Vide a press release No. 16/2019 dated June 27th 2019 ("Press Release") the Securities and Exchange Board of India ("SEBI") has on its board meeting held on 27th June 2019 provided that the payment made by listed companies to related parties towards brand usage or royalty will be considered material if such transaction (s) exceeds 5% of the annual consolidated turnover of a listed company in a financial year. The SEBI further prescribed that such transactions would require the prior approval of the shareholders with no related party having a vote to approve such resolutions.
Royalty payments particularly to promoters have been substantially high in the past decade. Earlier, though royalty payments were related party transactions, they did not earlier fall within the ambit of matters requiring shareholder approval as they did not exceed 10% of the revenue or net worth. Further, companies maintained that such royalty payments were in the ordinary course of business and on an arm's length basis.
This provision by the SEBI is based on a Kotak Committee recommendation which proposed shareholder approval for royalty payments exceeding 5% of the annual consolidated turnover. The objective behind the recommendation is to improve transparency of related party transactions.
It is likely that any kind of fees such as technology transfer fee, technical knowhow fees would all fall within the ambit of "Royalty payments" for the purposes of this provision. However, it in only when the regulations have been notified to this effect that the extent of implications of this provision can be truly examined.
The provision for requirement of shareholder approval is unlikely to affect large MNCs, most of whom already obtain shareholder approval for their royalty pay-outs to holding companies/related parties. Such a provision is likely to affect Indian promoters who charge substantially high royalties to their companies for their brands. It is important to note that the SEBI has not prohibited these payments but merely specified that they require prior shareholder approval.
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