Listed entities paid royalties exceeding 20% of their net profits to related parties: Sebi study

A recent study conducted by capital markets regulator Sebi revealed that listed companies paid royalties to related parties (RPs) exceeding 20 per cent of their net profits, which is one out of four times. "One out of two times, listed companies that paid a royalty, did not pay a dividend or paid more royalty to RPs than the dividend paid to non-RP shareholders," the market watchdog's study also stated.

The study, released on Thursday, is based on annual, company-level information, in respect of 233 listed companies across sectors in India. And, these companies have made royalty payments, amounting to less than 5 per cent of turnover to their RPs, during the 10-year period from financial year (FY) 2013-14 to FY 2022-23.

"During the period, there were 1,538 instances of royalty payments within 5 per cent of the turnover of the company (i.e., not requiring majority of minority shareholder approval) by 233 listed companies. Of these, 1,353 instances of royalty payments were by listed companies that made net profits and 185 instances of royalty payments were by companies that made net losses," Sebi's study underscored.

In terms of royalty payments by net-loss-making companies, the study pointed out that there were 185 instances of royalty payments by 63 companies that made net losses between FY14 and FY23. "Such companies made royalty payments of Rs 1,355 crore to their RPs. 10 companies incurred net losses at least for five years while paying royalty amounting to Rs 228 crore to their RPs," it added.

With reference to consistent royalty-payers, Sebi noted that 79 companies consistently paid royalties to their RPs during all the 10 years under study. "While aggregate royalty payment by these companies kept pace with growth in turnover and net profits till FY19, royalty payments tempered post-FY19. In the case of 18 companies, royalty payments outpaced both turnover and net profits throughout the period. Aggregate royalty payments by these companies grew at a CAGR of 14.6 per cent over the 10 years, which is more than double the CAGR of turnover (6.5 per cent) and net profits (6 per cent) of these companies. 11 out of 79 companies consistently paid royalty exceeding 20 per cent of net profits during all the 10 years," it mentioned.

Sebi also provided a list of issues flagged by proxy advisory firms on royalty-related matters. Some of them were companies with little correlation to their profit, performance not higher than their peers, contrary to the principles of corporate governance and significant payments towards brand usage.

In the case of MNCs, Sebi said shareholders of the Indian subsidiary have little information on the rates of royalty being charged from fellow subsidiaries in other geographies. "Independent fairness opinions by different agencies on royalty payments vary significantly in terms of valuation. This suggests a high degree of subjectivity surrounding the valuation, and the fairness of royalty rates arrived upon," it further said.