UNILEVER and Holcim Ltd., ‘the world’s largest cement maker’, are seeking higher royalty from their units in emerging markets as business slows at home, spurring protests by minority investors.

Holcim’s two Indian units, ACC Ltd. and Ambuja Cements Ltd., are seeking shareholder consent to almost double fees to the parent, after the Switzerland-based company signed a similar agreement with its Indonesian unit. Hindustan Unilever Ltd., controlled by the world’s second-biggest consumer-goods company, last month said it will pay a higher fee to its parent.

The increase in the fees, meant to compensate the controlling shareholder for providing technology and expertise, comes as India prepares to enact a law requiring approval from 75 per cent of minority investors for transactions with related parties. Local units of two dozen overseas companies have doubled the fees in the past four years after Asia’s third-largest economy eased rules to spur technology transfers, according to Institutional Investor Advisory Services.

“The small investor is simply left in the lurch,” said Prateek Agrawal, chief investment officer at Mumbai-based ASK Investment Managers Pvt., with R16 billion ($299 million) under management. “We should not be accepting this as fait accompli.”

Hindustan Unilever had its recommendations cut by at least 11 brokerages on Jan. 23 after saying it will double fees to Unilever. The stock had its biggest two-day drop in two years after announcing the plan, which Chief Financial Officer Sridhar Ramamurthy said was ‘designed to help us grow competitively.’ They have dropped 12 per cent this year compared with a 0.5 per cent increase in the benchmark Sensex index.

Related-party transactions “ought to be transparent and where necessary, or of a certain size, be put to vote,” Hugh Young, who helps manage about $70 billion of Asian equities including Hindustan Unilever and Ambuja Cements at Aberdeen Asset Management Asia Ltd. in Singapore, said in an e-mail. “We have raised this at various levels, not just in India. To the company, to the parent, to independent directors.”

ACC, which reported its slowest sales growth in two years in the three months to Dec. 31 and a 46 per cent drop in profit, and Ambuja Cements are asking shareholders for approval to boost the ‘Technology and Knowhow Fee.’ Voting rights for both companies are controlled by Holcim.

‘Majority of Minorities’ :The voting exercise “does not serve any purpose unless Holcim chooses not to vote,” said Amit Tandon, managing director of Institutional Investor Advisory Services, a proxy adviser. Companies should either seek approval from ‘majority of minorities’ or from 75 per cent of investors through a special resolution, he said.

R. Nand Kumar, a spokesman for ACC, and Doris Rao, a spokeswoman for Ambuja Cements, didn’t respond to emails seeking comment.

Maruti Suzuki India Ltd. paid Rs18 billion as royalty to its parent Suzuki Motor Corp. in the year ended March 31, exceeding the company’s Rs16.8 billion profit in the period. Suzuki’s 54.2 per cent stake in Maruti also entitled it to Rs1.17 billion of dividend, according to data compiled by Bloomberg.

Total payout by the 25 highest royalty-paying companies for the year ended March 31 more than doubled to Rs36.4 billion from 15.3 billion rupees in 2008, according to a Dec. 11 report by Mumbai-based Institutional Investor Advisory.

No dividend: “We can have a look at it,” UK Sinha, chairman of the Securities & Exchange Board of India, the nation’s market regulator, said when asked about royalty payments. The assessments would have to be on a case-by-case basis “to see whether the royalty is by way of some special relationship with the promoter company or it is genuine.”

The Institutional Investor’s report found that since 2008, at least three companies, Whirlpool of India Ltd., Asahi India Glass Ltd. and 3M India Ltd., haven’t paid dividends, which would have been shared by all shareholders as against royalty fees that accrue only to the overseas parent.

Asahi India Glass, which reported a loss of Rs651 million in the year ended March 31, paid Rs205 million rupees as royalty fees in the year.

“The basis of charging of royalty should also be questioned,” said ASK’s Agrawal. “Shouldn’t royalty be levied only on incremental operating profits rather than on whole of sales, which can create issues when the business may actually be making a loss.”

‘Pension Plan’: Spokesmen for Asahi India and Whirlpool of India as well as the spokeswoman for 3M didn’t respond to emails seeking comment.

The levies have increased amid slowing global sales. Holcim has accelerated a European cost-saving programme to counter weak demand. Asahi Glass Co.’s profit plunged 67 percent to 12.7 billion yen ($135 million) in the six months ended Dec. 31, while Benton Harbour, Michigan-based Whirlpool Corp.’s net income dropped 40 per cent to $122 million in the three months ended Dec. 31.

“It’s a pension plan for” the biggest shareholder, said Jitendra Nath Gupta, founder of Stakeholders Empowerment Services. “That is why clear deliverables have to be negotiated when royalty payments are increased.”

The levy charged by the overseas parents of Indian units jumped after the government in December 2009 removed caps on royalties, allowing companies to pay their foreign sponsors any amount their board approved without seeking government approval, a move Bhargava termed a ‘watershed’ development.

‘The payout spike was ‘an unintended consequence,’ said Tandon.

India’s Lok Sabha, the lower house of parliament, on Dec. 18 passed a bill making it mandatory to seek approvals by a special resolution for related-party transactions.

The law will be applicable depending on the amount of the transaction or size of the company’s capital. The amounts are yet to be determined.

“As shareholders, we would like to have a vote on royalty proposals when they come up,” Debasish Mallick, chief executive officer at IDBI Asset Management Ltd. in Mumbai said in a phone interview on Feb. 8. “Royalty is a matter of concern for investors as it hurts company profits and dividend payments.”—Washington Post/ Bloomberg