Nestle India board approves hike in royalty rate to 4.5%

Nestle India today announced an increase in the royalty rate payable to its parent company, Nestle SA, to 4.5 per cent of its sales from the current 3.5 per cent, over a five-year period beginning 2014.

The royalty rate will be increased by a full 100 basis points through staggered increases of 0.20 per cent over a five-year period beginning January 2014, the company said in a statement.

 ''Nestle India's board of directors today, with only independent directors voting and the executive directors recusing, approved a staggered increase in the royalty rate @ 0.20 per cent per annum over the next 5 years effective 1 January 2014.  This royalty is paid on third party sales and is net of tax,'' the company said in a web site release.

Nestle SA had, two years ago, sought a review of the two decades old royalty rates and subsequently  substantiated the claim by a study conducted by Mckinsey & Co. This study had gone through a further review by two Indian firms, Bansi S Mehta & Co and KPMG (Registered), using different valuation methods, the release noted.

''This increase is based on the lower limit of the ranges established by the two Indian firms and is in line with the erstwhile guidelines of the Government of India. It is also comparable to the royalty being paid by the Nestlé affiliates in similar countries,'' it said.

The royalty rate on exports will also now be aligned to 4.5 per cent of sales, it added.

Nestle India has a general license agreement that allows it to access Nestle Group's intellectual property rights, including global portfolio of brands, proprietary science and technology including over 1,300 patents. Besides access to over 6,000 brands such as Nestle, Maggi and Nescafe, it also gives Nestle India access to technologies developed by the global network of 32 research and development centers, including the one recently inaugurated at Manesar, Haryana, according to the release.

Nestle India said its recent capacity investments of around Rs3,000 crore have benefited from this.

''This will enable Nestlé India to continue to deliver long term sustainable profitable growth and create shared value for society and its shareholders,'' chairman and managing director of Nestlé India A Helio Waszyk said.