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McDonald's seeks higher royalty from India arm

Hardcastle Restaurants to pay royalty of 8% of net sales by 2020, against the current 3%

Dev Chatterjee & Viveat Susan Pinto  |  Mumbai 

McDonald’s Corporation, the US-based fast-food multinational company, has signed an agreement with its Indian franchisee Hardcastle Restaurants Private Limited (HRPL) under which the latter would pay royalty of eight per cent of net sales by 2020, against the current three per cent. This would be one of the highest royalties paid by an Indian company to its parent abroad.

Recently, HRPL had become a direct subsidiary of the BSE-listed WestLife Development, an investment company of the Mumbai-based Jatia family. HRPL had signed the royalty agreement with McDonald’s before it became WestLife’s direct subsidiary. According to the agreement, for 20 years up to 2030, HRPL would operate as a development licensee (franchisee). The licence can be extended by another 10 years. Apart from lending its marquee brand name, McDonald’s would also help train HRPL staff, according to the agreement.

An email sent to HRPL did not elicit any response.

Higher royalty payouts have become a bone of contention between promoters of and pro-investor groups. Many shareholder activist organisations have raised questions on increased royalty payments to parent They have sought this be cleared in the annual general meeting of shareholders, with 75 per cent voting for the resolution.

Shriram Subramanian, founder and managing director of Ingovern Research Services, says the royalty should not hurt minority shareholders’ interests and the management should give the rationale for any increase in royalty payments. “It is important to know whether the expenditure on research and development is increasing in line with the increase in royalty payout and whether the technology for which the royalty being paid is proprietary in nature,” he said.

McDonald’s expects to reap a bonanza from its Indian operation, as the sales and profits of its Indian franchise are rising at a scorching pace. For the last financial year, HRPL’s profit after tax rose 126 per cent to Rs 42 crore, while revenue increased 44 per cent to Rs 544 crore. Its same-store sales rose 23 per cent in FY12, as the company opened 24 stores across west and south India. For FY12, it paid a royalty fee of Rs 11.5 crore, against none in the previous financial year.

Two years ago, HRPL had bought back McDonald’s Corporation’s 50 per cent stake in the company and restructured its operations. The Jatias hold 86 per cent stake in WestLife. According to Securities and Exchange Board of India guidelines, the promoters would have to reduce their stake to 75 per cent by June.

McDonald’s’ joint venture with Vikram Bakshi’s Connaught Plaza Restaurants for operations in north and east India continues to run in the same manner.

On May 5, 2010, the government had amended the Foreign Exchange Management Rules, 2000, which did away with the need for the commerce ministry to approve royalty payments to technical collaborators (parent companies) exceeding five per cent of domestic sales and eight per cent of export sales. On May 13, 2010, the Reserve Bank of India had issued a notification permitting banks to release foreign exchange for such royalty payments. Thus, all regulatory requirements capping royalty payments to foreign collaborators were done away with. Since then, a number of multinational have increased royalty benefits from Indian subsidiaries. However, in the recent ACC-Ambuja Cements case, its independent directors had raised objections to higher royalty payouts to its parent Holcim. The payout was later cut from two per cent of sales to one per cent.

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First Published: Wed, January 09 2013. 00:58 IST