Nestle India set to hike royalty rate payable to parent

Written by feBureau | New Delhi | Updated: Mar 23 2013, 07:26am hrs
After Hindustan Unilever (HUL), Nestle India has decided to increase the royalty rate payable to the parent, Nestle. In a filing to the Bombay Stock Exchange on Friday, Nestle India, makers of popular products like Maggi and Nescafe, said that its board of directors has approved a staggered increase in the royalty rate at 0.20% per annum over the next five years, effective January 1 , 2014.

The company said that the proposal was voted upon by only the independent directors while the executive directors recused themselves.

The company said that the board of directors of Nestle India had negotiated and Nestle accepted the increase in royalty. This increase is based on the lower limit of the ranges established by the two Indian firms and is in line with the erstwhile guidelines of the government of India. It is also comparable to the royalty being paid by the Nestle affiliates in similar countries. The royalty rate on exports will now be aligned to 4.5% of sales against the current from 3.5%, it said.

In January, HUL entered into a revised royalty deal with its parent Unilever on technology, services and trademark licences provided by its Anglo-Dutch parent, wherein royalty costs were to be raised in a phased manner to 3.15% of total sales by March 2018, from 1.4% of turnover for HUL.

Nestle India has a general licence agreement (GLA) that allows it access to Nestle Groups intellectual property rights, including global portfolio of brands, proprietary science and technology including over 1,300 patents, extensive research and development capabilities and expertise on best practices. The GLA includes access to over 6,000 brands and technologies developed by the global networks of 32 research and development centres, including the one recently inaugurated at Manesar, Haryana which will further assist in localisation of global concepts.

Nestle Indias recent capacity investments of around R3,000 crore have benefited from this, the company said.

It said that Nestle had requested two years ago for a review of the two-decade-old royalty rates and subsequently substantiated the same by a study conducted by McKinsey & Co. This study was subjected to a fairness review by two Indian firms Bansi S Mehta & Co and KPMG who independently used different valuation methods and recommended ranges of royalty rates, which were similar to that of McKinsey & Co, the statement said.

The existing GLA, the proposal from Nestle and the studies performed by the independent firms were examined by the corporate governance committee, majority of its members being independent directors, the company said.

In December 2009, the government had freed up caps for payments for foreign technology collaborations and royalty fees under the automatic route, including lump-sum payments for transfer of technology, payments for the use of trademark and brand name. Foreign sponsors who earlier required government approval for charging royalty under the various heads were now free to charge any amount as royalty to their Indian subsidiaries.

However, proxy advisory firms, which provide investors with advice on corporate governance issues have been critical of MNC firms increasing royalty rates payable to their parent firm on the ground that the shareholders nod are not taken before deciding on such issues. Further, they maintain that ever since the government relaxed the norms on payout of royalty rates, the the MNCs have been constantly increasing royalty rates without showing matching performance.

In fact, several such firms had slammed HULs move and before that of cement maker ACC, which had decided to seek shareholder approval through postal ballot. Boards of cement companies ACC and Ambuja Cements are controlled by Switzerland-based Holcim.

The top 20 royalty paying companies now remit R3,601 crore, up from R1,196 crore five years ago. A study conducted by proxy advisory firm IIAS found that total royalty for 25 companies has increased to R3,635 crore in 2011-12, up from R1,528 crore in 2007-08. Maruti Suzuki has consistently paid the highest royalty and the R1,803 crore paid in FY12 accounts for 5.2% of its net sales.