LG Electronics India, which filed its offer document last week for a $1.8-billion initial public offering (IPO), paid 2.3-2.4% of sales in royalty to its parent in FY24, totalling `323 crore, its draft red herring prospectus (DRHP) showed.
Analysts and proxy advisory firms say that royalty rates may increase in the future as LG India continues to depend on its parent entity for various aspects of its business. This is despite efforts to increasingly localise operations by the firm.
In its DRHP released on Friday, LG India said it continued to seek support from its parent for product design and innovation, technologies for manufacturing, brand and related technical knowhow as well as exports.
“The interdependence of an MNC parent and its subsidiary will continue to exist. Investors will need to keep a close eye on royalty payments and the reasons provided (by Indian units) for the payouts,” Shriram Subramanian, founder and MD at proxy advisory firm InGovern, said.
Hyundai India, another Korean firm, which recently went public, disclosed in its pre-IPO document that it had raised the royalty payout to 3.5% of sales in June 2024 from 2.3-2.5% of sales that existed earlier. For the April-December period of FY24, the company paid `8,088.80 crore in terms of royalty to its parent based in South Korea, it said.
“Royalty payouts that are above 5% of sales require shareholder approval. Even then, royalty payments are a key monitorable for investors,” G Chokkalingam, founder of Mumbai-based Equinomics Research, said.
In May this year, shareholders of Nestle India had rejected the proposal to increase royalty payment to its Swiss parent from the existing rate of 4.5% to 5.25% of sales over five years. The rejection had prompted the company to go back to shareholders in July to seek their approval for the existing royalty rate of 4.5% of sales. This was cleared by an overwhelming majority, with 99.54% in favour and 0.46% against the proposal, the firm had said.
Had the proposal to increase royalty gone ahead, Nestle’s royalty rate would have been among the highest in the domestic consumer goods industry. Companies such as Colgate-Palmolive India, Procter & Gamble Hygiene and Healthcare, and Hindustan Unilever (HUL) pay royalty of 4.5%, 5% and 3.45% each of their turnover, sector analysts said.