Royalty and technical fees paid out by a clutch of 30 multinational corporations (MNCs) in 2017-18 were flat compared with the outgo in 2016-17 while their profits before tax (PBT) grew 15%. Data sourced from Capitaline show that as a share of their net sales, royalties at 3% were marginally lower than the 3.3% seen in 2016-17.
The amount paid out by these companies in 2017-18 was Rs 7,565 crore, virtually flat compared with the outgo of Rs 7,528 crore in the previous year. The sample included companies such as Maruti Suzuki, Hindustan Unilever, Nestle, ABB, Bosch and Colgate Palmolive.
Although fund managers have constantly complained about the high royalties that MNCs as have proxy advisory firms, the fact is that the CNX MNC Index has now beaten the Nifty in nine of the ten years to 2017-2018. The MNC benchmark’s performance was particularly outstanding in 2016-17 and 2017-18, when the index rallied more than 25% whereas the Nifty gained a little over 10%.
Maruti Suzuki returned a spectacular 62% in 2016-17 and followed it up with a dazzling 47% in the 2017-18. Moreover, HUL gained 46% in 2017-18.
In contrast, the local companies in these sectors have given smaller returns.
MNCs have been tweaking their royalty policies. In February, 2013, HUL announced a new agreement, with Unilever Plc, for technology and trademark licences. The existing royalty cost of around 1.4% of turnover would increase, in a phased manner, to a royalty cost of around 3.15% of turnover by March, 2018, or a total estimated increase of 1.75% of turnover. In January this year, Maruti Suzuki said it would lower royalties on new cars; moreover, after sales of a particular model hit a threshold — to be decided by the parent Suzuki Motors, the royalty would reduce. Also, the royalty would be de-linked from currency fluctuations.
Shareholders in MNCs have also benefited from the buybacks of shares in these companies. In 2013, Unilever Plc announced a buyback of a 22.5% stake in the Indian outfit at a 20% premium to the then last traded price. In 2012, Glaxo Smithkline Consumer Healthcare came out with an open offer to acquire 31.84% of the total equity shares at a price of Rs 3,900.
In a report in February this year, proxy advisory firm, IIAS observed several MNCs have outperformed their relevant indices making royalty payments less egregious.“Even so royalty payments remain high — in 2016-17, 31 MNCs paid an aggregate Rs 7,778 crore accounting for 20% of pre-tax, pre royalty profits, “IIAS wrote.
