India's markets regulator just made it easier for companies to give away larger royalties

• SEBI relaxed norms in relation to royalties and brand usage payments.
• Payments may be considered material if they exceed 5% of annual income. It was earlier at 2%.
• This is good news for multinational companies who pay large amounts as royalty to their parent companies.

The market regulator Securities and Exchange Board of India (SEBI) today relaxed norms in relation to royalties and brand usage payments.

“Payments made to related parties towards brand usage may be considered material if the transactions exceed 5% of the annual consolidated turnover of the listed entity during a financial year,” SEBI said in a statement released after its board meeting today.

If a royalty payment to related party exceeds this specified percentage, it would require shareholders to vote on it, without related parties participating in it.

Its regulations earlier had defined material payments at 2% of a listed company’s annual turnover. Royalties paid by companies include technical know-how fees, or brand usage fees and other service related payments.

This comes as good news for many multinational companies in India who pay large amounts as royalty to their parent companies. However, India’s largest auto maker Maruti Suzuki and others like General Electric T&D India, Hitachi Air Conditioner India might remain unaffected since their royalty payments well cross the extended five percent.

These three companies pay as much as 20% of their pre-tax profits to their parent companies, according to a report by Mint. At least 14 of 27 MNCs paid more than 2% of their income as royalty, it said.