Royalty payments by Indian listed companies to related parties (Royalty RPTs) have long been a flashpoint in corporate governance. In several instances, companies paid substantial royalties to related parties while failing to declare any dividend to shareholders. In other cases, the royalty outflow to related parties exceeded the total dividend paid to non-promoter shareholders, raising serious concerns about value distribution and fairness. SEBI’s findings1 revealed a troubling pattern: royalty payments were often made without adequate justification, and companies routinely failed to provide consistent or transparent disclosures—particularly in distinguishing between payments made for brand usage, technology transfers, or other intangibles.
This pattern persisted for years—largely unchecked, largely unquestioned.
Until now.
In a significant regulatory shift, the newly issued Industry Standards directly address these long-standing disclosure gaps. They reflect a deeper regulatory awakening: a recognition that royalty payments, if left unchecked, can quietly erode shareholder value, distort financial reporting, and weaken the very foundations of corporate governance.
Read our primary paper on the new Industry Standards here.
The Existing Law
SEBI Listing Regulations consider brand usage or royalty RPTs as material if “the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed five percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity”.
Such Royalty RPTs require prior shareholder approval.
Prior to the Industry Standards, there was no separate disclosure format for Royalty RPTs. Shareholders only got the following information in most cases:
- Summary of the information provided by the management of the listed entity to the audit committee
- Justification for why the proposed transaction is in the interest of the listed entity
- A statement that the valuation or other external report, if any, relied upon by the listed entity in relation to the proposed transaction will be made available
- Percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT, on a voluntary basis
The New Disclosure Mandate
Any proposed RPT involving royalty must now be dissected before the Audit Committee and, where material, before shareholders—with disclosures including:
A: Historical Information
- Gross amount of royalty paid by the listed entity or subsidiary to the related party during each of the last three financial years. Gross amount here would mean total payments made for the use of intellectual property, trademarks, technology transfers, brand usage before deducting any expenses or adjustments, that is the full contractual payment value.
- The purpose for which such payments were made in the last three financial years – and are proposed to be made going forward – must now be clearly disclosed. SEBI had earlier flagged that many companies failed to classify royalty payments based on their underlying purpose, such as brand usage, technology know-how, or management services. The new Standards address this gap by mandating not only clear classification but also the disclosure of each component as a percentage of the total royalty paid over the past three years, and as a percentage of the total royalty proposed in the upcoming transaction.
For example, if royalty is being paid for the use of a brand, the company must disclose that, say, 65% of the royalty paid over the last three years was attributable to brand usage, and that 70% of the proposed royalty payment in the current transaction is also for brand licensing.
For companies that operate under composite license agreements, which bundle multiple IPRs, the disclosure must still explain the rationale for why disaggregation isn’t feasible, if that’s the case.
Impact: Classification of royalty payments by purpose gives shareholders a clearer view of the true economic substance of these transactions. It reveals whether payments are genuinely tied to value-adding elements—such as technology or know-how—or are disproportionately skewed toward brand usage or management fees. For companies operating under composite license agreements bundling multiple purposes, the requirement to explain why disaggregation isn’t feasible prevents such structures from becoming a shield for opacity.
Historical disclosures further enhance oversight by allowing shareholders, regulators, and audit committees to spot patterns and anomalies that single-year data may obscure. If a company routinely pays high royalties for brand usage without a corresponding rise in brand value, market share, or performance, it signals potential misuse—perhaps to route profits to related parties. Tracking changes in the proportion of royalty payments over time can also reveal shifting justifications, often timed with regulatory changes or rising
B. Royalty vs Dividend
One of the more contentious themes that emerged from SEBI’s extensive analysis of royalty payments between FY2014 and FY2023 was the disproportionate allocation of corporate resources toward royalty payments to related parties, often at the expense of shareholder dividends.
In 1 out of 2 times, listed companies that paid royalty did not pay dividend, or paid more royalty to related parties than dividend paid to non-related party shareholders. There were 315 instances (out of 1,538) where listed companies made royalty payments, but no dividend was paid to shareholders. And in 417 instances, royalty pay-outs exceeded dividend paid.
Recognizing the gravity of this imbalance, the Industry Standards have now embedded specific disclosure requirements aimed at surfacing this tension. Companies must disclose the following in any proposed Royalty RPT:
- Any dividend paid in the last three financial years and, if so, the quantum and percentage of profits distributed as dividends. Audit Committee will need to comment on the reasons for less dividend payment than royalty payment, if so.
- Percentage of the royalty paid (in each of the last three financial years) relative to the net profits of the listed entity.
- Comparative disclosure of royalty and dividend paid or proposed to be paid during the current FY
- Rate at which royalty has increased in the past 5 years, if any, vis-à-vis rate at which the turnover, profits after tax and dividends have increased during the same period.
Impact: By compelling companies to openly present royalty payments alongside dividend data, SEBI is effectively reframing the debate: the question is no longer just “is the royalty at arm’s-length?”, but also “is the value distribution fair and proportionate?”.
Moreover, by requiring Audit Committee’s to comment on why dividends have not been paid—especially when large royalty outflows have occurred—the Standards confront one of the more subtle forms of value leakage in promoter-driven structures
Comparative disclosure with other financial matrix will aid shareholder understanding on whether royalty payments are rising faster than revenue, profitability, or shareholder returns. It may indicate that such payments are detached from operational value creation and instead serve as a mechanism for value extraction by related parties.
C. Parent Company Royalty And Peer Benchmarking
If the royalty is being paid to the parent company, the listed entity must disclose: Minimum and maximum royalty rates charged by the parent company to other foreign group entities, along with corresponding absolute values. The disclosure must be made on a gross basis, including taxes paid on behalf of the recipient. This requirement may be waived only if the parent company charges a uniform royalty rate across all group companies, and such uniformity is confirmed.
The Standards additionally mandate peer benchmarking as well. The listed entity/ subsidiary paying royalty must disclose whether any industry peer pays royalty for the same purpose. If yes, the entity must provide a peer comparison across:
- Aggregate royalty amount paid over the last three years.
- Royalty as a percentage of net profit over the same period.
- Annual growth in turnover over three years for all entities (listed company and peers)
Impact: These requirements directly respond to one of SEBI’s most critical findings: minority shareholders of Indian subsidiaries have no visibility into how much the parent charges other subsidiaries globally. Disclosing the minimum–maximum rates and amounts charged across the group allows shareholders to assess whether the Indian entity is being treated fairly. It also helps detect discriminatory pricing or inflated royalties disguised as group-wide policy.
Perhaps, an even more powerful disclosure is around peer benchmarking. By requiring companies to disclose whether industry peers pay royalty for similar purposes, and how the amounts compare over time, it places promoter-driven transactions in a market governance framework. Shareholders can now ask: Why is our company paying 12% of net profit as royalty while our peers pay only 4%? Why is royalty growing faster than turnover while competitors are flatlining? This peer data, when juxtaposed with profitability and turnover trends, serves as a red flag trigger for audit committees and proxy advisors.
Conclusion
The new Industry Standards represent a transformative step in addressing longstanding concerns around Royalty RPTs, ensuring greater transparency, fairness, and accountability.
By mandating detailed disclosures on historical payments, purpose classification, dividend comparisons, parent company royalty rates, and peer benchmarking, SEBI has empowered shareholders and audit committees to scrutinize royalty transactions more effectively. These measures not only safeguard shareholder value but also challenge companies to align royalty payments with genuine operational contributions rather than opaque value extraction. In essence, every royal rupee must now earn its crown
Royalty payments by Indian listed companies to related parties (Royalty RPTs) have long been a flashpoint in corporate governance. In several instances, companies paid substantial royalties to related parties while failing to declare any dividend to shareholders. In other cases, the royalty outflow to related parties exceeded the total dividend paid to non-promoter shareholders, raising serious concerns about value distribution and fairness. SEBI’s findings1 revealed a troubling pattern: royalty payments were often made without adequate justification, and companies routinely failed to provide consistent or transparent disclosures—particularly in distinguishing between payments made for brand usage, technology transfers, or other intangibles.
This pattern persisted for years—largely unchecked, largely unquestioned.
Until now.
In a significant regulatory shift, the newly issued Industry Standards directly address these long-standing disclosure gaps. They reflect a deeper regulatory awakening: a recognition that royalty payments, if left unchecked, can quietly erode shareholder value, distort financial reporting, and weaken the very foundations of corporate governance.
Read our primary paper on the new Industry Standards here.
The Existing Law
SEBI Listing Regulations consider brand usage or royalty RPTs as material if “the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceed five percent of the annual consolidated turnover of the listed entity as per the last audited financial statements of the listed entity”.
Such Royalty RPTs require prior shareholder approval.
Prior to the Industry Standards, there was no separate disclosure format for Royalty RPTs. Shareholders only got the following information in most cases:
- Summary of the information provided by the management of the listed entity to the audit committee
- Justification for why the proposed transaction is in the interest of the listed entity
- A statement that the valuation or other external report, if any, relied upon by the listed entity in relation to the proposed transaction will be made available
- Percentage of the counter-party’s annual consolidated turnover that is represented by the value of the proposed RPT, on a voluntary basis
The New Disclosure Mandate
Any proposed RPT involving royalty must now be dissected before the Audit Committee and, where material, before shareholders—with disclosures including:
A: Historical Information
- Gross amount of royalty paid by the listed entity or subsidiary to the related party during each of the last three financial years. Gross amount here would mean total payments made for the use of intellectual property, trademarks, technology transfers, brand usage before deducting any expenses or adjustments, that is the full contractual payment value.
- The purpose for which such payments were made in the last three financial years – and are proposed to be made going forward – must now be clearly disclosed. SEBI had earlier flagged that many companies failed to classify royalty payments based on their underlying purpose, such as brand usage, technology know-how, or management services. The new Standards address this gap by mandating not only clear classification but also the disclosure of each component as a percentage of the total royalty paid over the past three years, and as a percentage of the total royalty proposed in the upcoming transaction.
For example, if royalty is being paid for the use of a brand, the company must disclose that, say, 65% of the royalty paid over the last three years was attributable to brand usage, and that 70% of the proposed royalty payment in the current transaction is also for brand licensing.
For companies that operate under composite license agreements, which bundle multiple IPRs, the disclosure must still explain the rationale for why disaggregation isn’t feasible, if that’s the case.
Impact: Classification of royalty payments by purpose gives shareholders a clearer view of the true economic substance of these transactions. It reveals whether payments are genuinely tied to value-adding elements—such as technology or know-how—or are disproportionately skewed toward brand usage or management fees. For companies operating under composite license agreements bundling multiple purposes, the requirement to explain why disaggregation isn’t feasible prevents such structures from becoming a shield for opacity.
Historical disclosures further enhance oversight by allowing shareholders, regulators, and audit committees to spot patterns and anomalies that single-year data may obscure. If a company routinely pays high royalties for brand usage without a corresponding rise in brand value, market share, or performance, it signals potential misuse—perhaps to route profits to related parties. Tracking changes in the proportion of royalty payments over time can also reveal shifting justifications, often timed with regulatory changes or rising
B. Royalty vs Dividend
One of the more contentious themes that emerged from SEBI’s extensive analysis of royalty payments between FY2014 and FY2023 was the disproportionate allocation of corporate resources toward royalty payments to related parties, often at the expense of shareholder dividends.
In 1 out of 2 times, listed companies that paid royalty did not pay dividend, or paid more royalty to related parties than dividend paid to non-related party shareholders. There were 315 instances (out of 1,538) where listed companies made royalty payments, but no dividend was paid to shareholders. And in 417 instances, royalty pay-outs exceeded dividend paid.
Recognizing the gravity of this imbalance, the Industry Standards have now embedded specific disclosure requirements aimed at surfacing this tension. Companies must disclose the following in any proposed Royalty RPT:
- Any dividend paid in the last three financial years and, if so, the quantum and percentage of profits distributed as dividends. Audit Committee will need to comment on the reasons for less dividend payment than royalty payment, if so.
- Percentage of the royalty paid (in each of the last three financial years) relative to the net profits of the listed entity.
- Comparative disclosure of royalty and dividend paid or proposed to be paid during the current FY
- Rate at which royalty has increased in the past 5 years, if any, vis-à-vis rate at which the turnover, profits after tax and dividends have increased during the same period.
Impact: By compelling companies to openly present royalty payments alongside dividend data, SEBI is effectively reframing the debate: the question is no longer just “is the royalty at arm’s-length?”, but also “is the value distribution fair and proportionate?”.
Moreover, by requiring Audit Committee’s to comment on why dividends have not been paid—especially when large royalty outflows have occurred—the Standards confront one of the more subtle forms of value leakage in promoter-driven structures
Comparative disclosure with other financial matrix will aid shareholder understanding on whether royalty payments are rising faster than revenue, profitability, or shareholder returns. It may indicate that such payments are detached from operational value creation and instead serve as a mechanism for value extraction by related parties.
C. Parent Company Royalty And Peer Benchmarking
If the royalty is being paid to the parent company, the listed entity must disclose: Minimum and maximum royalty rates charged by the parent company to other foreign group entities, along with corresponding absolute values. The disclosure must be made on a gross basis, including taxes paid on behalf of the recipient. This requirement may be waived only if the parent company charges a uniform royalty rate across all group companies, and such uniformity is confirmed.
The Standards additionally mandate peer benchmarking as well. The listed entity/ subsidiary paying royalty must disclose whether any industry peer pays royalty for the same purpose. If yes, the entity must provide a peer comparison across:
- Aggregate royalty amount paid over the last three years.
- Royalty as a percentage of net profit over the same period.
- Annual growth in turnover over three years for all entities (listed company and peers)
Impact: These requirements directly respond to one of SEBI’s most critical findings: minority shareholders of Indian subsidiaries have no visibility into how much the parent charges other subsidiaries globally. Disclosing the minimum–maximum rates and amounts charged across the group allows shareholders to assess whether the Indian entity is being treated fairly. It also helps detect discriminatory pricing or inflated royalties disguised as group-wide policy.
Perhaps, an even more powerful disclosure is around peer benchmarking. By requiring companies to disclose whether industry peers pay royalty for similar purposes, and how the amounts compare over time, it places promoter-driven transactions in a market governance framework. Shareholders can now ask: Why is our company paying 12% of net profit as royalty while our peers pay only 4%? Why is royalty growing faster than turnover while competitors are flatlining? This peer data, when juxtaposed with profitability and turnover trends, serves as a red flag trigger for audit committees and proxy advisors.
Conclusion
The new Industry Standards represent a transformative step in addressing longstanding concerns around Royalty RPTs, ensuring greater transparency, fairness, and accountability.
By mandating detailed disclosures on historical payments, purpose classification, dividend comparisons, parent company royalty rates, and peer benchmarking, SEBI has empowered shareholders and audit committees to scrutinize royalty transactions more effectively. These measures not only safeguard shareholder value but also challenge companies to align royalty payments with genuine operational contributions rather than opaque value extraction. In essence, every royal rupee must now earn its crown
Author
Payaswini Upadhyay
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