Hindustan Unilever (HUL), which boasts of leading brands like Rin, Lux, Dove and Knorr in its portfolio, has come in for sharp criticism in the manner in which it approved an increase in the quantum of royalty payment to its parent company, Unilever, at a board meet held in January.
Proxy advisory firms, which provide investors with independent opinion on corporate governance issues, have slammed the FMCG major for not seeking shareholders? approval before going ahead with an increase in the royalty payment from the current 1.4% of the turnover to 3.15% in a phased manner till March 31, 2018.
According to advisory firms like Stakeholders Empowerment Services (SES) and Institutional Investor Advisory Services (IIAS), HUL should have sought an approval from its shareholders before approving the increase in payment. Incidentally, more than 10 brokerages had cut their rating on HUL on January 23 after the company said it will increase the royalty payment.
In a latest note, SES says that while HUL has not violated any law by approving the increase in royalty payment at a board meeting, the company as a ?flag bearer of good corporate governance practices? should have ?moved a special resolution at a shareholders? meeting, which would have required an approval from 75% of the non-interested voting members?.
SES, which is headed by former Sebi executive director JN Gupta, also highlights the fact that the new Companies Bill 2012 and Sebi?s discussion paper on corporate governance norms state that such related party transactions can be approved only after taking approval by a special resolution.
SES is of the opinion that this may be a case where the promoters are trying to seal the agreement and extract benefits from the company before the stricter regulations kick in, says the report.
HUL, meanwhile, did not respond to queries related to the manner in which it approved the increase. Meanwhile, an analysis by IIAS has revealed that ever since the government relaxed the restrictions on royalty payment in December 2009, the top 20 royalty paying companies have remitted R3,601 crore as royalty payments, up from R1,196 crore, five years ago.
?Since the rules have been eased, the multinationals have not behaved responsibly. They have been impatient, constantly pushing up royalty with little in the performance to justify this increase,? stated IIAS in an analysis done recently. ?The managements that negotiate the royalty arrangements are employed by the company with whom they negotiate. Often, they negotiate with their own bosses. This is not conducive to head butting,? it added.
IIAS suggests that such arrangements should be put up for voting by shareholders through a special resolution requiring 75% approval from all shareholders voting. It suggests an alternate route also with the majority of minority investors signing off on the arrangement.