Royalty payments unlikely to come down to 2% immediately, says proxy advisory firm IiAS

The industry is bracing for July 1, when the Securities and Exchange Board of India’s (Sebi) rules of capping royalty payments at 2 per cent will kick in. The move would affect tech transfers and bottom lines, said sources. CNBC-TV18 talked to Amit Tandon, managing director of IiAs, corporate governance and proxy advisory firm as well as Abhimanyu Bhattacharya, partner at Khaitan & Company about the impact of the rules.

Tandon said it would be premature to believe that royalties will come down to 2 percent. “The fact is that if it is more than 2 percent, you need shareholder approval and when they talk about shareholder approval, they say you need majority of minority investors to sign off on it," he said.

Bhattacharya pointed out that it is a related party transaction and as per Sebi rules, related parties cannot vote in the matter, making it a majority of minority situation. " So essentially that is the fear that stakeholders have represented before Sebi that one should be cognisant of these regulations as well,” Bhattacharya added.

From a global perspective, royalty and brand usage payments in the US are largely around the same rates as India and they are governed by the related party transaction rules, said Bhattacharya.

"So from that perspective, it is not unusual for India to also move towards this regime but at the same time, the concerns that the stakeholders have put forward have not misplaced as well,” he further mentioned.

Speaking about the issue of lack of parity between listed and unlisted companies, he said, “That is a fair concern that has been raised before the Sebi committee that the listed companies are looking at a situation where they will be restricted by the 2 percent cap, the threshold, you will have to take approval beyond that but for unlisted companies they don’t have that worry if at all, they are governed by the companies’ act, which has a far higher threshold of 10 percent – so from that perspective, there is a disparity between listed and unlisted companies when it comes to shareholder approval.”