New Delhi: India’s largest consumer goods firm by sales, Hindustan Unilever Ltd (HUL), will pay more royalty to its parent Unilever Plc, a move that will increase its expenses and possibly hit profits.

In an announcement to the stock exchanges on Tuesday, HUL said that starting January, it will pay 1% royalty of net sales to Unilever on select brands. The list of such brands wasn’t immediately available.

“The board of directors have approved a trademark license agreement with Unilever, which provides for payment of trademark royalty at the rate of 1% of net sales on specific brands, where Unilever owns the trade mark and HUL is the licensed user," the company said in its statement to the exchanges.

Analysts say this will also have a negative impact on the company’s stock price. “Though the details are not clear yet as to what would be the exact increase in the total royalty to be paid, this will bring down the profitability of the company and affect market sentiments," said Sanjay Singh, analyst, ICICI Securities Ltd.

More earnings: The Unilever Plc headquarters in London. Simon Dawson / Bloomberg

On 5 November, the government approved a proposal from department of industrial policy and promotion to permit all payments for royalty, lumpsum fee for transfer of technology, payments for use of trademark/brand name on the automatic route without any restrictions, and subject to Foreign Exchange Management Act (Fema). With the aim of promoting transfer of technology into the country, the government removed existing ceilings on royalty payment. However, HUL’s proposal to pay 1% of net sales as royalty is well below these ceilings.

Under Fema, royalty payments up to 1% of sales do not need the approval of the Reserve Bank of India. “However, payment of royalties comes under intellectual property services and the company will have to pay a service tax on the same," said Anuradha Salhotra, founder partner of law firm Lall Lahiri and Salhotra.

According to HUL’s 2008-09 annual report, the firm paid Rs116 crore or about 0.6% of its domestic sales of consumer goods as royalty for the 15-month period ended March. “The total royalty paid by HUL including sums to other subsidiaries was about Rs130 crore (for 15 months) in 2008-09," Singh of ICICI Securities added. Singh’s calculations show that under the new rate, this could mean Rs200 crore of royalty every year—or a direct impact of Rs100 crore on the firm’s profit after tax.

Besides the increased royalty, HUL’s board has also approved amendment to the existing Technical Collaboration Agreement (TCA) with Unilever, adding product categories where the parent provides technical inputs and also products manufactured by third-party manufacturers where technical inputs developed by Unilever are made available.

“Royalties will not be applicable for products that come under the TCA. We will pay royalties for only usage of trademarks and brands of the parent company that don’t fall under TCA," said a spokesperson for HUL.

“HUL would pay money for technical assistance provided to the third party manufacturers, but the nature of the technical inputs is not known so it is very difficult to quantify the impact of the development," said Shirish Pardeshi, analyst, Anand Rathi Financial Services Ltd, who added that the “one that that is clear" is that the impact will be “negative".

Debashish Mukherjee, principal at AT Kearney, said: “Royalties and equity are two ways for parent companies to earn from subsidiaries. Whilst equity payment takes place once a year, royalties is linked to sales and is a steady source of income for the parent."

HUL’s shares closed at Rs265.80 each on the Bombay Stock Exchange on Tuesday, falling 2.2 % on a day when the exchange’s benchmark Sensex index fell 1.3%.