For firms, royalty payments have grown faster than sales since pandemic

Listed companies have seen a sharper rise

Companies are paying more royalties in relation to sales than they did before the pandemic.

Firms’ expenses under royalties, technical know-how, and similar fees increased at a compound annual growth rate of 15.5 per cent between 2018-19 (FY19) and 2022-23. There has been a 9.9 per cent increase in sales.

The data for a large sample of companies is available till FY23. Many are yet to provide financial details for FY24. The gap was narrower over a similar period ended FY19.

Royalty-related expenses had grown 10 per cent over a similar period ended FY19 while sales grew 9.4 per cent. The gap has risen from 60 basis points to 560 basis points (chart 1).

The analysis is based on numbers from the Centre for Monitoring Indian Economy (CMIE) pertaining to listed and unlisted companies excluding the financial sector.

The shareholders of Nestle India refused to increase royalty payments to 5.25 per cent of net sales, and the company later said it would pay royalties at the present rate of 4.5 per cent of net sales to its parent company Société des Produits Nestlé S.A, on June 12.

Royalties are fees paid for intellectual properties owned or other assets owned by another entity. Foreign companies can be paid royalties for the use of their brands and other assets including products they develop.

Since the pandemic listed companies have seen a faster increase in royalty payments than unlisted ones. For listed companies, royalty payments rose 16.5 per cent between FY19 and FY23, compared to 10.9 per cent growth in sales.

Unlisted companies’ royalty payments increased 14.6 per cent while their sales grew by 9.3 per cent during the same period.

In FY22, listed companies paid royalties at 1.02 per cent of their sales, the highest since at least 1990-91, the earliest year for which data is available.

This declined in FY23, when it was 0.8 per cent.

For unlisted companies, it was 0.73 per cent in FY22 and 0.76 per cent in FY23.

Listed companies have been paying higher amounts relative to their sales for five years in a row, including the year before the pandemic (chart 2).

The limited data for FY24 shows 56 non-finance companies reporting that royalties accounted for 0.58 per cent of their sales.

Expenditure on royalties in the manufacturing sector has increased. It was 62 basis points in FY23 relative to sales as against less than 40 basis points in FY14 (chart 3).

Data is available for 37 manufacturing companies for FY24. They paid the equivalent of 1.17 per cent of their sales in royalty payments.