Royalty fees to parent co earn investors’ ire

Mumbai: Huge royalty payouts by Indian subsidiaries are being termed an 'unfair' corporate practice, drawing increasing concern and attention from investors and shareholders. Since the liberalization in royalty fees and payments for foreign technology collaborations three years ago (December 2009), payouts by these subsidiaries have increased significantly, while their sales and margins have not grown proportionately. 
    The recent high royalty outgo by ACC and Ambuja Cements to parent Holcim has again brought the issue into the spotlight. An analysis of the 25 highest royaltypaying companies reveals that these payments more than doubled over five years, while sales have grown by just over 70%. As against this, the BSE 100 companies have, by far, performed much better than these 25 companies. 
    Concerns have been raised by shareholder advisory firms on high royalty payouts, given the fact that their local competitors are growing faster and earning higher margins. The analysis done by shareholder advisory firm, Institutional Investor Advisory Services (IiAS), since 2007-2008, shows that three companies with the highest royalty remittance of Rs 2,495 crore had paid Rs 784 crore as these fees in 2007-08. While remittance has gone up 3.2 times, their revenues have gone up by only 1.8 times. The top 20 royalty-paying companies now remit Rs 3,601 crore as royalty payments, up from Rs 1,196 crore five years ago. Total royalty for the 25 companies in the study increased to Rs 3,635 crore in 2011-12, up from Rs 1,528 crore in 2007-08. 
    Interestingly, four (3M India, Timken India, Whirlpool of India and Asahi India Glass) of the 25 companies have not paid any dividend in the last five years, but have paid royalty of Rs 385 crore since 2007-2008 (excluding one-off dividend payments). 
    The 25 companies paid on an average about 25% of profits as royalty to foreign parents in FY12. ABB and Maruti Suzuki topped the list with this ratio at over 200% and 100% respectively. Other companies such as Nestle India, Procter and Gamble, Alstom T&D and BASF India paid royalty in the 30-40% range of net profits. A note from IiAS says, "Data indicates that foreign sponsors are less concerned about the impact royalty payments have on the bottom line of Indian subsidiaries." 
    Says Shriram Subramanian, MD of proxy firm In-Govern Research, "We recommend that institutional investors be very concerned when companies make high royalty payments to parents or group companies that cannot be justified."