Sebi study finds irregularities in royalty payouts by listed Indian companies

A study on the pattern of royalty payments by Indian companies by market regulator Securities and Exchange Board of India (Sebi) has found that between 2014 and 2023, one out of four times profit-making companies paid royalties to related parties in excess of 20 per cent of their net profits.

The study carried out among 233 listed companies, also found that at least one out of two times, listed companies either failed to pay dividend while promptly paying royalty, or royalty payments were far in excess of dividends paid out to non-related parties.

Over the 10-year period between 2014 and 2023, 1,538 royalty payouts were within 5 per cent of turnover of the company concerned. Such royalty payouts do not require approval by minority shareholders. 

Of the 1,538 royalty payouts 1,353 were by listed companies that made net profits and 185 were by companies that made net losses, the study found.

Over the 10-year period, 60 loss-making companies paid out Rs1,355 crore as royalty to related parties in 185 instalments.

Out of these, 10 companies that continued to report net losses for at least 5 years paid out a total Rs228 crore as royalty to related parties.

The Sebi study found 79 companies that were consistent in their royalty payments for all the 10 years from 2014 to 2023. These payouts were in line with the growth in turnover and net profit till 2019, after which royalty payments declined.

However, 11 out of the 79 companies continued to pay royalty in excess of 20 per cent of their net profits for the entire 10-year period.

Royalty payouts by 18 companies grew at a combined CAGR of 14.6 per cent and were far in excess compared with their turnover and net profit, which grew at a CAGR of 6.5 per cent and 6.0 per cent, respectively, for the 10-year period.

Highlighting certain issues flagged by proxy advisory firms on royalty payments, the Sebi study said royalty payments by companies have no relation with their revenue or profits.

Also, performance wise royalty-paying companies were in no way better than those companies that have no royalty obligations.

Some companies even perpetuate royalty payments without any regard for the principles of corporate governance, the study noted.

Royalty-paying companies themselves spend considerable amounts on brand promotion and advertising, without realising the full potential of the brand names they pay for.

Pay outs such as `management fees’ and `technology licence fee’ etc are outside the ambit of royalty payments, although these can also be large.

Also, as advisory firms point out, disclosure levels on royalty or technology licence fee are poor and shareholders have little knowledge on payments related to these.

Studies carried out by different agencies have found that royalty payments have no prescribed pattern and that there is a certain amount of arbitrariness in such payments.