Transparency in Royalty Payments: Bridging the Governance Gap

Why Transparency in royalty payments could redefine shareholder trust.

Shedding Light on Royalty Payments Royalty payments by listed companies in India have long been a topic of scrutiny, with SEBI’s recent findings exposing significant gaps in transparency and governance. This article unpacks the issues plaguing royalty disclosures and highlights why greater transparency is crucial for safeguarding shareholder interests.

Table of Contents

The Current Landscape of Royalty Payments

SEBI’s analysis of royalty transactions among 233 listed companies (FY 2013-14 to FY 2022-23) reveals:

In 417 instances, royalty payments to related parties (RPs) exceeded dividends to non-RP shareholders.
79 companies consistently paid royalties over a decade, often without adequate disclosure on the purpose and benefits.
Proxy advisory firms flagged that royalty payments often lack alignment with financial performance.

These findings underscore the need for transparency to ensure shareholder trust and corporate accountability.

Governance Gaps in Royalty Disclosures

“Why are shareholders kept in the dark?” Governance in royalty disclosures

Key gaps identified in SEBI’s report include:

Purpose of Payments: Companies often fail to specify whether royalties are for brand usage, technology transfer, or other services.
Lack of Justification: Few firms provide clear explanations of how royalties contribute to business growth or shareholder value.
Non-Uniform Disclosures: Practices vary widely, making it difficult for investors to assess fairness or performance.

Such gaps create an opaque environment, fueling concerns about governance standards. Transparency in royalty payments

The Cost of Poor Transparency

“What’s the price of secrecy?”

The lack of robust disclosures has direct and indirect consequences:

Eroded Trust: Shareholders may question the fairness of royalty transactions, particularly when payments exceed dividends.
Performance Doubts: Proxy firms note that royalty-paying companies often fail to outperform their peers.
Regulatory Scrutiny: Poor practices invite tighter regulations, potentially increasing compliance burdens for companies.

SEBI’s Recommendations: A Path to Transparency

SEBI proposes several measures to improve disclosures: SEBI recommendations for royalties

Segregated Reporting: Companies should disclose royalty payments by purpose, such as brand usage or technology know-how.
Peer Comparisons: Mandate benchmarking of royalty rates with industry and geographic peers.
Qualified Cost-Benefit Analysis: Provide shareholders with clear insights into how royalties drive business value.
Periodic Shareholder Approvals: Introduce validity periods for royalty resolutions to ensure regular review.
Enhanced MNC Disclosures: Indian subsidiaries of MNCs must disclose royalty rates paid in other geographies.

Global Practices: Lessons for India

Countries with advanced corporate governance systems offer valuable insights:

Japan: Enforces stringent disclosures for intra-group royalty payments.
USA: Requires detailed justifications for royalty expenses exceeding specific thresholds.
UK: Mandates independent valuation of royalty transactions to ensure fairness.

India can adapt these practices to foster greater transparency and protect investor interests.

Transparency as the Cornerstone of Trust

For royalty payments to be seen as a legitimate expense, they must be backed by clear, consistent, and comprehensive disclosures. By embracing SEBI’s recommendations and global best practices, Indian companies can strengthen governance, enhance shareholder confidence, and set a benchmark for corporate transparency. It’s time to bridge the gap and illuminate the path forward.