Nestle India set to hike royalty rate payable to parent

Mar 23 2013, 01:56 IST
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SummaryAfter Hindustan Unilever, Nestle India has decided to increase the royalty rate payable to the parent, Nestle.

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 Group’s 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 India’s 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

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