Nestle drops plan to pay royalty in perpetuity to Swiss parent

Nestlé India has dropped a controversial proposal to pay royalty in perpetuity to its Swiss parent after minority shareholders and proxy advisory firms said the move was against good corporate governance norms. In an exchange filing, the food major said it was amending agenda item number six of the notice of the annual general meeting, slated for April 25, where it sought to pay royalty of 4.5 per cent in perpetuity. 

Nestlé is the first firm after Jubilant FoodWorks and Jubilant Life Sciences to be making an about-turn on royalty in the past two months, as companies now have to seek shareholder approval for royalty above 2 per cent following revised listing obligation and disclosure requirements issued by the Securities and Exchange Board of India last year. Nestlé India said its royalty resolution would be effective July 1 since Sebi had deferred implementation of the revised disclosure guidelines by three months. 

Nestlé India last reviewed the scheme in 2013, raising royalty rate to 4.5 per cent from 3.5 per cent over five years. In response to an email from Business Standard, a company spokesperson said: “Though the general licensing agreements are reviewed periodically by the audit committee, the resolution has been modified to provide for shareholder approval every five years. The resolution does not propose any revision in the royalty rate.” 

Royalty has been a contentious issue in India with proxy advisory firms and investors frequently questioning the rationale behind high royalty rates paid by the Indian subsidiaries of foreign companies or even group firms paying royalty to holding companies. 

J N Gupta, co-founder and managing director of proxy advisory firm Stakeholders Empowerment Services, said the company should have come up with a royalty review process every three years.

“Seeking shareholder approval for royalty payment in perpetuity is against good corporate governance practice. By amending the resolution, the company has taken a step in the right direction,” Gupta said. 

On Sunday, Nestlé India had said: “Respecting the feedback received and our commitment to high standards of corporate governance, including shareholder rights, approval of members shall be sought every five years in compliance with applicable laws and regulations.” 

In Jubilant’s case, proxy advisory firms had expressed displeasure over the move of its promoters charging royalty of 0.25 per cent of net sales from Jubilant FoodWorks and Jubilant Life Sciences each for use of its brand name. Proxy advisory firms had then argued that there was no basis to this royalty, prompting both firms to withdraw the proposal within hours of announcing it. 

On Monday, Nestlé stock price was up 0.22 per cent on BSE as investors reacted positively to the news. The stock closed trade at Rs 10,964.75 per share after touching an intra-day high of Rs 11,091.35 per unit.