SEBI study says that 1 out of 4 times, listed companies paid royalty exceeding 20% of their net profits to Related Parties

SEBI has conducted a study analyzing the royalty payments made by listed companies to their Related Parties (RPs). The study is based on annual, company level information, in respect of 233 listed companies across sectors in India. These companies have made royalty payments, amounting to less than 5% of turnover to their RPs, during the 10-year period from FY 2013-14 to FY 2022-23.

During the period, there were 1,538 instances of royalty payments within 5% of turnover of the company (i.e., not requiring majority of minority shareholder approval) by 233 listed companies. Of these, 1,353 instances of royalty payments were by listed companies that made net profits and 185 instances of royalty payments were by companies that made net losses. SEBI noted that while analyzing Royalty Payments by Net-Profit making Companies, 1 out of 4 times, listed companies paid royalty to RPs exceeding 20% of their net profits.1 out of 2 times, listed companies that paid royalty, did not pay dividend or paid more royalty to RPs than dividend paid to non-RP shareholders.

During FY14-23, there were 185 instances of royalty payments by 63 companies that made net losses. Such companies made royalty payment of Rs. 1,355 crore to their RPs.10 companies incurred net losses at least for five years while paying royalty amounting to Rs. 228 crore to their RPs. A total of 79 companies consistently paid royalty to their RPs during all the 10 years under study.

While aggregate royalty payment by these companies kept pace with growth in turnover and net profits till FY19, royalty payments tempered post FY19. In the case of 18 companies, royalty payments outpaced both turnover and net profits throughout the period. Aggregate royalty payments by these companies grew at a CAGR of 14.6% over the 10 years, which is more than double the CAGR of turnover (6.5%) and net profits (6.0%) of these companies. A total of 11 out of 79 companies consistently paid royalty exceeding 20% of net profits during all the 10 years.

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