There have been several recent cases where royalty payments have become one of the major items of expenditure for companies, especially in the pharmaceutical sector. ``It is true that Unilever owns 51 per cent stake in Hindustan Lever, but we also own shares in the company and there are thousands of other small shareholders. We have to see whether the HLL bottom line would be affected by the royalty payment,'' said a senior official of a mutual fund.

This follows reports that HLL is formalising an agreement to pay one per cent of turnover as royalty to Unilever. This means Unilever will get around Rs 70 crore as HLL had clocked a turnover of Rs 10,125 crore. The initial reaction on the stockmarkets has never been positive to any royalty payment announcement. Though the HLL scrip has not gone down steeply, market watchers attribute this to the fact that HLL has distributed its royalty payment over a longer time period, restricting the immediate impact on earnings.

Smithkline Beecham Consumer Healthcare (SBCH) is the prime example of a stock which was hit hard after a royalty announcement. In 1997, the company announced that the Horlicks brand, which accounts for a large portion of turnover, would attract a five per cent royalty on net sales value. The stock market reaction at that time had been extremely negative with the scrip showing a net decline of 25 per cent in seven trading sessions. But that was the lowest price and since then it has reached that low.

Other players like Nestle and Rhone-Poulenc have also been paying royalties to their parent companies but the market reaction has not been so negative in these cases. The Tatas have formulated a brand equity scheme whereby various Tatacompanies will pay royalty to Tata Sons for using the Tata name. Though royalty payments to parent companies are not an unusual phenomenon (often such agreements help the local company generate more revenue from new products), in the short term market perceptions about them take a beating, analysts say.

``In the HLL case, though the parent has been backing the Indian arm, a large number of HLL brands are quite old and have been developed by the Indian arm. Hence the royalty is questionable,'' said an analyst, adding, ``the company's move to spread the royalty payment over 24 years instead of seven years is partly out of self-interest since a higher payout would seriously dent the bottomline.''

The company has said that the payment is not for brands but for technology. Some analysts say that there is a lot of technology involved even in products such as soaps, shampoos, detergents and even ice-cream. They point to Levers' claims that the total fatty matter in their soaps is lower than usual, and to thespecial chemicals used in their detergents. Their ice-creams, for instance, are claimed to have low bacteriological content.

Also to be taken into account is that the latest technological developments abroad will now be available immediately to the Indian subsidiary. HLL's outgo on account of in the current year is expected to be in the region of around Rs 70 crore which would drive down its EPS by Rs 2.

But some analysts say that the one per cent royalty to Unilever by HLL would not hurt the profit margins and the one per cent royalty outgo would be compensated by some other means.

The royalty agreement

MUMBAI:
The proposed technology and knowhow collaboration agreement will be valid for 24 years and will involve payment of royalty at 1 per cent (net of taxes) on the qualifying turnover computed in the manner prescribed by the RBI and the Centre. The Industrial Policy, 1991, allows foreign technology collaborations/transfers through payment of 5 per cent and 8 per cent or domestic andexport sales for seven years through automatic approval procedure administered by the RBI.

HLL approached the ministry of industry for the necessary amendments to the terms approved by the RBI under the automatic approval scheme. The Centre has accepted the amendments sought by the company in reducing the rate of royalty on domestic and export sales to a uniform 1 per cent and extending the period of technology collaboration to 24 years.