A study released by SEBI on Thursday revealed that royalty payments made by listed companies to their related parties (RPs) more than doubled over the past 10 years reaching Rs 10,779 crore in FY23 from Rs 4,995 crore in FY14.
The study found that in one out of every four cases, listed companies paid royalties to RPs amounting to more than 20 percent of their net profits.
Royalty payment is the consideration paid by a company for technology transfer agreements or collaborations entered into with another company, or for the use of trademarks/brand names of another company. In India, these royalty payments are made by listed companies to their parent or affiliated companies for the use of brand names, technology transfer, and access to technical expertise.
The SEBI study is based on annual data from 233 listed companies across various sectors in the country, and these companies made royalty payments to their RPs amounting to less than 5 percent of their turnover during the 10-year period from FY 2013-14 to FY 2022-23.
It noted that in half of the cases where listed companies paid royalties, they either did not pay any dividends or paid more in royalties to RPs than in dividends distributed to non-RP shareholders.
During the period from 2013-14 to 2022-23, there were 1,538 instances of royalty payments within 5 percent of the turnover of the company, which did not require majority approval from minority shareholders — by 233 listed companies. Of these, 1,353 instances of royalty payments were by listed companies that generated net profits, while 185 instances were by companies that reported net losses.
Between FY14 and FY23, there were 185 instances of royalty payments made by 63 companies that reported net losses. These companies paid a total of Rs 1,355 crore in royalties to their RPs, and another 10 companies sustained net losses for at least five years while paying royalties amounting to Rs 228 crore to their RPs.
SEBI also raised concerns about inadequate disclosures and the lack of consistency in how companies report royalty payments made to RPs.
“Appropriate disclosures with respect to the rationale and rate of royalty payments are not being provided by listed companies in their annual reports. Besides, classification of royalty payments made for purposes such as brand usage and technology know-how is not being disclosed,” SEBI stated.
Seventy-nine companies continuously paid royalties to their RPs throughout all 10 years of the study, and although the total royalty payments by these companies aligned with the growth in turnover and net profits until FY19, the payments began to moderate after FY19.
The royalty payments of 18 companies outpaced both turnover and net profits throughout the period, and 11 out of the 79 companies consistently paid royalties exceeding 20 percent of net profits for all 10 years.
The study concluded that royalty payments by listed companies to their RPs more than doubled in magnitude over the last decade, and while such payments saw significant growth until FY19, they began to decline as these payments were brought under regulatory oversight, requiring majority approval from minority shareholders for royalties exceeding 5 percent of the consolidated turnover of the listed entities.
SEBI also highlighted issues raised by proxy advisory firms regarding royalty-related matters. These concerns include a limited correlation between royalty payments and the revenue or profits of the companies making such payments.
Furthermore, the performance of royalty-paying companies does not appear superior compared to their peers that do not engage in royalty payments.
“Independent fairness opinions by different agencies on royalty payments vary significantly in terms of valuation. This suggests a high degree of subjectivity surrounding the valuation and the fairness of royalty rates determined,” the study revealed.
It further noted that shareholders of Indian subsidiaries have limited information on the royalty rates being charged from fellow subsidiaries in other regions, particularly in the case of MNCs.