As many as 32 multinational companies listed on BSE paid royalties worth Rs 7,100 crore to their global parents in 2015-16, a surge of around 13 per cent from the preceding fiscal, says a report. Proxy advisory firm IiAS said payout amount translates to around 21 per cent of the 32 companies pre-royalty pre-tax profits.
In contrast, pre-royalty pre-tax profits have grown at a compounded annual growth rate (CAGR) of 9.6 per cent and net sales have grown by 8.7 per cent. In 2015-16, aggregate royalty payments of 32 MNCs in the BSE 500 aggregated Rs 7,100 crore, up from Rs 6,300 crore in 2014-15.
A total of five companies — Maruti Suzuki India Ltd, Hindustan Unilever Ltd, ABB Ltd, Nestle India Ltd and Bosch –paid royalty of Rs 5,540 crore in 2015-16, which is 78 per cent of the royalty paid by the 32 MNCs. The report said that trend of increasing royalty payouts without commensurate improvement in revenues and profits continues.
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“Companies must provide greater clarity regarding the basis on which royalty is paid out, given that it has outpaced both sales and profits in the past five years,” IiAS said.
IiAS believes that the parent company needs to be compensated for brand and technical know-how. However, such payments need to be pegged at an appropriate level.
It further said that royalty is a legitimate payment, but its value must be evidenced in sales growth or higher pricing power. According to IiAS, an over 7 per cent lowering of margins driven by royalty alone is significant, and deprives investors of the earning per share (EPS) upside of investing in a stronger business or brand proposition.
Boards need to be thoughtful while approving royalty agreements. They have a commitment to the local entity and its shareholders to be responsible, it added.