By Ruma Dubey

“What's in a name? That which we call a rose by any other name would smell as sweet.” This is an often quoted dialogue from William Shakespeare’s Romeo and Juliet.

But looks like Shakespeare might have to rewrite this dialogue had he been alive today and had been a part of India Inc. Companies spend crores in establishing their brand name, creating an equity which is probably its biggest intangible asset. And if they are told, “What’s in a name?” they are sure to be mighty miffed!

Companies have always been charging royalty for usage of their name – family or parent (foreign) name. But with more and more domestic companies opting for this new mode of generating income for the promoters, minority shareholders definitely need to watch out. Recently the Department of Industrial Policy and Promotion (DIPP), looking at the way in which companies are doling out royalties to their foreign parents, request the Finance Minister to once again bring in restrictions on royalty payments. DIPP stated (it presented some outdated data) that the outflows on account of royalty and fee for technical services, taken together, are estimated to be as high as 15-18% of the FDI inflows over the periods 2009-10 and 2012-13 (The Govt removed the cap on royalty payments in Dec 2009). Royalty payments have increased from $1.7 billion in FY09 to $4.1 billion in FY13. This means for all the scouting around and great foreign diplomatic trips which Modi makes to foreign countries for FDI into India, almost 20% of its goes back by way of royalty. And that, in a nutshell, tells us the tale of royalty payment.

We are surely not talking about small money being remitted back to the parent. Maruti, the recent “newsmaker” when it comes to royalty payments, probably gives the DIPP a stronger case to present to the FM.  As per a report put out by advisory company, IiAS, over the past 15 years, the royalty paid by Maruti to Suzuki has increased 6.6 times at Rs.21,415 on per car sold. Compare this with the sales realization per car – up only 1.6 times. Currently Suzuki takes away 5.7% of net sales. It has gone on to call these payments as “extortive”.

On the other hand, those in the industry say that this report is more sensational than fact as royalty paid in Q1FY16 was 5.6% of sales while it was 5.4% in FY12. They argue that while the increase in royalty payment as a percentage has been nominal, Net Profit margins have grown from 4.7% to 9.1% and stock price has risen from average of Rs.1300 in FY12 to Rs.4000 in Q1FY16.

Apart from Maruti, the other four top five payers are – HUL which paid 4.6% of gross sales in FY10 now in FY15 paid 2.2% while Ambuja Cement’s payment also went up from 1.5% to 2.2%, that of ACC increased from 1.3% to 1.9% and Colgate, showed the maximum rise – up from 4.7% to 5.2%.

What is shocking is that FY15 was a bad year for India Inc yet none of the foreign parent thought it was morally not right to charge more; or rather why not give up in a bad year?

In case of FMCG companies, parent companies charge royalty mainly for use of brand equity as in FMCG sectors, it is the single most important factor which separates it out from the rest. In the capital goods sector too, there are many MNCs which pay a substantial royalty – ABB, Areva T&D, Cummins, Siemens and even Voltas and Thermax have smaller elements of royalty payments but in all these cases, it is for use of technology. Castrol India too pays a royalty to its parent and so did Hero Moto to Honda till 2014.

Though these payments are quite substantial, one can understand that the payment of royalty is essential when it comes to such MNCs or for use of technology. But promoters like Wadia’s and Godrej charging royalty for use of their family name? Some time ago, Wadia’s announced that they will be charging group companies - Bombay Burmah Trading, Bombay Dyeing, Citurgia Biochemicals, National Peroxide, Bombay Realty, Britannia Industries and GoAir - 0.35% of their profits for employing the family brand and benefiting from the shared services of the group. How many apart from those in the financial world know that all these companies belonged to the Wadia’s? So what is the point in charging a royalty for a name which is not really as well known?

The precedent was set by Tata’s who since 1990’s have been charging a royalty for use of their ‘Tata’ tag. As per the rules of their book, companies that directly use the Tata name, pay 0.25% of turnover or 5% of PBT, whichever is lower. And companies like Voltas, Indian Hotels, which do not directly use the ‘Tata’ tag, need to pay 0.15% of their turnover. One can understand Tata’s stating that they charge royalty for use of their family name as it is indeed one of the biggest brands in India but Wadia’s? Does the name Wadia add any value in today’s time, except maybe for their realty project?

There is now Godrej Properties, which thankfully is the only company within the Godrej group that pays a royalty of 0.5% of its turnover.  But Muthoot Finance paying a royalty of 1% of gross income to the promoters, subject to promoters continuing to hold 50% of the company, makes one wonder about the relevance of this family name tag.  The Shriram group also makes similar payment to its promoters. Mahindra & Mahindra and Bajaj, both do not yet charge anything for use of their family name. Nor do Walchand Hirachand, the Khaitan’s and Shapoorji Pallonji. But if this is the precedent set by some of the family run businesses, maybe others will also follow suit too.

The question which arises is – who decides which brand is worth paying? A “Gopichand’ or ‘Talwalkar’ charging royalty makes no sense, so what is the fair value of such payments? Ditto is the logic for MNCs too.

Yes, intangible assets like patents, copy-rights, trademarks, brand names and now family names are very difficult to be valued. The Wadia’s think that their family name commands a certain price but do we agree to that price? Royalty when paid for technology brings benefit in terms of knowledge but such royalty payments to promoters is a blow to minority shareholders who see money going into the pockets of the promoters, merely because of a family name.

It is we the people who help companies make a name and to charge us for making that very same name reeks of injustice.