Growth in royalty payments outpaces profit growth of 32 MNCs, says IiAs

Royalty growth outpaces their profit growth of 32 multinational companies in 2014-15

High royalty paid by Indian arms of multinational companies (MNCs) to their parent entities continue to be a concern for minority shareholders, says corporate governance and proxy advisory firm Indian Investor Advisory Services (IiAS).

It says 32 listed MNCs paid their global parents an aggregate royalty of Rs 6,300 crore or 21 per cent of their pre-tax profits in 2014-15, a 10 per cent higher outgo than in 2013-14. Royalty related payments for these MNCs grew at a compounded annual rate of 20 per cent, compared to seven per cent 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,” it said in a report issued on Thursday. IiAS said royalty, like other related party payments, should be approved by shareholders. This would push companies to explain the basis for the royalty charge. The proxy advisory firm maintains royalty payments are legitimate payouts for the use of brands and technological know-how developed by the parent entity but should be linked to performance of the domestic one.

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It says Maruti Suzuki, Hindustan Unilever, ABB, Nestle and Bosch are some domestically listed MNCs that paid a high amount as royalty in the past three years. Aggregate royalty payouts of these five companies were Rs 4,780 crore or 24 per cent of aggregated pre-royalty pre-tax profits in FY15. Maruti Suzuki and ABB paid a little over 30 per cent of their pre-tax profits in royalty for FY15.

A Royal Problem
Five-year (2011-2015) CAGR  in %	Revenue growth	PBT growth
BSE 200	13.5	8.4
32 MNCs	12.1	5.6
PBT Margins (median) in %	2011	2015
BSE 200	15.3	12.7
32 MNCs	13.9	11.5
Source: IiAS