Why SEBI Deferred Implementation Of Royalty And Brand Payment Regulations

The market regulator has deferred by three months the implementation of royalty and brand payment regulations, which required a majority of small shareholders to approve royalty paid to related parties if it exceeds two percent of a company’s net sales.

The Securities and Exchange Board of India pushed the implementation deadline in its March board meeting citing representations from some entities and industry associations that sought a review of the amendments, primary among which was increasing the limit to 5 percent as recommended by the Kotak Committee or remove the requirement altogether.

The SEBI decided to cap the royalty payment limit at two percent at a meeting held in December 2018 in Delhi, which was chaired by the secretary of economic affairs.

However, the regulator said in the board meeting agenda notes that it continued to receive representation from some entities and industry associations. The concerns raised are as follows:

Kotak Committee, SEBI At Odds:

• The SEBI recommendation was inconsistent with that of the committee. The committee had suggested five percent cut-off of net sales which was overruled by the Ministry of Corporate Affairs.

Risk Of Rejection By Minority Shareholders:

• The success of companies depends on technology-driven innovations. There could be a case where the minority shareholders may reject a proposal that would seriously impediment in the flow of technology.

Other Laws Relating To Royalty:

• Government approval for royalty was discontinued in 2009, on which no limits exist today. Under the Companies Act, 2013, threshold for approval for related party transactions were applicable prospectively to fresh agreements and not agreements which are valid and subsisting. The finance ministry also didn’t agree to a proposal seeking re-introduction of restrictions on royalty payments.

Disincentive For Listed Companies:

• The regulations are applicable to only listed companies. This would prevent subsidiaries of foreign companies to list in India.

Devotion Of Management Time:

• The process of getting shareholder approval requires considerable management time and cost in educating shareholders before voting takes place.

Issues Specific To One Company In The Sector:

• Only one or two companies in a sector may be affected by royalty payments in some sectors. Like in the auto sector of the 17 companies, only one company with majority control by foreign holding is required to pays royalty. This is discriminatory to the company in the sector.
• The measure will adversely impact the government’s ‘Make in India’ initiative and international partnership agreements.

The SEBI board is expected to consider these proposals again when it may meet in June.