Sebi's royalty move to discourage foreign firms from going public: Industry

Firms not in favour of greater say to minority shareholders, call move 'discriminatory'

The Securities and Exchange Board of India’s (Sebi’s) decision, to give minority shareholders a greater say in deciding royalty payments by listed companies, has attracted adverse feedback, reveals a note uploaded on the regulator’s website.
 
Starting this month, listed companies had to seek approval from ‘majority of minority’ shareholders for making royalty payments to a related party, with respect to brand usage exceeding 2 per cent of the annual consolidated turnover.
 
However, the adverse feedback has forced the regulator to re-think the move and defer implementation till June 30.
 
In a board meeting memorandum, Sebi has listed out half a dozen concerns raised by the industry.
 
Some of these include, as stated: “There could arise a situation in which minority shareholders could disapprove of the royalty, which would be a serious impediment in the flow of technology and hurt a company’s competitiveness. All stakeholders, including the minority shareholders, will lose in such cases.”
 
Some industry players have said the royalty move could discourage foreign companies from going public.
 
“Since the aforesaid amendment is only applicable to listed companies, this may disincentivise the listing of foreign companies’ subsidiaries in India. This may also encourage more unlisted subsidiaries of foreign companies to operate in India, with better technological knowhow, thereby placing their listed counterparts at a disadvantage,” the note highlights.
 
Some industry players have said the royalty proposal could increase compliance burden.
 
“The process of getting shareholder approval every year would require the company’s top management to devote considerable time and cost in educating shareholders across the world before voting takes place; this will reduce profits and hurt minority shareholders,” says one feedback highlighted by Sebi.
 
The move could also hit listed automobile companies and have adverse impact on some sectors, it has been highlighted.
 
“The requirement of approval for royalty has industry-specific repercussions, too, as there are cases where only one or two companies in the industry are affected. For example, among 17 companies in the auto sector in India, there is no other listed company with majority foreign holding except one and, hence, the specific company alone will be at a disadvantage, due to which the requirement is discriminatory.”
 
Some have suggested the move will “adversely impact” the Make-in-India policy, foreign capital flows, and also hinder manufacturing where foreign collaboration is involved.
 
The proposal on royalty was based on recommendations made by the Sebi-instituted committee on corporate governance under the leadership of Uday Kotak in October 2017. The committee, however, had suggested that brand usage and royalty payments exceeding 5 per cent of the consolidated turnover should require  a ‘majority of minority’ vote.

 
All suggestions made by the Kotak committee were placed before public and the ministry of corporate affairs (MCA) for comments.
 
Later, the Sebi board decided to enact a slightly harsher provision by going with a 2 per cent threshold, instead of 5 per cent.
 
However, ahead of its implementation, the market regulator decided to put the proposal on hold.
 
“In view of the aforesaid representations received and issues raised, it appears the matter may merit re-examination,” Sebi has said.
 
Industry says Sebi might water down the proposal and revert to the 5 per cent threshold. While there are firms that pay royalty of more than 2 per cent, most of them are below the 5 per cent threshold, data shows.