Royalty Concerns: What You Need to Know for SEO

Companies have been facing scrutiny over the royalties paid to their parent companies overseas for using brands and technology. The concern is that these payments don’t always align with the financial performance of the local businesses. A recent SEBI study of 233 listed companies from FY14-FY23 revealed that one in four companies paid royalties exceeding 20% of their net profits, with even loss-making companies making royalty payments. While this may seem unfair to local shareholders, it’s important to recognize the cost of using established brands and technology.

There are varying opinions on what constitutes a fair royalty rate. Some payments have raised eyebrows, with over 100 instances of royalties being 40-100% of net profits and 74 cases of royalties exceeding 100% of net profits. While imposing a cap may seem like a solution, it could lead to unwanted interference. However, SEBI’s study highlighted concerns about companies paying royalties without distributing dividends to shareholders, leaving minority shareholders at a disadvantage.

SEBI has rightly emphasized the need for better disclosures around royalty payments. The Kotak Committee suggested improved transparency on the value companies gain from using a brand or technology for which they pay royalties. Unfortunately, companies often provide vague explanations for royalty payments in their annual reports, sometimes even seeking shareholder approval without specifying payment periods. This lack of clarity can be misleading to investors.

While it’s crucial for the government to enforce better disclosure standards, shareholders can also take action by voting against companies engaging in unfair practices. By demanding transparency and holding companies accountable, investors can ensure their interests are protected.