Royalty payments from multinational corporations continue to moderate

Royalty payments by multinational corporations (MNCs) contracted about 10% in FY21, compared to a contraction in pre-tax and pre-royalty profits of 5%, research from the company finds. IiAS proxy advisory, covering 30 companies.

The previous year, royalty payments fell 9.5% while profits – pre-tax, pre-royalty – fell 9%.

In recent years, royalty payments from multinationals have declined and are now more aligned with revenues and profits. The top five multinationals represent nearly 80% of the total royalty paid. Payments to the parent company such as technical and know-how fees, operations support and expatriate cost are additional forms of charges levied on the Indian branch of global companies.
Although these do not fall under the charge from a regulatory point of view, the IiAS generally takes them into account in its assessment.

Identifying the level of royalty payments as a concern and based on the recommendations of the Kotak Committee, in 2019 Sebi imposed the requirement of majority minority shareholder approval for royalty payments above 5% revenues. That may explain the moderation in royalty payments with companies that don’t want to risk more regulation, IiAS analysts observe.

While many companies have decided to conserve cash during the pandemic and not pay large dividends, several multinationals have paid extraordinarily high dividends. Covid was the “rainy day,” but multinationals put the needs of their parent companies ahead of their domestic operations, the IiAS notes. Multinationals say these high dividends also help uncontrollable shareholders in times of crisis. While this is a legitimate argument, global parent companies tend to be the biggest beneficiaries of such (timely) largesse, given their high stake in the Indian arm.