The board of cement major ACC today increased the payment of technology and knowhow fees to its parent firm, Holcim of Switzerland, to one per cent of the net annual sales of the company, with effect from January 1. The proposal will be presented to ACC's shareholders at the next annual general meeting, the company said here in a statement today after the board meeting.
Holcim, which holds 50 per cent stake in both ACC and Ambuja Cements, had earlier proposed two per cent as technology fee but this was rejected by the independent directors of both the companies in October, saying the cement industry does not require very high technology transfer from Holcim. Hence, minority shareholders should not suffer due to the increased fees.
Reacting to the report, shares of both ACC and Ambuja Cements tanked today and recovered marginally at the closing. While ACC closed two per cent down at Rs 1,396 a share, Ambuja Cements closed the day at Rs 206 a share, down 2.16 per cent. Both companies jointly lost market capitalisation of Rs 1,200 crore, as investors reacted negatively to ACC's announcement to increase royalty from 0.6 per cent to one per cent.
Analysts say every per cent increase in royalty payment on net sales would result in the company's earnings per share going down by six per cent. But analysts add that as both the companies already pay royalty at the rate of 0.6-0.7 per cent of sales to Holcim Group, the additional royalty would affect the EPS incrementally only by two-to-three per cent for both companies.
"We believe this development would somewhat abate investor concerns over royalty payments by the cement majors to Holcim," said Mihir Jhaveri, an analyst with Religare.
"ACC and Ambuja Cements could witness an incremental EPS impact of just two-to-three per cent if the proposal is approved," he said. Under the new structure, both ACC and Ambuja Cements will pay close to Rs 100 crore each as technology fees to Holcim.
After the Holcim episode, many investor associations have asked multinational companies to seek shareholder approvals for raising royalties from their Indian subsidiaries as a special resolution in the shareholders meeting. They say higher royalties are not in the right spirit of governance, especially when the promoter is hoping to benefit from the company at the cost of other shareholders. "In these cases, the royalty payments should be at least put up for vote as a special resolution requiring 75 per cent approval," said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt Ltd.
In the October board meeting of Ambuja Cements, the independent directors led by veteran corporate lawyer M L Bhakta and economist Omkar Goswami had sought more details on the exact nature of technology being transferred by Holcim to its two Indian subsidiaries. They sent the proposal back to Holcim asking for more detaials. In a note to its institutional investors in October, foreign brokerage Macquarie had questioned the move by Holcim to charge royalty as cement industry is not innovative. Besides in the last fiscal, ACC had already paid Rs 57.3 crore in the name of training, technical know-how, market survey and management fees to Holcim which is almost 0.5 per cent of revenue, it had said.