The Royalty Payment Siphon by MNCs - Independent Director and Minority Voting as Possible Solutions?

Image from here

Readers may remember a post that I’d carried some time back about how the relaxation of approval norms for royalty payments by Indian companies was being exploited by multinational corporations to milk their Indian arms of their profit in the form of royalty payments and technology transfer fees. This is in turn had been depriving the minority investors in those Indian companies of their rightful dividend. A report by the Institutional Investor Advisory Services (IIAS) had also been mentioned indicating a consequential rise in royalty payments by these Indian subsidiaries to their parent companies.

Subsequently, Indiacorplaw blog has come up with a further analysis of the situation that is fast reaching dire proportions. Since the relaxation of approval that had taken place in December, 2009 the revenues of these subsidiaries have not shown much of an improvement, but their royalty payments have grown up by leaps and bounds; on the other hand, their local competitors have managed a sizable growth in both revenues and margins during that period. As a result, the majority shareholder (the parent company) is still making money through royalty payments, whereas the minority shareholders are losing out on dividend. Nor do the latter have any definite scope of demanding an accountability and/or transparency in the manner in which the royalty payments are being made under the present law in force.

As Indiacorplaw opines, this matter seems to be yet another case of related party transactions (RPTs) between the shareholder and the company which largely remains unregulated in the Indian scenario, so long as disclosures are made by the auditor in the financial statements. However, to be truly effective, such disclosures need to be unerringly accurate and not simply standardized over time that would leave the investor with little clue as to distinguish between the companies who are allowing such siphoning of profit. Perhaps the time has come for constituting a committee of independent directors to oversee all RPTs including royalty payments, while expressly considering the minority shareholders’ interest. Shareholders other than the recipient of the royalty payment may also be asked to vote on such payments on a periodic basis. Unless steps like these are taken soon, the MNCs will no doubt milk their Indian arms for all the profit that they are worth, which augurs ill for the minority shareholders in those subsidiaries.