BackRoyalty payments: feeling the pinch
How removing caps on royalty payments made by foreign-owned Indian subsidiaries has impacted financials of companies
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In end-2009, the government removed caps on royalty payments made by foreign-owned Indian subsidiaries. What has been the impact of this decision on company financials?
Many of these firms announced revisions in their royalty agreements after the relaxation. The impact is evident in rising royalty payments, which accounted for 2.4% of gross sales in 2014-15 compared with 1.2% in 2009-10.
That’s a near doubling in percentage terms. While this captures the step-up due to the relaxation, it has been in the range of 2-2.4% subsequent to 2009-10. Was this increase in royalty related to a quantum jump in sales growth? Well, the compound annual growth rate in the period was 12.4%, which is not earth shattering, but not bad either.
When it comes to growth in profit before tax (PBT), the growth rate is low at 4.2%. Of course, part of it can be attributed to the slump that has hit all companies in recent years. But look at how royalty has pinched in these years. For the sample, royalty as a percentage of PBT was 11.7% in 2009-10, which shot up to 26.1% in 2014-15, eating away more than a fourth of profits.
Now, one could argue that 2014-15 was a bad year and not really representative. But the data shows a steadily increasing trend over the years. Perhaps in a really bad year, the foreign parent could even suspend the royalty charge and alleviate the pressure on earnings.
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