Sebi beefs up the disclosures requirements around royalty payments

New Sebi norms effective September 1 require listed firms to provide granular royalty payment data to audit committees and shareholders including IP fees and cross-entity rates

The Securities and Exchange Board of India (Sebi) has introduced new standards mandating more detailed disclosures on royalty payments to related parties by listed companies.

 

These disclosures aim to provide sufficient information to audit committees and shareholders before they make decisions. While experts have welcomed the increased transparency, many have called for greater clarity.

 

Previously, Sebi highlighted findings from a study showing that one in four companies paid more than 20 per cent of their net profits to related parties as royalties.

 

"For companies with a composite license agreement that includes a bundle of intellectual property rights such as brands, patents, technology, and knowhow, state the key components of such agreements and the reasons why the royalty attributable to those key components could not be furnished separately," the standards said.

 

“Furnishing such information will make it difficult for paying royalty on the whole of the turnover for brands or technology that contributes only to a part of the turnover. Of course, it is possible that all the payments are combined under composite agreement and the listed company says that it is not able to provide Separate information,” said K S Ravichandran, managing partner of KSR & Co.

 

"Another interesting aspect of royalty payment disclosures is peer-to-peer comparison, which applies only to material related-party transactions," he said.

 

The standards also require disclosures on sunset clauses, helping audit committees and shareholders understand the duration of royalty payments. 

 

“One of the items under ‘royalty’ refers to ‘professional fee, corporate management fee or any other fee’.  While the intent is clear, these are actually not royalties, but either technical knowhow fees or corporate support  and management fees or cost sharing,” said Ketan Dalal, managing director, Katalyst Advisors.

 

“It would be good if the RPT circular could modify this appropriately. However, the intent seems to be for information regarding both royalties and such technical fee payments or even reimbursements to be provided to the audit committee, but these should not be clubbed with royalty because they are very different types of payments,” Dalal added.

 

The new standards also mandate disclosure of royalties received by the parent company from group entities in other jurisdictions, if the parent company does not charge a uniform royalty rate from all group entities.

 

Experts have raised concerns that the requirement to disclose the minimum and maximum amounts from all other group entities may be cumbersome. They noted that in many cases, the parent company may have as many as 75 to 100 subsidiaries, leading to an overwhelming amount of information for the audit committee and shareholders, potentially diverting focus from more meaningful data.

 

Sebi’s study on royalty payments, released in November 2024, analysed 233 listed companies over a 10-year period starting FY14.

 

The study found 1,538 instances of royalty payments below the approval requirement threshold, which is set at 5 per cent of the turnover. Royalty payments exceeding 5 per cent of the turnover must be ratified by a majority of minority shareholders. 

Transparency mandate

*  A 2024 Sebi study showed one in four companies paid over 20 per cent of net profits as royalties to related parties

  *  Sebi has set new disclosure standards after consultation with industry associations

  *  Payments for brand names, trademarks, technological know-how, and professional fees must be shared with audit committee, shareholders

*  Royalties received by parent firm from group entities in other jurisdictions must be disclosed

Regulator mandates common contract note

The Sebi has operationalised common contract note (CCN) with single volume weighted average price (VWAP), a move expected to help foreign portfolio investors and other market participants. After several extensions, the CCN has now been mandated from June 27. Before CCN, each exchange issued separate trade confirmations which lead to complicated reconciliation, settlement, and regulatory compliance. 

“The reform will simplify the post-trade reporting  process  by  consolidating  trades executed across multiple exchanges into a single, harmonised document, eliminating the  need to process multiple  contract  notes,” said Sebi.