In this week's Finshots Markets we talk about promoters and their relationship with brand royalty

The Story

If you’ve ever taken a business 101 class, you might remember your professor talking about something called brand value. It’s an asset. But it’s not a physical asset like plant and machinery. It’s what’s called an intangible. You just know that brand value exists. And it’s built over time when the product carves a niche for itself in terms of quality — Say Parle G biscuits or Vadilal ice creams!

But here’s something the professor may not have mentioned — the world of business is a tad bit complicated. Because sometimes, the company may not actually own the brand.

Wait…what?

Okay, let’s take a hypothetical situation here.

Imagine you’re the founder of Vadilal ice creams. Just hypothetically! You’ve just set up the business, you’re cranking out the frozen stuff and you’re thriving. Your ice cream is making a lot of noise and you notice copycats emerging. They’re piggybacking on your brand name to sell fakes. You realize it could be a blow to your reputation. So you quickly visit the trademark office and file for protection. And you register the brand name.

Once you get confirmation, you breathe a sigh of relief. You own the brand name now.

Life goes on. You expand operations. Business flourishes. And one day you decide that the time has arrived — you’re going public raising money through an IPO. Now investors look at your financial statements. And they see something interesting. They notice that your company is actually paying you (the promoter) a royalty.

A royalty? What for?

So they dig a little deeper and discover that the company is paying you a fee for the privilege of using the ‘brand’ name. The company doesn’t hold the brand name. It doesn’t hold the trademark.

Because when you visited the trademark office, you registered it all in your name. Not in the company’s name!

The end result?

As the business expanded, you drew a nice salary. And you received a fat royalty by licensing the brand name to your company.

Quite smart, no?

This structure also had another big advantage. Say that you were the target of a hostile takeover one day. Or a family feud threatened to steal the business away from you. You might lose it all. But, if you owned the brand name, no one could easily take it away. They’ll have to buy out the brand from you. Or they’ll have to keep paying you a royalty for using it. And at least that way, you could pocket a tidy sum for all your efforts over the years.

Anyway, this was all hypothetical. And we’re not saying that this is what’s happening. But, Vadilal Industries just announced that it’s willing to pay the promoters (aka the owners) a king’s ransom of up to ₹676 crores to buy the brand name Vadilal!

Yup, the promoter families — who have their internal feuds — own the Vadilal brand name. And they’d simply licensed it to Vadilal Industries.

Anyway, if you dig into their financial statements, you’ll see that Vadilal Industries paid the promoters a tidy sum of money each year — ₹47 lakhs in FY22 and FY21. On the face of it, that may not seem like much. It’s just 1% of the annual revenues of the company.

But here’s the thing. Vadilal Industries isn’t the only entity paying the promoters a royalty. There’s Vadilal Enterprises too — who paid ₹2.26 crores last year. To be clear, Vadilal Industries makes ice cream and frozen food and sells it to Vadilal Enterprises. And then Vadilal Enterprises handles distribution and pricing and sells the products to consumers in the domestic market. That’s why there’s a royalty paid on both fronts.

Now we’re not saying that all this is right or wrong. After all, SEBI does allow it. The only thing the market regulator says is that you need to get shareholder approval if it exceeds 2% of the company’s revenues.

But it does get one thinking — who should own the brand name anyway? The promoter or the company? Especially once it becomes a publicly listed company.

Because sometimes, investors raise eyebrows about such practices.

Remember WeWork, the coworking space behemoth?

Well, back in 2019, the company planned to go public and rebrand itself to ‘The We Company’. But before it could do that, it had to pay the co-founder Adam Neumann a boatload of money — nearly $6 million. Why? Well, Neumann had quietly gone and trademarked the ‘We’ name. He owned it, not the company. That meant if the company wanted to use the name, it first had to buy the trademark from Neumann. And investors weren’t pleased with this in the least bit. Investors revolted and Neumann returned the $6 million to the company.

But sometimes, royalty isn’t just paid out on the trademark. Sometimes, family names are involved.

It’s slightly different from brand value and this might emerge because the organization is run well and in a principled manner. The corporate governance standards are good and people begin to trust the family behind it — Say the Tata’s. Over the years, the Tata name has become synonymous with trust. It evokes goodwill.

If Tata is trying to cash out of the company, it can tell the prospective buyer, “You need to pay me ₹xx for all the goodwill I’ve built over the years. After all, even after we’re gone, you will continue to use the family name and people will continue to trust you.”

But in the meanwhile, it can make some money from the family name too. You see, the Tatas charge a royalty of 0.25% of revenues from companies that use the Tata Brand. And it charges 0.15% from ones like the Indian Hotels that are part of the group but doesn’t use the name directly.

All this money goes into a Tata Brand Equity Fund that has the goal of promoting the Tata brand name.

But you could raise the question — if a company like TCS is also paying money from its own coffers to brand and market itself, does it really need to pay the Tata Group more royalty? Is it really fair?

And sometimes, these royalty matters can get even more confusing. You’ve heard of the Wadia Group, haven’t you?

This family owns FMCG giant Britannia, furnishings business Bombay Dyeing and Manufacturing Co. Ltd and airline Go First. Well, back in 2012, they demanded a royalty from all these companies for using the ‘Wadia Group’ brand name.

You could ask — do people pick up a pack of Britannia because of the Wadia name? Does the biscuit maker really benefit from the family holding?

But that’s not the most bizarre incident. That distinction belongs to Jubilant Foodworks — the folks who sell Domino’s Pizza in India. The company is run by the Bhartias under the Jubilant Bhartia Group name. They’ve done a great job but most people who visit Domino’s have probably never heard of the Bhartias.

But suddenly, in 2019, they said, "Hey, we think you should pay us a 0.25% royalty on sales for using the Jubilant name." Despite the fact that people visit Domino’s because "Domino's" is an international brand. Jubilant doesn't mean much for the Indian consumer. So why did the promoters feel the need for a royalty?

It’s a fair question and it's probably why the promoters had to quickly reverse the decision. Investors made their displeasure evident by selling the stock immediately.

Anyway, in some cases, shareholders are completely fine with royalties being paid out to promoters. Or brand names being bought out. Vadilal Industries’ share price has jumped since the announcement. Investors didn’t bat an eyelid when it came to the Tatas. And there wasn’t much brouhaha around Britannia paying a royalty to the Wadias too. So there really isn’t a right answer as to what works or not.

So, do you think promoters should be allowed to hold on to a brand name or should it all be part of the company? And do you think it’s fair for a family to demand a royalty for lending their ‘name’ to what’s essentially their own company? A company in which they have a stake?

Tell us what you think.

Until then…

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