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May 19, 2024

Nestlé India Shareholders Reject Proposal to Increase Royalty Payment to Parent Company

Nestlé India shareholders have emphatically declined a proposition to escalate royalty payments to its parent company, Nestle SA. In a recent stock exchange filing, it was revealed that 57.17 per cent of shareholders opposed the resolution, which aimed to increase royalty payments to not exceed 5.25 per cent of net sales.

The proposed plan outlined a gradual rise in royalty over five years, with an incremental increase of 0.15 per cent annually over the current rate of 4.5 per cent, set to take effect from July 1, 2024.

Institutional Investor Advisory Services (IIAS), in its report dated May 3, strongly recommended shareholders to dissent against the proposal. IIAS expressed reservations stating, “The current proposal lacks our support as it suggests an increase in royalty payments to 5.25 per cent of net sales over a staggered five-year period, a decision based on a McKinsey & Company study evaluating Nestlé S.A.’s value proposition.”

IIAS highlighted Nestlé India’s commendable revenue growth, surpassing that of other geographical segments over a five-year span (4.6 per cent growth compared to a mere 0.03 per cent elsewhere). Additionally, it noted that while Nestle SA’s research and development (R&D) spending remained steady over the last decade, India’s royalty payments accounted for over 4.5 per cent of the overall R&D expenditure, despite contributing only 2.1 per cent to global sales.

Moreover, IIAS underscored a contraction in the parent company’s marketing and administration expenses at a Compound Annual Growth Rate (CAGR) of 1.2 per cent over ten years. The proposed maximum royalty rate of 5.25 per cent was also deemed excessive compared to royalty payments by other multinational corporations (MNCs) operating in India.

IIAS projected potential financial implications, stating, “Assuming a growth rate of 12 per cent, the aggregate license fees for the next five years would surge to Rs 6700 crore at the revised rates, resulting in an increased payout of Rs 610 crore over the five-year period.”

Vishal Gutka, Vice President of Consumer Affairs at HDFC Securities, voiced concerns about the ramifications of not increasing royalty payments, suggesting that certain global categories in which Nestle operates might not easily transition to India. He also warned of potential disruptions to innovations in existing categories due to shareholders’ reluctance to hike royalty payments.

In a separate development, shareholders voted in favor of appointing Suneeta Reddy as an independent non-executive director of Nestlé India, effective from April 5, for a term of five consecutive years.

The resounding rejection of the proposed royalty hike underscores shareholders’ vigilant oversight of Nestlé India’s financial strategies, prioritizing sustainable growth and prudent resource allocation.

Jhumpa Lahiri

Jhumpa Lahiri

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