporate governance led by veteran banker Uday Kotak. But while the panel had recommended approval by the majority of minority shareholders only if the royalty payment was 5 percent of the consolidated revenue, SEBI lowered the threshold to 2 percent on the suggestion of the Ministry of Corporate Affairs.

The Kotak committee felt that royalty payments are a special case of related-party transactions that aren’t in the normal course of business, and hence recommended that companies seek shareholder approval, said Shriram Subramanian, managing director of proxy advisory firm Ingovern.

SEBI deferred the implementation to June 30 just five days before the initial deadline of April 1 for studying the representations it received on the issue. The regulator, however, didn’t disclose who made those representations. An emailed query to SEBI remained unanswered.

Subramanian agrees SEBI deferring the deadline doesn’t amount to providing companies a window under easier norms. If a company takes approval prior to June 30, it will still need a fresh nod from the majority of small investors after the new rules kick if royalty exceeds 2 percent of net sales, he said.

Shareholders are increasingly becoming vocal in their rights. Feedback from investors, including institutional shareholders, made Nestle India Ltd. drop its plan to seek approval for paying royalty to its Swiss parent in perpetuity. It changed the resolution to seek a nod every five years. It’s seeking to pay 4.5 percent of domestic sales. Castrol India Ltd., however, received shareholder nod to increase royalty payment to 3.5 percent from 3 percent in the previous year.

Royalty Payments

In the year ended March 2018, 27 Indian listed companies paid an aggregate of Rs 6,737 crore in royalty, according to a report by IiAS. More than half of it was contributed by Maruti Suzuki India Ltd.’s payout to its Japanese parent Suzuki Motor Corp.

The royalty payouts of the 27 companies was equivalent to 16 percent of their pre-tax, pre-royalty profits and almost 27 percent of their aggregate Rs 25,040-crore profit after tax, IiAS said.

In 2017-18, 13 companies paid royalty in excess of 2 percent of their net sales. Hindustan Unilever Ltd. and Schaeffler India Ltd.’s payouts dropped below 2 percent from the previous year.

Brand Payouts

Domestic companies pay brand and royalty payments to their Indian promoters. The Tata Group has a brand equity agreement with group companies for use of ‘Tata’ name. The payouts are capped at Rs 75 crore and 5 percent of the profit—linking them to operational performance.

Jubilant Foodworks Ltd., however, had to withdraw its decision to seek royalty after a push back by shareholders.

“Companies need to articulate why they are being charged for the brand royalty. What is that the holding company is spending on brand and other services? Why was the brand not registered in the company’s name?” said Tandon. “All companies taking brand royalty need to answer these questions.” said Tandon.