In 2009, the Foreign Technology Agreement Policy was liberalised to facilitate the flow of foreign direct investment and technology into the country. However, that relaxation has had some unintended consequences, as evident from the increase in
royalties paid by Indian companies to their foreign partners since 2009. The payments, which include royalties, knowhow fees, technical fees, licence fees and information technology charges, have taken place without a commensurate increase in either sales or margins.
Top five companies
| Royalty Paid
|
| 2007-08 | 2011-12
|
Maruti Suzuki
| 493.1 | 1,803.10 |
| ABB | 146.9 | 374.9 |
| Nestle | 144.4 | 316.7 |
Hindustan Unilever
| 77.2 | 300.9 |
| Bosch | 28.6 | 129.1 |
Source: IiAS
|
Institutional Investor Advisory Services (IiAS), a proxy advisory firm, recently compiled data on the 25 highest royalty paying companies in India. The total royalty paid by these companies, which include ABB, Maruti Suzuki, Nestle and
Hindustan Unilever, increased to Rs 3,635 crore in 2011/12 from Rs 1,528 crore in 2007/08.
The top 20 royalty paying companies now remit Rs 3,601 crore. Five years ago their royalty payments amounted to Rs 1,196 crore.
While royalties have more than doubled, sales have not kept pace, growing a little over 70 per cent. The Indian subsidiaries of foreign companies now have better access to technology and knowhow and it is easier for them to use brand names and trademarks. So, the revenues of these companies should have shown higher growth in comparison to the restricted-royalty era. However, the report shows that year-on-year net sales have grown just 100 basis points while EBITDA growth has dipped by 930 basis points. In other words, transfer of technology has neither brought more efficient manufacturing or higher realisations for the brand.
Royalty Vs PAT
|
Company name
| Royalty/PAT (%) |
| ABB | 203.2 |
| Maruti Suzuki | 110.3 |
| Alstom T&D | 44.5 |
| Proctor & Gamble | 31.4 |
| Nestle India | 32.9 |
| BASF India | 30.2 |
| Source: IiAS |
Average royalty paid by the 25 companies has increased more than two-fold, while the dividend increase has been modest, at 1.3 times. Four of the 25 companies have not paid any dividend in the last five years but have paid royalty of Rs 385 crore since 2007/08 (excluding one-off dividend payments).
On average, the 25 companies in the study paid about 25 per cent of their profits as royalty to foreign sponsors in 2011/12. The data suggests that the foreign sponsors are less concerned about the impact such payments have on the bottomlines of their Indian subsidiaries. For instance, Asahi India Glass paid Rs 20.5 crore as royalty payments though it incurred a loss of Rs.58.7 crore in FY12.
The report also notes that the BSE 100 companies have outperformed the 25 companies in the study in growth over the past five years and have also reported better EBITDA margins.
In sum, it is not clear why companies are paying huge royalties when their local competitors are growing faster and earning higher margins.
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