SEBI flags concerns over royalty payments by listed companies — 10 key findings

Uncovering some startling trends in royalty payments made by listed companies to use someone else's intellectual property, brands, or technology, the latest study findings released by capital markets regulator SEBI show that one out of four times, listed firms paid royalties exceeding 20% of profits. The study raised concerns about poor disclosure levels in these transactions and said many times the listed companies did not provide "adequate justification" for such payments.

There were 185 instances of royalty payments worth ₹1,355 crore by 63 companies that made net losses to related parties (RPs), shows the data of listed firms tracked from FY14-23. The study is based on annual, company-level information, of 233 listed companies across sectors in India.

10 key findings of the SEBI study are:

1) There were 1,538 instances of royalty payments in 5% of the turnover of the company (i.e., not requiring majority or minority shareholder approval) by 233 listed companies. Of these, 1,353 instances of royalty payments were by listed ones that made profits and 185 by those that faced losses.

2) 10 companies incurred losses at least for five years while paying royalties worth ₹228 crore to their RPs. 11 out of 79 companies consistently paid royalties exceeding 20% of net profits during all 10 years.

3) 79 companies consistently paid royalties in 10 years of the study. While the aggregate payment kept pace with growth in turnover and profits till FY19, royalty payments tempered post FY19, finds the regulator.

4) 18 companies paid more royalty than turnover and profits throughout the period. Their aggregate royalty payments grew at a CAGR of 14.6% over the 10 years, over double the CAGR of turnover (6.5%) and their profits (6.0%).

Issues flagged by proxy advisory firms:

5) Royalty payments by companies have little correlation to revenue or profits. The performance of royalty-paying companies is not of a higher order compared to their peers, including those who are not paying royalties.

6) Companies often make significant payments towards brand usage, despite considerable spending on ads, brand promotion and creating/adding value to the parent brand.

7) Cash outflows to RPs (other than royalty or brand payments), are usually termed as ‘management fees’, 'technology license fees’, etc. Such payments do not fall within the ambit of royalty from a regulatory perspective and the quantum can be uncomfortably large.

8) Poor disclosure levels continue to keep a veil on royalty and related payments. Listed companies do not provide adequate justification or rationale for royalty payments, and details of benefits derived in return for such royalty paid.

9) In the case of MNCs, shareholders of the Indian subsidiary have little information on the rates of royalty being charged from fellow subsidiaries in other geographies.

10) Independent fairness opinions by different agencies on royalty payments 'vary' significantly in terms of valuation. SEBI says this suggests a high degree of subjectivity in valuation and the fairness of royalty rates arrived upon.