Maruti's royalty payment to Suzuki rises 6.6 times in 15 years

In the past decade, royalty payments as a percentage of pre-tax profit have increased from 13% to 36%

Maruti Suzuki’s royalty payment to its parent, Japan’s Suzuki, has again caught the attention of corporate governance firms and proxy advisors. As percentage of its profit, the royalty payment by India’s biggest passenger car maker has nearly tripled from 13 per cent in 2005-06 to 36 per cent of profit before tax and royalty in 2014-15.

In 2014-15, Maruti Suzuki’s expenses on royalty stood at Rs 2,767.7 crore.

In a report on the company, Institutional Investors Advisory Services (IiAS) has termed Maruti’s royalty payouts “extortive”. “Through the past 15 years, the royalty paid to Suzuki has grown 6.6 times to Rs 21,415 per car sold, while average sales realisation per car has increased only 1.6 times. While Suzuki’s consolidated R&D (research & development) spend per vehicle (including motorcycles) averaged four per cent of sales, its royalty payments from Maruti are six per cent of net sales,” stated the report.

“Maruti has been a stronger brand in India than Suzuki. To the extent that Maruti uses Suzuki’s technology, it must pay royalty. But how much is enough?” questions Hetal Dalal, chief operating officer, IiAS.

“We have seen the IiAS report. It has no relevance to any issue before shareholders. These are the views of IiAS on royalty charged by a company. At this point, this matter does not call for any comment,” a Maruti spokesperson said in an email response.

Company officials said royalty payments from FY12 to FY16 had seen negligible change. However, other parameters such as profits, sales and market share had improved substantially, they added.

Since 2009-10, the royalty paid to Suzuki has steadily increased from 22 per cent of profit before tax and royalty to as high as 46 per cent in 2011-12 and 2012-13. In the past two years, this fell to 41 per cent and 36 per cent, respectively.

According to an analysis by IiAS, through the past five years, Maruti’s aggregate payout towards royalty was Rs 11,870 crore, while the five-year profit before tax aggregated Rs 16,770 crore.

High royalty payments by the Indian arms of multinational companies (MNCs) became pertinent after the government lifted restrictions on royalty payments by Indian companies to foreign entities in 2009. The move was aimed at making India seem more investor-friendly.

In its note, IiAS advises investors to engage with companies to understand the terms and conditions based on which royalty is being paid.

Royalty payments are not put to vote, as these are classified as transactions in ordinary course of business, and done at arm’s length pricing. Securities and Exchange Board of India norms, too, do not mandate securing shareholders’ nod, as the value of the royalty payout rarely exceeds 10 per cent of the net worth.

“Institutional investors should take up the mantle and question such exorbitant royalty payments. This is an unequal distribution of wealth to promoters vis-à-vis minority shareholders. They should insist on disclosure from companies, explaining the need for such high payouts in lieu of royalties,” said Sriram Subramanian of InGovern, a proxy advisory firm.