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First Notes - 4 April 2019

First Notes - 4 April 2019

SEBI defers implementation of the brand and royalty regulation


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Regulation 23(1A) of the Securities Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) specifies that the payments made by the listed entities to related parties with respect to brand usage/royalty amounting to more than two per cent of consolidated turnover of the listed entity would be considered material. Therefore, such transactions would require shareholders’ approval on a majority of minority basis i.e. none of the related parties have a right to vote to approve such resolutions. These regulations were to be made effective 1 April 2019.

The above mentioned provision has been introduced by SEBI on 9 May 2018 through an amendment to the Listing Regulations. The amendment introduced was based on recommendations of the Committee on Corporate Governance constituted by SEBI under the chairmanship of Uday Kotak (the Kotak Committee).

New development

Recently, on 27 March 2019, SEBI in its board meeting decided to defer the implementation of the amended regulation pertaining to royalty and brand usage payments by three months i.e. upto 30 June 2019.

The decision was taken based on the representations received from the stakeholders relating to the revised regulation.

Our comments

A number of companies make payment towards royalty/brand usage to their related parties. However, there was no specific provision in SEBI regulations requiring disclosures relating to such payments made to related parties. Therefore, the Kotak Committee recommended that listed entities should provide a detailed disclosure pertaining to royalty and brand usage payments. The proposals mentioned that these disclosures should be provided when such payout levels are high and exceed five per cent of the consolidated revenues. The terms and conditions of such royalty payments should require a prior approval from the shareholders on a majority of minority basis.

The SEBI introduced an amendment to the Listing Regulations to implement recommendations of the Kotak Committee but with certain modification. The amended regulation requires all listed entities to provide detailed disclosures on the value an entity derives from a brand or technology for which it has agreed to pay royalty, brand, or technical fees to the parent entity/promoters in case such payouts exceed two per cent of consolidated turnover.

As the threshold of brand and royalty payment has been reduced from five to two per cent, many companies have made representation to SEBI as this is likely to affect genuine transactions when the objective behind these disclosures is to help with anti-abuse of related party transactions.

Additionally, the requirement to get approval from shareholders on a majority of minority basis may pose challenges for corporates when minority shareholders are scattered. Companies should use these three months to communicate with their shareholders and explain the terms and conditions of such payouts.

To access the text of the SEBI press release, please click here.

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