Q&A with Shriram Subramanian, founder and MD of Ingovern Proxy Advisory firm
There has been a spurt in multi-nationals increasing royalties from their Indian subsidiaries in the recent years after the government removed all restrictions on the same. The increased royalty has made many minority and institutional shareholders angry as the net profit of the Indian company goes down substantially and it hits the share price hard. Shriram Subramanian, the founder and MD of Ingovern Proxy Advisory firm, assists institutions that have financial exposure to Indian companies on how to vote on company resolutions. In an interview with Dev Chatterjee, Subramanian says minority shareholders in India are ripped off by the MNCs by increasing royalties.
There has been a recent spate of MNCs increasing royalty payments from their Indian arms. Almost every MNC like Maruti, ACC, Ambuja Cements have increased royalty payments from Indian subsidiaries. what's your take on this, especially in the backdrop of Unilever raising royalty from HUL?
Royalty payments are increasingly becoming a corporate governance concern for Indian companies. Increases in royalty payments aren’t justified by the companies as they reduce the distributable profits of the company and result in unequal distribution of wealth between the majority stakeholder and minority investors.
Another major concern is the role of the Board of these companies as the sole authority to approve such increases in royalty payments, with minority shareholders having no say in such matters. Given the current shareholding pattern in Indian companies, even if such proposals were put to vote as an ordinary resolution, it may not serve the intended purpose from a governance point of view.
Material related-party transactions such as royalty payments should be put to vote only among minority shareholders, and controlling shareholders (like foreign promoters) should be barred from voting on such resolutions.
What should be the role of Independent directors in the royalty issue? The independent directors of ACC and Ambuja took a pro-minority shareholders stance. Do you think this is missing in other board rooms?
There is an urgent need for independent directors on Indian boards to play a larger role in reviewing and approving related party transactions like royalties. Currently, it is not clear whether the directors seek any inputs or question the reasons for the increased royalty payments in such companies. Board structures of many MNC companies in India are not ideal with many conflicted directors and even solicitors and advisors occupying roles of chairmen of audit committees.
All related party transactions within group companies should mandatorily be approved by the audit committee comprising of only independent directors and should be disclosed publicly to all shareholders.
As good corporate governance practice, companies should put royalty payments for vote at shareholder meetings, which should be passed by a majority of the minority shareholders.
Increasing royalty payments is well within the Indian norms. Then, why do you think this is an issue for minority shareholders?
Government of India norms on royalty payments to foreign promoters coming under the purview of the Foreign Exchange Management (Current Account Transactions) Rules 2000 (“Rules”) were primarily intended at foreign exchange control and do not deal with any issues related to minority investor concerns.
The rules were amended in early 2010 with the intention of fully liberalising royalty payments without any ceiling limits and bringing all such payments under the automatic route. However, these rules do not deal with governance related concerns for minority shareholders arising due to foreign promoters unjustifiably increasing royalties from their Indian entities.
Unlisted subsidiaries of MNCs can pay as much royalties as they want. However, as long as companies remain listed, increasing royalties creates unequal distribution of wealth.
You are advising Indian institutions on voting on these issues. What should be the strategy of Indian institutions on these matters?
Institutional investors should engage actively with their portfolio companies and raise the royalty payment issue with them. Institutional investors should strongly oppose any resolution if it is put for voting without adequate disclosures justifying increased royalty payments. They should also compel their portfolio companies to put such resolutions to be passed by a majority of the minority shareholders.
The Indian FIs are not united in these issues and do not vote jointly as in the case of Akzo Nobel. How can this problem be solved?
Institutional investors in India are still not very active in engaging with their portfolio companies on corporate governance matters and largely abstain from voting unless there is a major concern affecting their portfolio performance. There is no need to be united on all issues, each Indian FI should develop their own thinking, but, they
should engage with companies on corporate governance matters and vote or raise issues publicly.
Do you think there is a need to change laws whenever minority shareholders' interests are not protected by the management?
Regulatory agencies like th MCA and the Sebi are already cognizant of many of these issues. The new Companies Bill 2011 and the Sebi consultative paper of Jan 4th address many of these. However, enforcement of these laws and penalties for non-compliance of these laws isn’t stringent in India.
The Income Tax department is looking at royalty payments as tax avoidance. Do you think the tax department has a case?
Increasing royalty payments can lead to reduced tax incidence for Indian companies as such payments are tax deductible. However, such payments are subject to withholding tax for the foreign promoters, unless they are governed under the DTAA rules with the host country in which the foreign promoter is registered. Foreign companies may use the DTAA route to avoid taxation on royalty paym
ents and hence effect overall tax collections.
What is the international experience on royalty payments? What the norms in US and UK? Can a MNC charge a higher royalty from its subsidiary based in US and UK?
Per se, payment of royalty isn’t an issue. I am not aware of the norms in the US and the UK. It is the unjustifiable increase in royalty payments for listed MNCs that is of concern.
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