The dent in the Q1FY11 profits of Maruti Suzuki, induced by higher royalty payouts has raised the red flag. Forming JVs with established foreign companies is usually celebrated together with a stock price rise on the bourses but now, it is actually generating us wonder whether it is worth it?
HUL, starting out of Jan 2010 is paying 1% of net sales as royalty to Unilever. And there are others like ABB, Bosch, Colgate, Castrol, GSK Consumer, Hero Honda, Hyundai Motors, Honda Siel, Nestle and P&G which also pay put huge sums as royalties. Parents company is as such a gainer and together with the dividends, generally there is payment of royalty too. On the other hand, the minority shareholder needs to put up with exactly the profits posted and dividend or bonus. Is this fact justified?
In April, the ministry of commerce and industry issued a notification removing the cap and permitting Indian companies to pay royalty to their technical collaborators without seeking prior government approval. Before April, royalty payment was capped at 5% of domestic sales and 8% of exports. And it was constant persuasion of the MNCs, which many say made the Govt remove the cap and that is now hurting, especially the minority shareholders.
The parent company usually pays out a large amount of cash on R&D, to develop new products and technologies. So the justification of royalty payment is created as compensation for the money spent by the parent on development. However with domestic companies paying hefty royalty at the cost of profits, it makes one wonder about the yardstick used to settle the royalties. Is the royalty paid commensurate with the cost parents company spends on expertise acquired?
Yes, minority shareholders enjoy the benefits of the expertise without sharing the charge. But what is worrying is always that royalty payouts have started increasing with each passing year. Royalty payments earn parent companies over dividend payouts. And many now look at royalty payments from emerging markets as a steady and lucrative income source while they may be struggling in their home country; many a times for products and technology that are old.
India needs the expertise and new products, sowhat exactly is the way out? Only two solutions to this – firstly, we learn to absorb and adapt the technology thereby reducing dependency on foreign companies. But is that always possible? Do we’ve got the expertise and money to pay huge sums like the way MNCs do on R&D? And the way can we get the latest models from globally renowned brands without royalty? Even Tata Motors, when it sells Jaguars and Land Rovers in India will have to pay royalty as it is governed by the country of origin rule concerning in which the models were created and developed. So there is certainly really no question of complete indigenization or not option for expertise in today’s global world.
The other solution could possibly be, India could also earn royalty from selling our home-made products and technologies to other emerging countries. But would Indian brand names make that impact which a Benz or a Toyota makes? And how many Indian companies can earn such royalties? Moreover, the amount of Indian companies invest large sums on developing new products?
Royalties are here to stay. If we’d like world class and also the latest products, we need to pay. But the concern is on the amount being paid. And that is something which, we will have to live with in an era of globalization.
