Royalties hit 16-year low in FY25 amid regulatory heat, shows data

Royalty and technical knowhow payouts relative to the value of goods produced have fallen to their lowest since FY10, shows the data from the Centre for Monitoring Indian Economy (CMIE)

Companies may have cut back on royalty payments amid increased regulatory scrutiny and an institutional pushback in 2024-25 (FY25). 

Royalties and technical knowhow payouts relative to the value of goods produced have fallen to their lowest since FY10, shows the data from the Centre for Monitoring Indian Economy (CMIE). 

The value of such payouts was 0.43 per cent of sales and changes in stock in FY25 compared to 0.88 per cent in FY24. Fees for technical knowhow are for expertise passed on from parent to a group company, but some entities make such payouts under “royalty”. 

Both have been taken together here to give a broad sense of payout for support from parent companies. 

The data is based on 855 listed non-financial firms, for which the FY25 data is available. The numbers for earlier years reflect the full listed non-financial segment. The expenses are relative to the value of goods produced, including both goods sold and goods added to inventories or changes in stock. 

The Securities and Exchange Board of India (Sebi) has sought to improve disclosures on related parties including royalty payments with effect from September 1. 

There is increased awareness among shareholders about such payouts, said Dhiraj Sachdev, chief investment officer at asset manager Roha Venture. There have been instances where royalty payouts to parent companies far exceeded dividends, essentially paying out larger shareholders at the cost of smaller ones. 

Such instances now have an impact on valuation since many shareholders avoid companies that may not act in their best interests as reflected in company decisions on royalties. 

“It is some reflection of corporate governance standards for minority shareholders,” said Sachdev. 

Minority shareholders had opposed an increase in the royalty payouts of Nestle India to its parent arm in May last year. The company was looking to increase payout to 5.25 per cent of sales from 4.5 per cent over a five-year period. 

Around 71 per cent of institutional shareholders opposed the move. Hindustan Unilever’s (HUL’s) royalty payouts faced shareholder scrutiny in 2023 as did those of Maruti Suzuki. 

Manufacturing companies have seen FY25 payouts drop to 0.47 per cent of sales and changes in stock compared to 0.67 per cent in FY24. 

There has also been a decline for mining, electricity as well companies in construction and real estate. 

Sebi came up with a consultation paper on royalties in November 2024. 

“While the necessity of royalty payment to be considered as an expenditure from the perspective of business growth is acknowledged, such payments when viewed through (the) profitability lens reveal too pressing an issue to be overlooked,” said the study. 

It noted 185 instances of loss-making companies making royalty payments. They paid ₹1,355 crore during FY14-23. It also noted 417 instances where royalty payments exceeded dividend payouts to minority shareholders. Royalties exceeded 20 per cent of profits for 11 of 79 companies over a 10-year period, and 31 of 79 companies over a five-year period, noted the Sebi study. 

Emails sent to the companies mentioned above did not receive a reply.