SEBI Raises Red Flags Over Royalty Payments By Listed Companies

The Securities and Exchange Board of India raised concerns on Thursday about royalty payments by listed companies, with proxy advisory firms highlighting various issues related to transparency, fairness, and corporate governance.

Proxy advisory firms, which monitor corporate governance practices, have expressed concern that many companies are paying royalties that bear little relation to their actual revenues or profits. In some cases, companies have continued to make substantial royalty payments even while reporting losses.

SEBI also pointed out that the performance of royalty-paying companies often does not outperform their peers, including those that do not make similar payments, as revealed by a study from the markets regulator.

A significant portion of SEBI’s concerns centres around the practice of making royalty payments for brand usage. Companies often pay substantial amounts to related parties for the use of a brand, even though these same companies are investing heavily in advertising, brand promotion, and building the brand’s value themselves.

Another issue highlighted in the study is that companies often make large payments under other categories, such as ‘Management fees’ and ‘Technology Licence fees,’ which are not classified as royalty payments from a regulatory perspective.

Perhaps most concerning is the lack of transparency surrounding royalty payments. The report mentions that many companies fail to provide adequate disclosure about their royalty arrangements, including the rationale behind the payments and the specific benefits derived from them.

In the case of multinational companies, shareholders in Indian subsidiaries often have limited access to information about the royalty rates charged by the parent company or its other subsidiaries in different markets. The release also noted the wide variability in the independent fairness opinions provided by different agencies on the valuation of royalty payments.

Looking at the data provided in the release, 25% of the companies analysed paid royalties exceeding 20% of their net profits. In half of the cases, the amount spent on royalties was greater than the dividends paid to external shareholders.

It is also important to note that 63 companies paid a total of Rs 1,355 crore in royalties while facing losses.

The report also mentioned that 10 companies continued to pay royalties totalling Rs 228 crore despite posting losses for five consecutive years. Additionally, 79 companies maintained consistent royalty payments for over a decade. However, since FY19, growth in these payments has slowed, suggesting that the trend of royalty payments may be stabilising.

In some cases, royalty payments have even outpaced company turnover and profit growth. The report found that 18 companies had royalties that grew faster than both their revenues and profits. Furthermore, 11 companies have been paying royalties that represent over 20% of their net profits for at least 10 years.