India Inc has no reason to fear a cap on royalty payout

India Inc may not be impacted significantly if the Centre decides to bring back the cap on royalty payments to foreign companies.

Until 2009, royalty for technical collaboration was capped at 5 per cent of domestic sales or 8 per cent of exports. For use of brand names, it was limited to one per cent of domestic sales and two per cent of exports.

A few companies used the relaxation post 2009 to peg up their payments, but most listed players saw only a slight change to their royalty-to-sales ratio, even though the quantum of payments jumped.

Ambuja Cements, Sharp India, Honda Siel Power, Maruti Suzuki, SKF India, and Singer India saw a rise of one percentage point or more in the royalty-to-sales ratio between 2009-10 and 2012-13.

For 2012-13, 43 of the 68 listed companies, which disclosed the royalty data, paid less than 2 per cent of sales as fee for use of technology or brand name. These companies (including Bosch, BASF India, 3M India, Godfrey Philips, Agro Tech Foods and Bayer Crop Science) may see no reason to reduce their payouts if the cap is reapplied. Profits and margins of these companies, therefore, may not improve because of lower royalties if a cap does kick in.

Among the few companies that did exceed the earlier limits were Honda Siel, Maruti Suzuki and Colgate Palmolive, which may have to trim payouts if the limits are re-imposed. Voith Paper, P&G Hygiene, and Foseco India paid around 4 per cent of sales as royalty.

Listed Indian companies forked out ₹5,025 crore in the form of royalty payments in 2012-13. That is, 2.7 per cent of their sales went out as fee for use of technology or brand name.

This was 20 per cent more than the payment in the preceding year, despite the single-digit growth in sales and a slight drop in net profits. Some companies, though, shell out a whole lot more than others, and only a handful accounts for the bulk of payments.

The top ten players make up 80 per cent of the royalties listed companies pay. As a result, if payments are capped, only a handful of companies will be affected.

In absolute terms, Maruti Suzuki paid the most, shelling out ₹2,454 crore to its parent in 2012-13.

This amount was 36 per cent higher than what it paid in the preceding fiscal, even as revenues grew slower at 22 per cent. Maruti, in fact, accounts for half of all royalties paid by listed companies.

A distant second is Hindustan Unilever paying ₹376 crore. HUL’s payments could rise as the company revised the royalty fee last year, with an aim of bringing it to 3.15 per cent of sales by 2018.

The fee used to be less than half that, at 1.4 per cent of sales.

Nestle follows HUL. Many fast-moving consumer goods companies pay fees for access to technology or use of brand names from their parents’ global pool.

Other major royalty payers include capital goods companies such as ABB, Cummins and Alstom, and auto-ancillaries Bosch and Munjal Showa.

Before Hero and Honda parted ways in 2011 and restructured royalties, Hero paid the highest royalty after Maruti.