Ever since the Fera law was legislated in the 1970s, HLL has been saying that Unilever needs preferential treatment as a majority shareholder since it was giving the Indian subsidiary technology free of cost. But now, HLL says that it needs to pay the royalty because it might otherwise not get priority in Unilever's scheme of things.

"The HLL management is of the view that as against seeking technology ex gratis from Unilever, there is a greater benefit in securitising continuation and updation of the company's knowhow and technology base with payment at a modest rate," said a company press release last Tuesday, explaining the logic behind reversing its earlier preference for "free knowhow".

The "free knowhow" theme has been repeatedly used by the HLL management to arguefor favourable terms for Unilever's equity investment requirements in India. For example, HLL opposed the RBI's move to force Unilever to pay a market-related price for a preferential allotment in HLL after the Tomco merger. And one of the reasons cited was "free technology" from Unilever.In a writ petition filed by HLL in the Mumbai high court four years back, the HLL counsel justified the preferential allotment and said: "By virtue of the existing 51 per cent holding of HLL, Unilever has been providing free of cost its technology and knowhow, brandname and trademark, research and development, training and management to HLL." The petition also mentions: "It is only reasonable that Unilever would be interested in restoring its equity back to 51 per cent (after the Tomco merger)...which has been the sine-qua-non for supplying, free of cost, R&D, technology knowhow, marketing support (both domestic and international including brand names) management systems, training facilities." The notice for clearing thepreferential issue, convened for June 30, 1993, made similar points: "Your company is a subsidiary of Unilever plc, which holds 51 per cent of the issued and subscribed capital of your company. This status enabled your company to have complete access to the technology, knowhow, brand names, management practices, etc, free of charge, for the past several years."

Analysts feel that HLL's move to pay royalty now after enjoying several years of "free of cost technology" probably stems from the fact that Unilever was finally not given a discount in price in the 1993 preferential allotment. As against the asking price of Rs 105 per share at which the preferential allotment was to have been originally made by HLL to the parent, the price at which the issue finally got transacted was higher at Rs 357-after HLL decided that it would be better to settle out of court. The argument presented by HLL in favour of a discounted price at that time was that Unilever had sacrificed royalty on technology for HLL for severalyears, and the MNC should thus be duly compensated with a discounted price in the preferential allotment issue. However, this argument was thrown aside by the government and HLL was forced to make the issue at a higher price, which meant an extra outgo of Rs 75 crore from Unilever's kitty.

In June 1993, the then HLL chairman SM Datta addressed a letter to each of the company's shareholders explaining the logic and rationale of the merger and the justification for the preferential allotment of 29.84 lakh shares to Unilever and the pricing for the same. Elaborating on the issue, Datta said inter alia: "Being a Unilever subsidiary has been a source of major strength for your company and has been responsible in several ways for its phenomenal growth and prosperity.." The context in which these statements were made seemed to suggest that HLL wanted to make a low-price preferential offer to Unilever because of the benefits of "free technology" among other things.

Even in the in(famous) insider trading case,HLL's main defence had been that it had purchased Brooke Bond Lipton India shares from the Unit Trust of India (UTI) to ensure that Unilever continued to maintain a 51 per cent holding in the merged entity. "The purpose of this purchase was to supplement the company's existing holding in BBLIL so as to ensure that the percentage shareholding of Unilever in the combined company was not lower than the existing percentage holding of Unilever in HLL so that the company continues to derive the benefits and advantages that it currently does by virtue of Unilever's 51 per cent shareholding in the Company", stated a Sebi order in the insider trading case (where HLL was held guilty), quoting a letter dated May 15, 1996. Clearly, the benefits included receiving technology without payment of royalty fee, as outlined earlier in the petition in the preferential allotment case.

However, HLL now seems to be saying that free technology essentially meant dated technology or low priority for HLL's needs at Unilever.According to an HLL spokesperson, ``by not paying any royalty, we realised that we were not getting priority over other Unilever subsidiaries for getting the requisite technology. In the growing competitive scenario in India today, the requirement for premium technology products is immense. We cannot ignore the competition which is expected to bring in technologically-driven products into the country.''

HLL was apparently not getting tailormade technology, as was the case with other Unilever subsidiaries paying royalty. By paying a royalty, HLL can now demand a tailor-made technology for specific projects from the parent.The spokesperson said that it is only because HLL is a 51 per cent subsidiary of Unilever that it can have access to technology. ``Had Unilever's holding been just about 40 per cent, the ambit of the technology access would have been restricted, and would have been more costlier. Thus, it was very important to maintain the subsidiary status. And, we will be paying royalty only on thetechnology, not on the brand name,'' the spokesperson said. HLL will pay a one per cent royalty (net of taxes) on the qualifying turnover to Unilever for a period of 24 years. This is nevertheless the lowest royalty being paid by a company in India. But at a ballpark figure of Rs 70 crore annually, even the one per cent is not peanuts. The insider trading case is currently pending before the Mumbai High Court and a prosecution petition is pending before the civil court.