Royalty Payments by Listed Companies Increase Significantly in FY23
Introduction
A recent study conducted by the Securities and Exchange Board of India (SEBI) has revealed a significant rise in royalty payments made by listed companies to their related parties (RPs). The overall royalty payments surged to Rs 10,779 crore in the financial year 2023 (FY23), a substantial increase from Rs 4,955 crore in FY14.
Key Findings of the SEBI Study
The SEBI study highlights several crucial findings regarding royalty payments:
- Doubling of Royalty Payments: Royalty payments more than doubled over the last decade.
- Significant Share of Net Profits: In one out of four instances, royalty payments exceeded 20% of the net profits of the companies.
- Dividend Discrepancy: Half of the companies that paid royalty did not distribute dividends or paid more in royalties than they did in dividends to non-RP shareholders.
Understanding Royalty Payments
Royalty payments typically refer to consideration paid by a company for several purposes, such as:
- Technology transfer agreements
- Use of trademarks or brand names
- Collaborations with other companies
In India, listed companies often make royalty payments to their holding companies or subsidiaries for brand usage or technology know-how transfers.
Instances and Trends Over the Years
Between FY14 and FY23, 1,538 instances of royalty payments within 5% of turnover were noted, with:
- Profit-Making Companies: 1,353 instances involved companies making net profits.
- Loss-Making Companies: 185 instances involved companies facing net losses.
Interestingly, some companies consistently paid royalties despite incurring net losses. Specifically, 10 companies faced losses for at least five years while paying Rs 228 crore to RPs.
Regulatory Insights and Concerns
SEBI’s study also raised concerns over the lack of:
- Proper Disclosures: Insufficient disclosure regarding the rationale and rate of royalty payments in annual reports.
- Uniform Disclosure Practices: Inconsistent classification and disclosure of payments made for brand usage and technology know-how.
Moreover, 79 companies persistently paid royalties throughout the decade, with royalty payments initially keeping pace with turnover and profits until FY19. However, post-2019, regulatory measures mandated shareholder approval for sizable royalty payments, leading to a temporary decline.
Dissecting the Concerns Raised by Proxy Advisory Firms
Proxy advisory firms have identified several issues concerning royalty payments, including:
- Minimal correlation between royalty payments and a company’s revenue or profits.
- Performance of royalty-paying companies does not significantly outperform peers not engaged in royalty payments.
The study also highlighted the subjectivity and variation in valuation and fairness opinions regarding royalty payments. Notably, shareholders of Indian subsidiaries of MNCs often lack information about royalty rates extracted from fellow subsidiaries in other regions.
Conclusion
The surge in royalty payments by listed companies underscores the need for enhanced transparency and sound financial practices. With SEBI’s regulatory efforts, the focus shifts to ensure fair and justified royalty rates, fostering investor confidence and market integrity.
SEO Takeaway
Royalty payments remain a critical area for investors and regulators alike. This article delves into SEBI’s findings and explores the emerging trends and issues, providing valuable insights for stakeholders in the financial landscape.
For further updates on royalty payments and related market news, stay tuned to our platform.
Source: https://money.rediff.com/news/market/royalty-payments-by-listed-cos-surge-to-rs-10-779-cr-in-fy23-sebi/18472620241114