Sebi’s plan to restrict royalty payments to 2% runs into hurdles

Mumbai: Based on the recommendations of the Kotak panel, the Securities and Exchange Board of India had decided to restrict royalty payments to 2%. Royalty payment is the fee paid by Indian subsidiaries to overseas parent companies for the usage of the brand.

However, Sebi has received stiff resistance from markets, including the finance ministry. According to the minutes of board meeting held on 27 March, released on its website on Thursday evening, this has forced Sebi to delay its implementation till July. This comes even as Nestle India was forced to take shareholder nod for payment to its Swiss parent company. Nestle managed to get this approved on Thursday through a simple majority.

A lowdown on what is amiss in Sebi's plans:

Contrary to Kotak committee's recommendations

The governance panel had proposed seeking shareholder approval for royalty payment of more than 5% of the consolidated turnover of a listed entity. This was reduced to 2% based on the recommendations of the corporate affairs ministry. "This is inconsistent with the recommendations of the committee," according to market participants.

Runs the risk of rejection by minority shareholders

According to the industry's arguments, royalties are critical for Indian companies specially when it comes to taking advantage of technology and other innovations of their parent companies. "There could arise a situation where minority shareholders could disapprove royalty payments, which would be a serious impediment in the flow of technology and would hurt a company's competitiveness".

Contravening other laws

1. As of 2009, there is no limit prescribed by the government on royalty payments. According to corporate India, royalty payments have always been in excess of 2%.
2. The Companies Act prescribing this as a related party transaction was to be implemented prospectively and on fresh agreements.
3. The finance ministry, in 2015, did not agree on imposing restrictions on royalty payments. This will prevent excessive outflow of foreign exchanges and would send a negative signal to foreign investors/ would be retrograde.

Will make listing less lucrative

As the norms are applicable only to listed companies, it will make it less lucrative for MNCs to list their Indian subsidiaries

Could be discriminatory

In the auto sector, out of 17 companies, only one has listed its Indian subsidiary — Maruti Suzuki India. This would make it unfair as only Maurti would need to cap royalty at 2% and seek shareholder approval.

Impact on Make In India and foreign partnerships

This would dissuade foreign MNCs to invest in research & development (R&D) and innovation in India. Can also affect certain foreign partnerships and hinder manufacturing where foreign partnerships are involved.