Comprehensive Analysis: SEBI Study on Royalty Payments by Listed Entities

A recent study conducted by the capital markets regulator, SEBI, has highlighted intriguing insights into royalty payments by listed companies in India. This examination opens up discussions on the corporate governance practices and financial transparency of companies across various sectors.

Summary of SEBI’s Findings

Between the financial years 2013-14 to 2022-23, SEBI studied 233 listed companies, revealing significant royalty payments to related parties (RPs). A striking find was that these payments exceeded 20% of net profits for these companies, a notable financial commitment.

• Royalties constituted less than 5% of turnover in most instances
• 1,538 instances of royalty payments within 5% turnover threshold without requiring minority shareholder approval
• Out of these, 1,353 payments were by companies with net profits
• 185 payments were by companies reporting net losses

Royalty Payments Amidst Losses

SEBI’s study made a crucial observation concerning companies incurring net losses while continuing to make royalty payments. In 185 instances, 63 companies accumulated losses during the ten-year period while still remitting royalties amounting to Rs 1,355 crore to their RPs.

• 10 companies had net losses for at least five years
• Despite losses, these companies paid Rs 228 crore as royalties

Consistent Royalty Payments

SEBI’s research also examined ongoing royalty payments by firms regardless of their financial performance. Seventy-nine companies consistently paid royalties over the decade, aligning their payments with growth in turnover and net profits until FY19. However, royalty payments declined post-FY19.

• 18 companies’ royalty payments outpaced both turnover and net profits
• CAGR of 14.6% in royalty payments, exceeding turnover (6.5%) and net profits (6%) growth
• 11 companies continually exceeded 20% of net profits in royalty payments

Concerns from Proxy Advisory Firms

The study referenced concerns raised by proxy advisory firms on royalties:

• Lack of correlation with profit performance and peer comparisons
• Potential violations of corporate governance principles
• Substantial remuneration for brand usage lacking transparency

Royalties in Multinational Companies (MNCs)

For MNC subsidiaries in India, shareholders highlighted the limited insights on royalty rates charged by parent companies to fellow subsidiaries in different regions. SEBI noted a significant variance in valuation assessments provided by different agencies, indicating a subjective dimension to determining royalty fairness.

The financial implications and corporate governance aspects outlined in SEBI’s study emphasize the need for companies to ensure alignment with shareholder interests and to increase transparency regarding royalty payments.

Disclaimer: The above article is informational and does not constitute financial advice. Consult a financial advisor for personalized guidance.

Published on: Nov 14, 2024

Source: https://www.businesstoday.in/markets/story/listed-entities-paid-royalties-exceeding-20-of-their-net-profits-to-related-parties-sebi-study-453792-2024-11-14