Explaining the rationale for royalty, Narayanan said technology, brands and processes used by Nestle India belong to the global parent and these are of global standard adapted locally in the country.
Shareholders and analysts are waiting to see whether Nestle India will approach minority shareholders to get their approval to pay out a royalty of more than 4.5%. Nestle India chairman and managing director Suresh Narayanan told FE that the company does not intend to raise it beyond 4.5%. “There has been no discussion on this,” Narayanan said.
Effective January 1, 2014, the board of Nestle India had approved an increase in the royalty paid to Nestle SA from 3.5% to 4.5% through a staggered increment of 20 basis points each in the next five years. The decision was taken by independent directors as executive directors recused themselves. Nestle India follows a January-December financial year. Royalty is paid on third-party sales, net of tax by the company.
While announcing the December quarter results, the company said Nestle India receives valuable support from its parent’s research and development capabilities and expertise. ICICI Securities in a post-results report said, “Consensus is likely interpreting this as a precursor to a royalty increase proposal.” Analysts at JP Morgan in a report noted that updates on royalty structure will be closely watched.
Nevertheless, as noted by CLSA, the company will soon have to seek shareholder approval regarding its royalty payout. From 2019-20, as per the Securities and Exchange Board of India, local units of global multinationals will require approval from the “majority of minority” shareholders in case they intend to make royalty payments beyond 2% of consolidated revenue.
This essentially means that even Nestle India plans to stick to 4.5% royalty, it will require shareholders’ approval. As per CLSA estimates, every one percentage point change in royalty impacts earnings by 4-5% for companies such as Nestle India.
Explaining the rationale for royalty, Narayanan said technology, brands and processes used by Nestle India belong to the global parent and these are of global standard adapted locally in the country. “There is no patented technology that India has put forward,” he added.
“As a responsible corporate citizen, we will continue to comply with all relevant rules and regulations with respect to the existing arrangement where currently no changes are foreseen,” Nestle India said in a written response to FE.