Investor returns take a hit as arms of foreign MNCs hike royalty payment

The sharp increase in royalty payments by Indian subsidiaries of multi-national corporations (MNCs) in the last five years has hit the returns of minority investors, says a new study.

According to Ambit Capital, which conducted a study of the top 15 foreign MNCs in India, engineering major ABB’s royalty payment has grown at a compounded annual growth rate of 18 per cent over the past five years (FY2009-13) while its net sales grew at a much slower pace of 3 per cent. This trend was seen in Hindustan Unilever and Maruti Suzuki too.

Gaurav Mehta, Research Analyst, Ambit Capital, said while ABB’s profits recorded a negative CAGR of 29 per cent and sales registered dismal growth, royalty and related payments to its global parent showed a steady growth.

In the case of Maruti and ABB, royalty and related payments increased from 3.3 per cent in FY09 to 5.8 per cent in FY13, he said.

Interestingly, GlaxoSmithKline Pharma, Siemens and Oracle Financial Services did not make any royalty-related payments to their parent organisations.

In the case of GSK Consumer, P&G Hygiene and Ambuja Cements the compounded annual sales growth was much higher than their royalty payments.

Shriram Subramanian, Managing Director, InGovern, a proxy advisory and corporate governance research firm, said the increase in royalty payments would depress the returns for shareholders and result in unequal distribution of wealth between promoters and minority shareholders.

Subramanian said investors should punish companies by restricting their investment in shares of their Indian subsidiary. Instead of expecting the Government to regulate such actions or the market regulator SEBI to check these excesses, moral pressure would work wonders, he added.

In 2009, the Government eased the regulations on royalty payments by Indian subsidiaries to their global parent companies. It allowed Indian companies to pay royalties under different heads, including payments for use of brand name, technology and technical know-how.

Following the Government’s diktat, the Reserve Bank of India liberalised the Foreign Exchange Management Act in December 2009, doing away with curbs on remittances for royalty payments on trademarks or brand names of foreign companies or partners.

Since 2010, there has been a steady spurt in royalty payments leading to lower dividend payouts to Indian shareholders. Apart from royalty, MNC parents also receive a major chunk of the dividend paid out by the Indian subsidiary, thanks to their high shareholding in the India arm.

Castrol, Colgate-Palmolive and GSK Pharma have historically been the most generous MNCs in terms of rewarding their shareholders. On the contrary, Bosch, Maruti and Oracle Financial Services are firms which seem to have followed a low dividend payout policy, said the study.

COMMENT NOW