The board of Nestle India today approved an increase of 1.1 percentage points in its rate of royalty payment to its Geneva-based parent, which will be staggered over the next five years. Currently, packaged foods major pays the 3.4 per cent of sales as royalty, lower than Colgate-Palmolive and Procter & Gamble.
The move will see an increase of 20 basis points every year in Nestle's rate of royalty over the next five years, which, according to chairman and managing director Helio Waszyk, would ensure the Indian subsidiary access to the entire capabilities of the parent. "It will enable Nestle India to continue to deliver long-term sustainable and profitable growth and create shared value for society and its shareholders."
In recent months, companies such as Maruti Suzuki, ACC, Ambuja Cements, McDonald's Corporation and Hindustan Unilever have upped their royalty rates, amid protests from minority and institutional shareholders.
In a recent interaction with Business Standard, Shriram Subramanian, founder and managing director of Ingovern Proxy Advisory firm, said, "Royalty payments are increasingly becoming a corporate governance concern for Indian companies. Increases in royalty payments aren't justified by the companies as they reduce the distributable profits of the company and result in unequal distribution of wealth between the majority stakeholder and minority investors."
Subramanian added a major concern remained the role of the board of directors as the sole authority to approve such increases in royalty payments. "Minority shareholders having no say in such matters," he said.
"Given the current shareholding pattern in Indian companies, even if such proposals were put to vote as an ordinary resolution, it may not serve the intended purpose from a governance point of view," he added.
In Nestle's case, the decision to increase the royalty rate was approved by independent directors only, with the executive directors having recused themselves from the board meeting held today.
Nestle said its parent had requested for a review of royalty payouts two years ago, which was approved only now following a detailed study by two Indian firms - M/S Bansi S Mehta & Co and KPMG.
Nestle India has a general licence agreement that allows its access to the parent's intellectual property rights including its portfolio of brands such as Maggi and Nescafe as well as proprietary science and technology. The company said that the 4.5 per cent rate of royalty was comparable to what subsidiaries in similar countries (read emerging markets) paid to the parent.