SEBI Study Highlights: Royalty Payments by Indian Listed Companies

A recent study by the Securities and Exchange Board of India (SEBI) has shed light on a significant trend among Indian listed companies regarding their royalty payments to related parties. This post delves into the findings of the SEBI study and its implications on the financial standing of these companies.

Key Findings of the SEBI Study

The SEBI study examined annual data from 233 listed companies in India over a span of ten fiscal years, from 2013-14 to 2022-23. One of the standout findings was the frequency and volume of royalty payments made to related parties (RPs). The analysis reveals:

• One out of four times, listed companies paid royalties to RPs exceeding 20% of their net profits.
• In 50% of the cases, these royalty payments surpassed the dividends distributed to non-related shareholders.
• A total of 1,538 instances were recorded where royalty payments were made within 5% of the company’s turnover.

Profitability and Losses

Out of these 1,538 instances of royalty payments:

• 1,353 were made by profit-generating companies.
• 185 instances involved companies that reported net losses.

Interestingly, 63 companies with net losses made royalty payments amounting to Rs 1,355 crore during this period. Among these, 10 companies paid Rs 228 crore while enduring net losses for at least five fiscal years.

The Continuous Royalty Payers

The study also highlights a subset of companies that consistently paid royalties over the entire decade. Specifically, 79 companies maintained regular royalty payments to RPs. While these payments matched the growth in turnover and net profits up until FY19, a tempering was observed post FY19.

Remarkable Growth in Certain Companies

Notably, 18 companies exhibited a growth in royalty payments that outpaced both their turnover and net profits. Over the ten years, these payments grew at a compound annual growth rate (CAGR) of 14.6%, compared to their turnover and net profits with a CAGR of 6.5% and 6% respectively. Among these, 11 companies consistently paid royalties exceeding 20% of their net profits throughout the ten-year period.

Concerns Raised by Proxy Advisory Firms

Proxy advisory firms have raised several issues pertaining to these royalty arrangements, including:

• The lack of correlation between royalty payments and the companies’ revenue or profits.
• The performance metrics of royalty-paying companies do not necessarily surpass their non-royalty-paying counterparts.
• Requests for perpetual royalty payment approvals, which conflict with sound corporate governance principles.
• Significant payments towards brand usage, despite substantial spending on brand promotion and value addition.
• Poor disclosure levels obscuring the rationale and benefits linked to these payments.
• Limited transparency for shareholders regarding the royalty rates charged in different geographies, especially concerning MNCs.

Broader Implications

The insights from the SEBI study underline the need for increased transparency and strategic justification of royalty payments among listed companies. Given the significant financial impact, shareholders and potential investors should look critically at royalty practices as part of their investment decision-making process.

Moreover, companies should enhance their disclosure practices concerning royalty payments, ensuring that stakeholders are well-informed about the strategic benefits and justifications for such financial arrangements.

The study’s findings serve as a crucial touchstone for improving corporate governance and ensuring balanced fiscal practices among companies, promoting an equitable financial landscape for all stakeholders involved.

Conclusion

Royalty payments, while being a legitimate financial transaction, require careful management and transparent reporting. As SEBI continues to monitor and evaluate such practices, there is hope for more rigorous guidelines that will enforce greater integrity and fairness in how companies manage these payments. Investors and stakeholders alike should remain vigilant and demand accountability to ensure their interests are protected.

Source: https://economictimes.indiatimes.com/markets/stocks/news/sebi-study-1-out-of-4-times-listed-companies-paid-royalty-exceeding-20-of-their-net-profits-to-related-parties/articleshow/115302033.cms