The Trick That Quietly Reduces Company Profits

Imagine you invest in a restaurant. The business grows. It becomes famous. Customers pour in. Profits rise. But every year, before you see a single rupee of those profits, the original founder, who still controls a large share of the restaurant, collects a fee for “letting” the business use the restaurant’s name. The name that became famous because your investment helped build it. That fee comes directly off the bottom line, reducing what’s left for all shareholders, including you. And you had almost no say in setting the amount.

This, in essence, is how brand royalty payments work in India’s listed corporate world, and it is happening at a scale that most retail investors have never been told about.

The Scale of the Problem

In November 2024, SEBI published a landmark study covering royalty payments by 233 listed Indian companies over a ten-year period from FY 2013–14 to FY 2022–23. The findings were striking. In FY 2023–24 alone, these companies paid ₹10,800 crore, roughly $1.3 billion, to related parties in the form of brand royalties and related fees. That is not a one-off figure. It represents a decade-long trend of steadily rising payments, with total royalties having roughly doubled over the study period.

What makes this more than a dry accounting matter is what SEBI found in the details. In one out of every four instances studied, listed companies paid royalties exceeding 20% of their net profits to related parties. This means, in a quarter of all cases, more than one rupee in five of profit went directly to a promoter or parent entity before any dividend reached a regular shareholder. More troubling still: 63 companies paid royalties totalling ₹1,355 crore even while reporting net losses. They were, in effect, extracting cash from companies that had no profits to distribute.

How the System Works

The mechanics are worth understanding clearly, because they are elegantly structured to appear routine.

A listed company, say, a steel manufacturer, an FMCG firm, or a consumer electronics company, operates under a brand name. That brand name is, ostensibly, “owned” by a separate private entity: either a promoter-controlled holding company in the case of Indian conglomerates, or the foreign parent company in the case of multinational subsidiaries. The listed company pays an annual fee, typically expressed as a percentage of turnover, for the right to use that brand.

The payment flows from the publicly listed entity (where minority shareholders hold stakes) to the private entity (which the promoter or parent controls fully). Since royalty is an operating expense, it is deducted before calculating taxable profit. The result: the listed company’s reported profit is lower than it would otherwise be. Dividends to minority shareholders are reduced. But the promoter receives a cash stream from the private entity, one that is unaffected by minority shareholder voting rights, dividend decisions, or market pressures.

The structure creates an asymmetry that is at the core of the governance problem. Promoters who control large blocks of shares in listed companies can effectively tax those companies on behalf of their private interests, with minority shareholders bearing the cost.

Case Study: JSW Group

The JSW Steel case became something of a textbook example when it was disclosed in 2014. JSW Steel, India’s third-largest steelmaker and a publicly listed company, proposed to pay 0.25% of its consolidated net turnover annually to JSW Investments Pvt Ltd, a company owned almost entirely (99.99% of equity) by Sangita Jindal, the wife of JSW Group chairman Sajjan Jindal. At the time, this worked out to roughly ₹125 crore per year, a figure that would grow as JSW Steel’s revenues expanded.

The rationale offered was that the “JSW” brand belonged to JSW Investments and the listed company needed to pay for its use and promotion. Proxy advisory firm Institutional Investor Advisory Services (IiAS) called it “an abusive related-party transaction” that would “create conflicts of interest and dilute minority shareholder value.” Other governance advisors pointed out that the JSW brand had been built over decades through the operations, capital, and labour of the publicly listed entity itself, that it could not simply be declared the private property of the promoter family’s holding vehicle.

The resolution was nonetheless approved at the AGM. Promoters who control large voting blocs in their own companies have a structural advantage in passing such resolutions: their votes count on the “for” side, even when they are the direct beneficiaries of the transaction.

JSW was far from alone. In a separate episode, JSW Energy proposed routing billions of rupees worth of coal imports through JSW International Trade Corp, a Singapore-based entity owned by Sangita Jindal and her daughter Tarini Jindal. Minority shareholders and institutions blocked that resolution at an AGM, with proxy advisors noting the Singapore entity appeared to function largely as a pass-through intermediary with no obvious operational necessity.

A Brief History of Regulations

The regulatory history of royalty payments in India is a story of gradual tightening that has consistently lagged behind the creativity of corporate structuring.

Before 2010, royalty payments were capped: at 5% of domestic sales for technical collaboration agreements, and 2% for pure brand usage. The government scrapped these caps in December 2009, ostensibly to attract foreign direct investment and technology transfer. The effect was immediate: royalty payments by multinational subsidiaries surged. Estimates suggest the payments of 25 top multinationals including Maruti Suzuki, HUL, Nestlé India, and Colgate-Palmolive jumped 140% in the years following deregulation.

In 2018, the Uday Kotak Committee on Corporate Governance recommended that royalty payments exceeding 5% of annual consolidated turnover should require approval from minority shareholders. SEBI accepted the recommendation but lowered the threshold to 2%, meaning shareholder approval was required for payments above 2% of turnover. From 2019, this became mandatory.

The problem is the threshold. SEBI’s own 2024 study found 1,538 instances of royalty payments that fell below the 5% of turnover threshold, meaning they did not trigger the minority shareholder approval requirement under the existing rules. Companies learned to structure their payments carefully: keeping individual entity payments below the threshold, splitting fees across multiple related-party entities, or categorising payments under different labels (management fees, technology fees, information technology services, or “other services”) that cumulatively added up to significant outflows but individually cleared regulatory hurdles.

IiAS analysts identified this fragmentation explicitly in their study of ABB India, where royalty payments split across three entities brought each below the regulatory threshold individually, even though the combined outflow to the parent amounted to approximately 8.2% of sales. SEBI’s rules, as written, addressed the headline figure but not the cumulative reality.

The Taxation Maze

There is a second dimension to the royalty issue that operates through the tax system rather than securities regulation: transfer pricing.

For multinational subsidiaries, royalty payments to foreign parents are by definition cross-border transactions. Indian transfer pricing rules require that such transactions be conducted at “arm’s length” prices, the same price an unrelated third party would charge. In practice, valuing a brand or a technology licence is deeply subjective. Independent valuers appointed by different companies frequently arrive at wildly different conclusions for similar assets, a fact the SEBI study explicitly noted.

Tax authorities have increasingly decided to challenge these valuations. In August 2025, the Income Tax Appellate Tribunal (ITAT) in Delhi slashed royalty payments declared by Sony India Pvt Ltd as “excessive” relative to the services actually rendered, in a transfer pricing case. The ruling was significant enough that analysts expect it to become a benchmark for future scrutiny of MNC royalty payments by Indian tax authorities. The income tax department had previously challenged Maruti Suzuki’s royalty payments to Suzuki, arguing that the Indian company had been paying to promote a brand that was less well-known than Maruti itself, effectively arguing that it was Maruti that had built Suzuki’s brand equity in India, not the other way around.

This creates an ironic dynamic: SEBI regulates royalties from a shareholder protection angle, while the tax department approaches them from a revenue angle. For different reasons, both are arriving at the same conclusion, that many of these payments are excessive. Yet neither regulator, acting alone, has fully contained the practice.

SEBI’s 10-Year Study: What It Actually Found

The 2024 SEBI report deserves particular attention because it is the most comprehensive analysis of this phenomenon to date, covering a decade of data across 233 companies.

Several findings stand out beyond the headline numbers. The study noted that independent fairness opinions on royalty payments, the mechanism supposedly ensuring that payments are at arm’s length — “vary significantly in terms of valuation” across different agencies. This suggests that the required valuation process is not producing reliable, consistent outcomes. Whoever commissions the valuation has significant influence over what number emerges.

The study also found that in cases where shareholders of MNC subsidiaries dissent, as they occasionally have at Hindustan Unilever and Nestlé India, the dissent rarely achieves any material change. Foreign parents who own controlling stakes in their Indian subsidiaries can vote their shares to approve royalty payments, meaning minority dissent is structurally outvoted.

SEBI responded in 2025 by requiring audit committee scrutiny of all material related-party transactions and mandating disaggregated disclosures for payments exceeding ₹1,000 crore. The Asian Corporate Governance Association (ACGA), in an open letter to Indian regulators in April 2025, pushed further, advocating for “double materiality” thresholds that consider both the financial value and the counterparty significance of royalty transactions, and calling for independent director oversight to be genuinely independent rather than nominally so.

The Indian Promoter Model

For Indian conglomerates, the royalty mechanism functions somewhat differently from the MNC model, though the underlying governance tension is the same.

In the domestic conglomerate model, a promoter family owns a private holding company or trust. That entity claims ownership of the brand, say, the group’s name or logo. Multiple listed subsidiaries across different business lines then pay annual brand fees to that central private entity. Since the promoter family controls the private entity, these fees flow to them directly, separate from any dividends that require board approval and are visible to all shareholders.

The Tata Group, to its credit, has developed what is widely regarded as a relatively transparent and defensible version of this structure. Tata Sons charges group companies for use of the Tata brand, with fees capped at 5% of profits and waived entirely if a company is loss-making. The brand equity agreement is publicly disclosed, and Tata Sons maintains an organised brand management function with documented responsibilities. Governance advisors generally accept that this structure provides genuine brand stewardship.

Not all domestic conglomerate arrangements are so structured. Where promoters control large voting blocs, where audit committees are populated with loyalists, and where disclosures are minimal, the brand royalty mechanism can shade into a reliable cash extraction tool. Jubilant FoodWorks famously had to withdraw a proposed royalty payment to promoters within hours of announcing it in February 2019, following immediate investor backlash. The speed of the withdrawal suggested the move had been undercooked on governance grounds. The Fortis Healthcare saga saw the Singh brothers attempt to offset over ₹500 crore they owed the company by offsetting it against purported royalties for the Fortis brand, a claim that was met with considerable scepticism.

The MNC Strategy

For multinational subsidiaries, the royalty dynamic operates somewhat differently, but the minority shareholder impact is similar.

Unlike domestic promoters, foreign parents have a genuinely arguable case: they built brands globally, Nestlé, Maruti, Bosch, Colgate, and their Indian subsidiaries benefit from that global brand equity, technology, research, and supply chain infrastructure. A brand like Nestlé commands consumer trust in India partly because it carries the weight of a global reputation built over a century. That is real value, and it is reasonable to pay for it.

The question is one of proportion. IiAS data showed that Maruti Suzuki’s royalty payments to Suzuki grew 6.6 times over fifteen years, while average car sales realisation grew only 1.6 times. Suzuki’s R&D spend per vehicle averaged 4% of sales; its royalty receipts from Maruti ran at 6% of net sales. In FY 2023–24, Maruti paid royalties equal to 37% of its profit after tax. Nestlé India paid 28%. P&G’s Indian entity paid 31%. For Hitachi’s Indian operations, royalty payments in some years exceeded 100% of reported profits.

These are not payments for brand use in any meaningful commercial sense. They are, in the words of one analyst, a mechanism for “the global slowdown forcing foreign parents to take away money from their subsidiaries.” When a parent company needs cash, whether from economic pressure, shareholder demands, or repatriation strategy, raising royalty rates charged to captive Indian subsidiaries is a lower-friction path than cutting costs or operations.

The minority shareholders of Maruti or HUL or Nestlé India have a stake in listed entities whose reported profits are structurally reduced by this mechanism, and whose dividend capacity is correspondingly constrained.

What Changes Are Actually Coming

The regulatory trajectory, while incremental, is moving in the right direction.

SEBI’s 2025 disclosure standards require companies to provide substantially more detail on royalty payments before they are approved, including how rates compare with payments made to and by other group entities globally, and how the rationale for the rate was determined. Audit committees are now responsible for reviewing this information, not merely rubber-stamping it.

The taxation front is increasingly active. The ITAT ruling on Sony India signals that tax authorities are willing to use transfer pricing powers to push back on payments that cannot be substantiated by services rendered. As these cases multiply, the precedents become binding benchmarks that make egregious royalty structuring riskier.

ACGA and other governance advocacy bodies continue to push for stronger measures: mandatory independent valuation by regulators rather than company-appointed advisors, enforceable clawback rules if royalties are found to be excessive, and clear penalties for regulatory violations rather than the soft warnings that have characterised enforcement to date.

What This Means for Investors

For a retail investor in India’s equity markets, the royalty issue is not an abstraction. It is a direct tax on returns.

When a company you hold pays 20–30% of its profits to a promoter or parent entity before distributing dividends, you are receiving a smaller share of the value you helped create. When those payments happen regardless of whether the company is profitable, you are subsidising a cash extraction mechanism that operates independently of business performance. And when the payments are structured to fall below regulatory thresholds that trigger mandatory approval, you have no voice in the matter.

The practical implication for investors is the same as the implication for regulators: scrutiny matters. Before investing in a listed company — particularly an MNC subsidiary or a domestic conglomerate — it is worth examining the royalty and related-party payment history in the annual reports. Questions worth asking: How large are the payments relative to profits? Have they been growing faster than revenues? Are they paid even in loss years? How is the rate determined, and by whom? Is the recipient entity publicly disclosed and its ownership clear?

These are not comfortable questions for companies to answer. That is precisely why they are worth asking.