THE RISING COST OF ROYALTY

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. As per data put out by DIPP, in FY13, almost 20% of FDI earned by India, which was at $22.4 billion, went away as royalty payment 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. The top five royalty payers in India Inc – Hindustan Unilever, ABB India, Nestle India, Bosch and Maruti Suzuki, which collectively in FY13, remitted almost Rs.4000 crore, up from Rs.3100 crore in FY13. It is quite shocking to realize that Maruti’s  royalty payment in FY13 was more than parent Suzuki Motor Corporation's standalone profit. In FY14, it paid 6% of net sales, a gradual hike from 2.7% it started in FY08.

In FY13, It was Honda Seil which topped the list of royalty payments, paying 6% of net sales, followed by Maruti at 5.54% but which has gone up to 6% in FY14. Colgate pays 5.31%, P&G pays 4.89%, Page Industires pays 4.8% and this is more than GSK Consumer’s 3.31%. Interestingly, little known and followed stock on the bourses, Savita Oil paid 3.76% in FY13.

While royalty payments have gone up, there is no real relationship between increased royalty and net sales. Looking at the 25 listed royalty paying companies, while royalty payment has gone up 23% in FY13 from FY08, the increase in sales was only 13%. Thus royalty payment are not commensurate with increase in topline and profitability.

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 will 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. The Aditya Birla group is also stated to be mulling over charge of royalty for its family name and so is L&T! 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?

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.