Claiming the 'JSW' brand belongs to a private company owned by promoter and Chairman Sajjan Jindal's wife, Sangita, JSW Steel has proposed to pay a substantial sum annually for use and promotion of the brand name. The firm is going to seek its shareholders' approval for this related-party transaction at its annual general meeting on July 31.
According to the terms of the deal, the annual recurring payment, linked to the turnover of the company, works out to around Rs 125 crore for the current year and is likely increase in subsequent years. The company says paying for brand promotion is an accepted practice among conglomerates and that the transaction is at an arm's length. But corporate governance experts are calling the deal, which is to take effect from April 1, 2014, "abusive". They say the brand has evolved over the years and cannot suddenly become the private property of promoters.
In its notice for the annual general meeting (AGM), the company informed shareholders that the 'JSW' brand was owned by JSW Investments Pvt Ltd (JSWIPL), a promoter group company. "Sangita Jindal, wife of Mr Sajjan Jindal (promoter and chairman and managing director of the company), holds directly and through nominees 2,049,880 shares, representing 99.99 per cent of the total equity share capital of JSWIPL," it said.
Encouraged by the recent success of Bengaluru FC, a football club sponsored by the company, JWISPL wants to promote the brand. For this, it wants a revenue-linked levy from all group companies. "Instead of taking such initiatives on an ad-hoc basis and on a standalone company basis, a professional approach with a structural set-up or framework has to be put in place to sustain the brand image. The company has been informed, given the size and scale of the JSW group, JSWIPL plans to nurture the brand by adopting the best global practices."
The company said a levy in the range of 0.15-0.50 per cent of the consolidated total operating income as brand licence fee was being charged by brand owners in various groups for brand usage.
"So, it is proposed to pay a brand license fee of 0.25 per cent of the consolidated net turnover of the company to JSWIPL, with effect from April 1, 2014, payable quarterly," it said in the notice.
In an emailed response to queries from Business Standard, a spokesperson for JSW Steel said: "To ensure consistency in brand usage, uniformity in performance standards among various companies using the brand, appropriate framework has to be in place through governance structure, code of conduct and a business-excellence model. The brand owner has to be vigilant and needs to monitor that the brand name is not misused and the value of the brand is not diluted. Accordingly, JSW Investment Ltd, the brand owner since inception, has carried out a study to adopt best practices in managing the brand architecture, benchmarking with both Indian and international conglomerates. To sustain and improve the brand value and to bestow the tangible and intangible benefits in the longer term, a sustainable corporate-branding campaign involving substantial expenditure has to be done on a consistent basis - to disseminate the idea, knowledge, information and core values of the brand through a systematic campaign."
The company added the proposed brand fee was benchmarked with the fees being paid by various conglomerates in India and abroad and that appropriate checks and balances were put in place so that the brand fee paid by various group companies was used for the purpose intended, duly certified by independent auditors.
J N Gupta, managing director of Stakeholders Empowerment Services (SES), said: "We do not understand the logic behind the JSW brand being owned by a company that is nearly 100 per cent owned by Sangita Jindal, wife of Sajjan Jindal. SES is of the opinion that ownership of the brand, which develops over a period of time along with growth of the business, cannot belong to a separate company promoted by the promoters of the company. If at all the brand is to be separated, it should be owned by a company jointly promoted by the group companies in proportion of their turnover or profit or assets or vintage or a combination of any or all the factors."
Gupta recommended shareholders to vote against the resolution at the AGM. He pointed out that the company started as a public company about two decades ago and had grown since then with public shareholders being part of it right from beginning. "How can ownership of brand be transferred to the promoters' family? Did promoters use their money to promote JSW," he asked.
"SES is of the view that it is an abusive related-party transaction and shareholders should ask the audit committee members and the board members the logic behind the approval of a transaction of this magnitude where every year about 10 per cent of net profit will be paid to Sangita Jindal through her company," SES said in a report.
The JSW spokesperson added: "There is nothing unusual or abusive in this transaction and JSW Group adheres to best corporate governance practices in all its actions."
$701 mn: Estimated worth of the JSW brand
32nd: The brand's position on Brand Finance rankings for 2013
Making JSW Investments, a company owned by Sangita Jindal, an annual recurring payment for brand promotion
Proxy advisor's take
"It is an abusive related-party transaction. Shareholders should ask what is the logic of a transaction of this magnitude where every year about 10% of net profit will be paid to Sangita Jindal through her firm"
Stakeholders Empowerment Services
(In a report)