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Royalty Payments by Indian subsidiaries of MNCs – Detrimental for minority shareholders
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Royalty payments by Indian subsidiaries of multinational firms have been a sticky issue for many years. India-based MNCs transfer money as royalty to their parent company abroad depending on the nature of business and agreements signed by them. While multinational companies are compensated for brand and technology, a high amount hurts minority shareholders who do not have a say in determining the royalty fees.

Some examples of the companies which have royalty arrangements

Nestle India Ltd said that a resolution for continuity of royalty payments every five years has been approved with a majority at its 60th Annual General Meeting.  Nestle, which presently pays 4.4% of its net sales as royalty towards its parent company, had sought shareholder approval for royalty payments every five years to its parent company. The company increased its royalty outgo from 3.5% of net sales in 2014 to 4.36%, or Rs 492 cr, in 2018.

HUL: In February, 2013, HUL announced a new agreement, with Unilever Plc, for technology and trademark licenses. The existing royalty cost of around 1.4% of turnover increased, in a phased manner, to a royalty cost of around 2.7% of turnover by March, 2018, or a total estimated increase of 1.75% of turnover.

Colgate’s 4.9% royalty rate is the highest in the sector though it is at par with the rate its parent charges other subsidiaries, and it has been consistent over the years. But its relatively weak financial show of late, and the steady fall in market share to a decadal low may make it tough for it to convince shareholders.

Maruti paid 4.7% of its net sales as royalty to its parent Suzuki Motor. Maruti has entered into an agreement with its Japanese parent company according to which it will be paying royalties to them in the Indian currency instead of the Japanese currency from 2022. Royalty payment in rupees aims to keep average royalty rates to 5 %of the net sales of existing models.

 

On 7th Nov’19, Raymond Ltd which announced its decision last week to demerge its consumer lifestyle businesses, which account for over three-fourth of its revenue, into a separate entity that will simplify the group structure as well as unlock potential shareholder value. Raymond indicated that the new company would hold its branded textile, branded apparel and garmenting businesses while the existing company would retain the group’s real estate project, Thane land bank, B2B shirting business, engineering businesses of auto components and tools & hardware, denim and fast-moving consumer goods business. Raymond’s lifestyle business comprises around 1,500 stores across more than 600 towns and cities. Some of its leading brands include Raymond Ready to Wear, Park Avenue, ColorPlus, Parx and Raymond Made to Measure.

The demerger, which will involve existing shareholders of the company receiving equal number of shares in the new company, is negative for the minority shareholders of the new company if they choose to exit from the old one, since the new company will be paying brand license fees to the old company fee every year.

Even though the company's management has argued that this is in line with industry practices, the fact remains that every case is unique. In Raymond's case, the brand was built over the last few decades and it was done within the core businesses of consumer lifestyle. So, originally, these businesses have actually contributed to the rise of the brand. The consumer lifestyle businesses are the reason why the Raymond brand value is high in the first place, and not the way around. However, it is not good corporate governance for a diversified company to hive off money spinner segments and then extract royalty payments from them at the cost of shareholders of the new company.

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