SEBI analysis of royalty payments made by listed companies to their Related Parties

SEBI has conducted a study analysing the royalty payments made by listed companies to their Related Parties(RPs). Issues flagged by proxy advisory firms on Royalty related matters includes:

1. Royalty payments by companies have little correlation to their revenue or profits.
2. The performance of royalty-paying companies is not of a higher order compared to their peers, including those who are not paying royalty.
3. Companies, at times, seek approval for royalty payments in perpetuity, contrary to the principles of corporate governance.
4. Companies often make significant payments towards brand usage, despite these companies themselves spending considerably on advertisement, brand promotion and creating/ adding value to the parent brand.
5. Cashout flows to RPs(other than royalty or brand payments),are usually termed as ‘Management fees’, ’Technology License fees’ etc. Such payments do not fall within the ambit of royalty from regulatory perspective and quantum of such payments can be uncomfortably large.
6. Poor disclosure levels continue to keep a veil on royalty and related payments. Listed companies do not provide adequate justification or rationale for royalty payments, and details of benefits derived in return for such royalty paid.
7. In case of MNCs, shareholders of the Indian subsidiary have little information on the rates of royalty being charged from fellow subsidiaries in other geographies.
8. Independent fairness opinions by different agencies on royalty payments vary significantly in terms of valuation. This suggests a high degree of subjectivity surrounding the valuation, and the fairness of royalty rates arrived upon.