High MNC royalty payouts remain a concern, says governance firm

Royalty payments' growth outpaces profit growth at 32 MNCs

High royalty paid by multi-national companies (MNCs) continues to be a concern for minority shareholders, said corporate governance and proxy advisory firm IiAS in a report on Thursday.

According to an analysis by IiAS, 32 listed MNCs paid their global parents an aggregate royalty of Rs 6,300 crore, or 21% of their pre-tax profits in 2014-15. The royalty outgo was 10% higher than in 2013-14.

Interestingly, the royalty-related payments for these MNCs has increased at a compounded annual growth rate (CAGR) of 20% compared to just 7% growth in pre-royalty pre-tax profits.

“While royalty is a legitimate payout, IiAS believes these must be linked to performance: yet, royalty and related payments for these companies increased at twice the rate of the growth in their pre-royalty pre-tax profits over the past five years,” said the proxy advisory firm in a report on Thursday.

IiAS said royalty, like other related party payments, should be approved by shareholders, which will push companies to explain their basis of charging royalty.

The proxy advisory firm maintains royalty payments are legitimate payouts for they use brands and technological know-how developed by the parent firm but should ideally be linked to performance of the domestic firm.

According to IiAS, Maruti Suzuki, Hindustan Unilever ABB, Nestle and Bosch are among domestically listed MNCs that have paid maximum amount as royalty in the past three years. Aggregate royalty payouts of these five companies were Rs 4,780 crore, or 24% of aggregated pre-royalty pre-tax profits in FY15. Maruti Suzuki and ABB paid over 30% of their pre-tax profits as royalty in FY15.

A royal problem	Performance alone should be the benchmark for royalty payments, says IiAS
5 year (2011-2015) CAGR  in %	Revenue growth	PBT growth
BSE 200	13.5	8.4
32 MNC's	12.1	5.6
PBT Margins (median) in %	2011	2015
BSE 200	15.3	12.7
32 MNC's	13.9	11.5
Source: IiAS