SEBI STUDY UNCOVERS ALARMING TRENDS IN ROYALTY PAYMENTS BY LISTED COMPANIES- EVEN LOSS MAKING COMPANIES ARE ALLOWED TO PAY ROYALTIES

 SEBI STUDY UNCOVERS ALARMING TRENDS IN ROYALTY PAYMENTS BY LISTED COMPANIES- EVEN LOSS MAKING COMPANIES ARE ALLOWED TO PAY ROYALTIES

ROYALTY AND FOREIGN TECHNICAL COLLABORATION PAYMENT

Royalty and Foreign Technical collaboration payment are governed by the RBI circular AP ( DIR Series) Circular No 5 dated 21 July 2003.

LIBERALIZED  THE FOREIGN TECHNOLOGY COLLABORATION AGREEMENT POLICY

Under  liberalized  the foreign technology collaboration agreement policy through Press Note No 2 (2003 Series) dated 24 -06-2003 , irrespective of who have entered into foreign technology collaboration agreements were  permitted on the automatic approval route to make royalty payments at 8% on exports and 5% on domestic sales without any restriction on the duration of royalty payments.

AUTOMATIC ROUTE:

The Government of India has reviewed the extant policy vide the press note no 8 (2009  series ) dated 16th December 2009 and it has been decided to permit, with immediate effect, payments for royalty, lumpsum fee for transfer of technology and payments for use of trademark/brand name on the automatic route without any limit as stated in the following table  i.e. without any approval of the Government of India. All such payments will be subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time.

With effect from16-12.2009,  after issue of Press Note 8 (2009 series)

For more details , please visit the following link:

https://rvseckarfema.blogspot.com/2011/02/foreign-technology-colloborations.html

ROYALTY PAYMENTS EVEN BY LOSS MAKING COMPANIES

In one out of four times, listed entities paid royalties exceeding 20% of their net profits to related parties.

And 185 instances of royalty payments were by companies that made losses.

SEBI Study found that some listed companies dolled out more than 20 per cent of their net profits as royalty to related parties.

SEBI study analysed 233 listed companies over a period of ten years, starting from financial year 2014 (FY14).

LESS THAN 5% AND MORE THAN 5%

SEBI study found 1,538 instances of royalty payments (RPs) below the approval requirement threshold, which is set at 5 per cent of the turnover.

Royalty payments of more than 5 per cent of the turnover must be ratified by majority of minority shareholders.

The cumulative 185 royalty payments by 63 loss-making companies amounted to Rs 1,355 crore.

SKIPPING OF DIVIDEND PAYMENT

Further, one out of two times, listed companies that paid royalty, did not pay dividend or paid more royalty to RPs than dividend paid to non-RP shareholders, the study revealed.

POOR DISCLOSURE LEVELS, UNFAIR PAYOUTS

SEBI’s study throws a light on poor disclosure levels, unfair payouts and unjustified payments for brand usage and technology know-how by these companies.

“In case of MNCs, shareholders of the Indian subsidiary have little information on the rates of royalty being charged from fellow subsidiaries in other geographies,” SEBI study said.

NO ADEQUATE DISCLOSURES IN ANNUAL REPORT

The SEBI study stated, "It has been observed that many of the companies are disclosing the royalty payment just as an item under the statement of transactions with RPs in the Annual Report, with no details being provided with respect to the rationale and rate of such royalty paid."

NON-DISCLOSURE OF PERIOD OF ROYALTY PAYMENTS

The SEBI study stated that the companies seeking approval of shareholders with respect to royalty payments, are not disclosing period or tenure of approval of such transactions. This is suggestive of the company seeking a perpetual approval for transactions."

ROYALTY PAYMENTS IN EXCESS OF 20% OF NET PROFITS

When analyzing consistent royalty payers, of which there were 79 companies, the study found that eleven out of them consistently paid royalty exceeding 20% of net profits during all the 10 years.

MY VIEWS:

·      Government should ban the loss making companies to pay royalties as it will diminish the forex reserves of the nation. Only profit making companies should be allowed to pay royalties.

·      In Directors Report , there should be a report on royalty paid , rate of royalty paid , turnover on which royalty paid so that shareholders will come to know the details about the royalties paid.

·      Audit committee should thoroughly scrutinize the amount of royalty paid, the justification for the payment .

Courtesy : SEBI STUDY REPORT

R V SECKAR, FCS 4075, 7904719295