Royalty payments by multinational corporations (MNCs) contracted by about 10% in FY21 compared to a contraction in the pre-tax, pre-royalty profits of 5%, a study by proxy advisory firm IiAS, of 30 firms, reveals. In the previous year, royalty payments had contracted by 9.5% while the profits – pre-tax, pre-royalty – had fallen 9%.
Over the past few years, royalty payments of MNCs have moderated and are now more aligned to revenues and profits. Before that, royalty payments were often little correlated to profits or revenues; they outpaced one or the other if not both across several years. In 2018-19, royalty payments rose 18.6% although the pre-tax, pre-royalty profits had gone up by only 9.3%.
The top five MNCs account for nearly 80% of the aggregate royalty paid and have dominated the conversation on royalty for the past several years.
Pay-outs to the parent company as technical and knowhow fees, operations support and cost of expatriates are additional forms of charges levied on the Indian arm of global companies. While these do not fall under the ambit of royalty from a regulatory perspective, IiAS typically factors this into its assessment.
Identifying the level of royalty payments as a concern and based on the Kotak Committee’s recommendations, in 2019, Sebi brought in the requirement of a shareholder approval by majority of minority vote for royalty payments in excess of 5% of revenues. This possibly explains the moderation in royalty payments with companies not willing to risk more regulation, IiAS analysts observe.
While many companies decided to conserve cash during the pandemic and not make big dividend payments, several MNCs paid out extraordinarily high dividends. Covid-19 was the proverbial ‘rainy day’, but MNCs put the needs of their parent companies ahead of their domestic business, IiAS notes. MNCs argue that these high dividends help non-controlling shareholders as well in the times of the crisis. While this is a legitimate argument, the global parents tend to be the biggest beneficiaries of such (timely) largesse, given their high shareholding in the Indian arm.
Investors, too, recognise that on a relative scale, the risk of bad behaviour at MNCs tends to be lower and overall governance tends to be better. This is also reflected in IiAS’ annual assessment of S&P BSE 100 companies on the Indian Corporate Governance Scorecard: Median scores for MNCs tend to be higher than those of family-controlled companies and state-owned enterprises, trailing just a little behind the scores of widely-held companies.
While MNCs continue to trade at higher multiples than comparable domestic peers, the discord with some of these decisions is increasing. IiAS feels the boards of these MNCs need to be more cognizant of the needs of their investors and not always appease the parent.