Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

JSW Steel Will Pay 125 Cr. or 30% of Profits to Promoter’s Wife For The “JSW” Brand

In a shameful episode, the promoters of JSW Steel have claimed complete ownership of the “JSW” brand, and decided to pay a company owned by Sangita Jindal (wife of the promoter Sajjan Jindal) Rs. 125 cr. in this year for the use and promotion of the brand.

The problem though is that JSW Steel was primarily responsible for building the brand in the first place. That means, shareholders first paid to help build the brand, and then, they’ll pay the promoters that own it. And then, Rs. 125 cr. is about 30% of its consolidated net profit of Rs. 400 cr. in FY 2014 (and 10% of the standalone net profit) which is a HUGE amount to pay!

The concept is not a good thing in corporate governance, though it is practiced internationally. Even in the Reliance Power IPO in 2008, the company was paying ADAG – the Anil Ambani led promoter group – a large sum (around 45 cr. IIRC) to use the Reliance-ADAG brand, and other ADAG companies were following suit.

This practice has even been followed by the Tatas, who demanded a 0.25% royalty on all turnover from their flagship Tata companies.

What this means that promoters will find a way to take more than their equity stake – some with high salaries, others with things like “brand royalty”. There are more of course – where companies pay high rents to promoters for their offices (and residences of top staff), or where they will “merge” with promoter owned entities at inflated valuations. And finally, some companies give large supplier contracts to companies owned by promoters (and I’m looking at you again, Tata) without any real “arms length” separation.

No one will oppose this. It’s how businesses do things, so it’s become a part of the game.

  • Ravi says:

    The link of tata royalty one is pointing to JSW only.

  • BRS says:

    i think Jet Airways also followed similar route (to divert IPO proceeds) during it’s IPO. That one statement was enough for me to take a call NOT to invest in Jet IPO.

  • Amit Prabhu says:

    The concept of paying royalty for use of group name may not be wrong in all cases. In the case of Tata’s I am sure the group companies derive benefit from the use of the name – attracting talent, credibility of the group as well as opening doors more easily. In case of companies where Tatas have a minority stake, in true sense Tata’s can refuse to allow the use of its name. So the fee is justified – Question now is what should be the quantum. Two changes should bring in some accountability – adoption of transfer pricing rules for domestic transactions (and trust me this is unwanted amendment) and the new Companies Act, that needs the Board to consider related party transactions and ratify them to be at arms length (again, no clue how board it supposed to do it). Despite the shortcoming of the provisions, there will now be greater scrutiny on these transactions.