SEBI study reveals trends in royalty payments by listed companies to related parties

SEBI has conducted an in-depth study on royalty payments made by listed companies in India to their related parties (RPs). The study covers data from 233 listed companies across various sectors over a ten-year period from FY 2013-14 to FY 2022-23. The analysis highlights the growing significance of these payments and the implications for shareholder returns and corporate governance.

The analysis focused on instances where companies made royalty payments within five per cent of their turnover, which does not require majority approval from minority shareholders under current regulations. SEBI's review identified 1,538 such instances, showcasing how widespread this practice is among the listed entities. Notably, of these cases, 1,353 instances involved net-profit making companies, while 185 payments were made by firms reporting net losses.

One of the key concerns highlighted in the report is the substantial payments made by profitable companies. SEBI observed that in one out of every four instances, listed firms paid royalties to related parties exceeding twenty per cent of their net profits. Furthermore, the study revealed that in fifty per cent of the cases, companies either did not distribute dividends or paid more in royalties to related parties than they did as dividends to non-related shareholders.

Royalty payments by loss-making companies

The study also examined the royalty payments made by loss-making firms. During the ten-year period, 63 companies reporting net losses still made royalty payments, amounting to Rs 1,355 crore. SEBI found that ten of these companies, which consistently reported losses for at least five years, paid a combined Rs 228 crore in royalties to related parties. Additionally, 79 companies consistently made royalty payments throughout the entire decade, signalling a possible trend of prioritizing related party interests.

Growth trends in royalty payments

SEBI's analysis showed that aggregate royalty payments initially kept pace with the growth in turnover and net profits up until FY 2019. However, post-FY 2019, there was a noticeable decline in the growth rate of royalty payments. Despite this, for 18 companies, royalty payouts exceeded the growth of both turnover and net profits throughout the entire period under review. The data revealed a compound annual growth rate (CAGR) of 14.6 per cent for royalty payments, significantly higher than the CAGR of turnover (6.5 per cent) and net profits (6.0 per cent).

A particular point of concern highlighted by SEBI was that 11 out of the 79 companies made royalty payments that consistently exceeded twenty percent of their net profits during all ten years of the study. This trend raises questions about the impact of such payments on the financial health and shareholder value of these companies.

 Implications for corporate governance

The study by SEBI brings to light the need for enhanced transparency and governance in royalty transactions between listed companies and their related parties. The findings suggest that while these payments can be a normal business practice, excessive payouts, especially by loss-making companies, could indicate potential conflicts of interest or prioritization of related party gains over shareholder returns. 

SEBI's review aims to provide a basis for assessing the implications of these royalty payments and may inform future regulatory measures to safeguard minority shareholder interests.