Rise in royalty payments is increasingly unrelated to any corresponding rise in margins or revenues
On January 22, 2013, the board of Hindustan Unilever announced that it will enter into a new agreement, effective February 1, 2013, with Unilever for the provision of technology, trade mark licence and other services. Under the agreement, the existing royalty cost of 1.4% of turnover will increase, in a phased manner, to a royalty cost of 3.15% of turnover no later than the financial year ending March 31, 2018 (total estimated increase of 1.75% of turnover). This, the company explained, is necessary because “the pace of innovations and the scope of services have expanded over the years and, as a consequence, HUL is enjoying the benefits of an increasing stream of new products and innovations, backed by technology and know-how from Unilever … This is helping HUL to remain competitive and further step-up its overall business performance.”
In a separate announcement, while reporting its quarterly numbers, the board of HUL indicated that its domestic consumer business showed an underlying volume growth of 5%, which is lower than the GDP growth.
Translated into absolute numbers, Unilever is currently being paid R3,009 million for technology, trademark licence and other services. This number will increase by R3,761 million for running in the same place.
In this, HUL is not alone. Almost all multinational companies operating in India have increased the amount of royalty they take out since December 2009, when the government, through press note 8, liberalised the payment of foreign technology collaborations and royalty fees (including lumpsum payments for transfer of technology, payments for the use of trademark and brand name) under the automatic route. The liberalisation of the Foreign Technology Agreement Policy was aimed at facilitating inflow of FDI and technology transfers into the country. Foreign partners no longer had to go through administrative hoops. Importantly, this meant that ‘foreign sponsors’ who earlier required government approval for charging royalty under the various heads were now free to charge any amount as royalty from their Indian subsidiaries.
The unintended consequences of waiving restrictions on royalty payments can be seen from the gradual increase in technical know-how, royalty, consultancy fees, etc, by foreign partners since 2009, without a commensurate increase in either sales or margins.
An analysis by our firm regarding the royalty paid by Indian companies since 2007-08 shows that:
* The three highest royalty paying companies are now remitting R2,495 crore, up