SEBI To Delay Regulations on Royalty Payments

Market regulator Securities Exchange Board of India (SEBI) has deferred on implementation of its regulations related to royalty payments and brand usage.

Based on the recommendations by SEBI's committee on corporate governance 2017, headed by Uday Kotak, the regulator introduced amendments mandating the listed companies to obtain approval from the shareholders on a “majority of minority” basis for payments with respect to brands usage or royalty amounting to more than 2% of consolidated turnover of the companies.

This Regulation 23 (1A) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is effective starting April 1 this year. However, SEBI has now proposed deferment of the regulation for a period of three months – till 30 June.

SEBI, in its latest board meeting memorandum, had claimed that the decision to hold the regulation was prompted by a set of representations which raised several concerns which will be considered for re-examination.

The concerns include inconsistency with the Kotak committee’s actual proposal which suggested the threshold at 5% of consolidated turnover of entities for royalty payments, as against 2%. SEBI chose the 2% threshold based on suggestions from Ministry of Corporate Affairs.

Reportedly, the Finance Ministry has also pushed for changes in the SEBI’s regulations on the grounds that it might hamper ease of doing business and disrupt the ‘Make in India’ initiative.

Initially, when SEBI came up with its regulations on royalty payments, corporate governance experts and market observers hailed the move saying that it would bring in transparency and accountability. Till 2009, Indian government approval was mandatory on such royalty or brand-related payments, but was discontinued.

While a number of companies make payments towards royalty, and royalty payments have continued to rise, investment advisers have pressed for checks by all stakeholders.

According to advisory firm Institutional Investor Advisory Services (IIAS), the government’s 25% rate of taxation on royalty (since 2013) failed to make any material impact for the Indian companies, as “India has Double Taxation Avoidance Agreements with most countries where royalty recipient companies are located”.

As per an IIAS study, by the end of March 2018, 27 Multinational companies (MNCs) had paid an aggregate of Rs. 67. 37 billion in royalties, more than half of which is by one Maruti Suzuki India Limited at Rs. 38.18 billion. This total royalty payment amounted to almost 27% of their aggregate Rs. 250.40 billion profit after tax. That year, of these MNCs, while Maruti Suzuki India Limited, GE T&D India Limited, 3M India Limited, and Johnson Control-Hitachi Air Condition India Limited have paid more than 20% of their pre-tax pre-royalty profits as royalty to their parent company, 14 of the 27 MNCs have paid over 2% of net sales as royalty to their parent company. Over the past few years, royalty payments by Indian companies have been on rise irrespective of their profits.

The latest proposal to further delay the regulations will only add to the woes of MNCs in their growth.