HUL's royalty increase catches flak

Proxy advisory firms that advise institutional investors have questioned consumer goods major Hindustan Unilever’s decision to increase the royalty payments to its Anglo-Dutch parent, Unilever Plc.

According to the firms, HUL’s move will enrich the foreign promoters disproportionately and harm the domestic minority investors.

They have also demanded various protection measures such as approval of minority investors, review by independent directors and even provision for clawback of the payout. HUL shares fell 2.9 per cent to Rs 481.55 on Tuesday on the Bombay Stock Exchange.

HUL’s board approved the royalty of 3.15 per cent of turnover effective from February 2013.

Currently, royalty payment stands at 1.4 per cent of turnover.

The company plans to raise the royalty from 1.4 per cent to 3.15 per cent in a phased manner till March 2018.

Taking this into account, the royalty for the coming financial year would stand at 1.9 per cent, up 50 basis points from the current levels.

According to a recent report by Institutional Investors Advisory Services, HUL was the fourth largest royalty payer among Indian companies.

It paid Rs 300.90 crore (Rs 3 billion) for FY12. Assuming some growth, IIAS estimates the royalty to be as high as Rs 900-1,000 crore (Rs 9-10 billion).

“It is a monstrous amount of royalty,” said J N Gupta, founder and managing director, Stakeholders Empowerment Services, adding, “Nobody

knows what the deliverables are and what the impact on growth is.

“We would like independent directors to give a review on the hike.”

According to Amit Tandon, managing director, IIAS, mutinationals have been rampantly abusing this provision.

“There is very little to justify this increase. We believe these decisions should come to minority investors for vote.”

Tandon said, “When we looked at the data, the top line growth of companies which did not pay royalty was better than the ones which paid over a period of time. Therefore, what are you paying royalty for?”

He demanded that there should be a claw-back provision, where the parent is made to pay back the royalty amount “if there is no comparable improvement in top line or bottom line growth”.

Maruti Suzuki (Rs 1,803 crore), ABB ( Rs 374.9 crore) and Nestle ( Rs 316 crore) are the top royalty paying subsidiaries of multinationals, according to the IIAS report.

With Indian subsidiaries now having easier access to technology, know-how, use of brand names and trademarks, the revenues for these companies should have shown higher growth in comparison to the restricted-royalty era.

However, IIAS found that year-on-year net sales have grown by just 1 per cent, Ebitda (earnings before interest, taxes, depreciation and amortisation) growth has dipped by a considerable 9.3 per cent, indicating that transfer of technology has not brought either more efficient manufacturing or higher realisations for the brand.