Hindustan Unilever Ltd., (HUL for short) while announcing the quarterly results recently also announced an increase in the royalty payments to its UK based parent company. During the press conference the company also informed that HUL has decided to pay an increase in royalty to its parent company from 2.65% to 3.45% till 2025 in a staggered manner. The increase turned out to be a red flag both for the stock market and the minority shareholders. Consequently, share prices of HUL tanked as much as 4% despite the credibly persuasive arguments put forth by the management justifying the logic of paying this increased royalty. The opposition to the payment of this enhanced royalty was no less effective. As expected, the self-appointed guardians of local native interest have been vehement in their arguments against the proposed increase. In their views royalty payments are not at all justified and it has asked the government to put a stop to such practices that are, according to them, simple transfer of profits without justification. Before we draw any kind of conclusion about the justifiability or otherwise of royalty let us look at how it is viewed by the new aatmanirbhar Bharat. HUL is every inch a vestige of colonial legacy for the new Bharat. For them resisting such moves is nothing but an article of faith. Royalty is homophonous with loyalty – loyalty to the Crown, no less. Justifiability comes much later. Their arguments range from the pedantic to the mundane. Sample these – “curbs on royalty payments will help increase the profits of MNCs, mainly in the automobile sector, prevent depletion of foreign exchange reserves and protect the interest of minority shareholders. It will also increase the revenue of the government, apart from saving valuable foreign exchange”. While advancing these justifications, the opponents of payment of increased royalties have not wasted their time to counter the arguments of justifiability or otherwise of such payments, conveniently forgetting the ever evolving technological and other innovations that facilitate radically new processes and products. It is not my argument that royalty of all kinds automatically stands justified. The Companies Act of 2013 has two cardinal principles to justify such royalty payments and also their quantum. You need to answer two fundamental questions. They are: 1. Are these royalty payments in the normal course of business? 2. Are these payments made at arm’s length? SEBI, on its part, has also mandated that such royalties cannot exceed certain prescribed limits. It also demands shareholders’ approval beyond these threshold limits. Other ways for such payments, if royalty is not paid, would be in the form of dividends. This skews the picture, for the pay-out benefits those shareholders who have done little to earn such royalty payments. There is another aspect also to be kept in mind. Today royalty payments appear more because of brand equity coupled with superiority of technology that help the business to bring state of the art products to us. This aspect is conveniently forgotten by those who oppose or is simply underappreciated by them. Royalty payments are both a reality and a necessity. The measures to keep it fair and equitable are better left to the Boards of the companies concerned. The government on its part can only put the guardrails in place and it is for the Boards to ensure that decisions on royalties are taken in the best interest of the companies. Finally, we also have to keep in mind that there is no free lunch on offer for one to gorge.
Last month all eyes were trained on the Supreme Court yet again. The apex Court was due to pronounce its judgment on the demonetisation case. The case, having come before the Court after considerable lapse of time reversing the earlier decision of the government to demonetise high value notes was clearly not on the cards. The judgment was expected to contain some legal lessons and political chastising of the ruling party for breaking the law. But the judgment became famous for a totally different reason. It was a Bench consisting of 5 judges B R Gavai, S Abdul Nazeer, A S Bopanna, V Ramasubramanyan and B V Nagarathna that came to take up the case. The judgement ironically, became more famous for the dissenting judgement than the overwhelming majority endorsing it. That was rather unusual as far as the top court’s judgements are concerned. The majority held the view that there was consultation between the Centre and the Reserve Bank of India (RBI) for six months, indicating a “reasonable nexus between the measures undertaken and the object sought to be achieved” and, therefore, the demonetisation notification passed the test in terms of the doctrine of “proportionality”. Test of Proportionality means examining whether the measure (demonetisation in this case) was in proportion to the outcome sought to be achieved, like eradicating black money, terror financing, etc., and whether there were consultations between the Centre and the RBI prior to the note ban. This provided just the breather to the Government. But just. Justice Nagarathna dissented with the majority with some forceful but convincing reasons. She opined thus: “There was no independent application of mind by the RBI. Parliament cannot be aloof on such an important decision”. It is not easy for a lone judge in a five judge Bench to go her own way. But she did. Justice Nagarathna held that RBI could initiate the demonetisation process and not the Centre. She held “Parliament should have discussed the law on demonetisation, and it should not have been done through a gazette notification. However, the process was well-intended, and its objective was to combat the black money, terror funding, hawala transactions, and other such practices.” There were enough lessons to be gleaned from the judgement. Sample these two diametrically opposite views on this this judgment from entirely different angles. Advocate Prashant Bhushan told the Business Standard: “The RBI hardly had any time to examine the issue. The decision was made in an arbitrary manner and without application of mind. The decision is unfortunate as it will give the government a licence (sic) to take such reckless decisions in the future”. Kirat Singh Nagra, Partner at legal firm DSK Legal, said: “The judgment will send out a strong message to the public and business communities about the need to undertake financial transactions by legitimate means and the courts are not guided by a populist agenda or public outcry in matters of critical economic policies.” The government’s keenness to demonetise the currencies may be understandable; but the process adopted by the Government left the RBI’s role in this saga debatable. Here is an aside. Justice Nagarathna is the daughter of Justice E S Venkataramaiah, the 19th Chief Justice of India.
Here is some good news in an otherwise hopeless looking world. In the recently concluded World Economic Forum the cynosure of all eyes was a man with an unpronounceable name of Kyriakos Mitsotakis, the Prime Minister of Greece. In 1999 he founded NBG Venture Capital, the private equity and venture capital subsidiary of the National Bank of Greece, and acted as its CEO, managing its portfolio and executing transactions in Greece and the Balkans, until April 2003, when he resigned his position to pursue a career in politics. His political career started from there. When the Greek economy descended into chaos and everyone had all but written off its future, he rose from the ashes and successfully brought his country back as a messiah to save his country. In fact, he became the Prime Minister of his country when the country was facing an unprecedented economic crisis. Greece was an economic disaster and was a basket case when he took over the reins as its Prime Minister. When everyone, bar him, rushed to write the obituaries of his country, he took up the challenge and soldiered on. Greece was in a sense the cultural cradle of Europe. Reckless profligacy led the country to the brink with very few wanting to and eligible for saving it from certain disaster. The new Prime Minister had other ideas. Through stringent austerity measures and pragmatic economic policies, he has led the country to a remarkable recovery. According to the European Commission, Greece’s economy grew by an impressive 2.4% in 2020 as against an expected growth of 1.4% as projected by the European Union. He achieved this after having lost a quarter of his country’s GDP thanks to the economic crisis. This was a remarkable turnaround for any country, especially because it was floundering through one of the harshest economic recessions for any country just a few years back. “I don’t think that the world fully appreciates the extraordinary pain the Greek reforms have involved or the tremendous sacrifices that you, the Greek people, have made,” stated Barack Obama in a speech he made in 2016 while visiting Athens on his last overseas trip as President. In 2018, Greece successfully exited its third and final bailout program, after having been forced to demand an astronomical €289 billion in financial assistance from the EU, European Central Bank and International Monetary Fund. This marked the beginning of a return for Greece to financial normalcy. The credit for this should go to the man who led the Greek during this economic turmoil. They say crises will find their own hero. No wonder Mitsotakis became the toast of the World Economic Forum at Davos in 2023.
First consider these facts on China. China rigorously pursued a “No Covid Policy” that came a cropper last month when Xi Jing Ping smelt trouble at home on this account. The Chinese strongman wasted no time to roll back the policy and allowed his people to travel, infect and, if inevitable, die of the disease. Whatever one may argue, this statement is factually correct. In a democracy Xi would have lost his job for this one mistake alone. Thankfully for Xi, China is not a democracy, nor it pretends to be one. Wait. That is not all. What I want to discuss is the unenviable demographic challenges that China faces all in the name of population growth (or lack of it). Consider these statistics, though a bit dated. The average life expectancy in China has increased from 40 in 1950 to 78.2 in 2021 while the total fertility rate has been falling. China began its journey to becoming an aging society in 2000, when Chinese people aged 65 or above exceeded 7 percent of the total population. This number rose to 14.2 percent in 2021 and by 2050, older adults will account for more than one-third of the total population (chinadaily.com.cn). China’s “One Child Policy” introduced after the launch of reforms much against the advice of economists played a role in accelerating the population aging and peaking of its population earlier than expected. China will lose the benefits of demographic dividends and face a daunting challenge to its pension systems. China has now rescinded the one child policy. But who pays for all these mistakes? Ruling elites in a country may not be able to help in the process of upliftment of the masses, but they can definitely be instrumental, knowingly or unknowingly, in creating questionable systems stymieing the progress of the very people they represent. That is a bitter truth. The declining number of women of childbearing age and the unwillingness of most couples to have more than one child because of the high costs of raising children have further worsened the situation. To address the problems of ageing population, the Chinese government needs to further reform the family planning policy, build a family-friendly society and encourage people to have more children by reducing the high costs of raising a child.
While writing these columns, I have been forced to follow politics and politicians. If someone were to ask me who among them (there are many) who impressed me the most, my quick and unhesitating answer would be Jacinda Arden, the Prime Minister of New Zealand. She is all of 42 and the leader of the Centre-left Labour Party. She has decided to call it a day all of a sudden. When she decided to do so, she had only this much to say “I know what this job takes, and I know that I no longer have enough in the tank to do it justice. It’s that simple.” Simple it is, but complex for a lot of people who find it difficult to accept what she considers to be simple. Her empathetic style of governance during several crises elevated her to the global stage. Her leadership style during the corona virus pandemic won her international praise. Arden became New Zealand’s youngest leader in more than 150 years when she was elected to office in 2017. Her win was viewed around the world as an antidote to the populist politics of the time. By the way, she became the second world leader in modern times to have a baby while in office. That is not all. She took her 3-month-old daughter to the U.N. General Assembly in New York. When the news about her resignation broke out there was only one question – “Why?” and not “Why not?” as normally applicable to all politicians. Here is wishing her peace and tranquility in her retired life if that is at all possible.
This editorial piece was supposed to end without this tail piece. However, in these days when good news is in short supply, I could not resist the temptation of adding this paragraph carrying exactly that – the good news. “David ran toward Goliath. He quickly threw a stone with his sling. The stone hit Goliath in the forehead, and the giant man fell to the ground. The Lord helped David defeat Goliath without a sword or armor”. This is a Biblical story told very many times over in everyone’s childhood. More often than not, a child neither believes the story nor does he expect that such an improbable outcome cannot come about except in a story. Sometime recently the world at large was set to witness such an outcome after the mighty Russians invaded a tiny country called Ukraine. When this happened on 24th of February 2022 the world was only wondering when Ukraine would surrender in defeat. It is almost an year since that fateful day. It was fateful not just for Ukraine but for the Russians too. In a few days the war would complete one year. The situation on the ground is that though Ukraine is battered badly it has not surrendered nor Russia has won. Sometimes facts can be stranger than fiction. So is it, in this case. First of all, Ukraine with the help of the Western world has managed to project that it is Vladimir Putin who has invaded the tiny country and not Russia. Putin has choked off natural gas supplies to Europe hoping that the latter would cave in without energy during the winter. When everything looked bleak, nature came to Europe’s help through an unseasonably warm winter. With this, Putin lost the most potent weapon in one stroke. Europe does not need Russian gas anymore to keep their homes warm. They have pivoted quickly to procure or produce alternative gas supplies from alternate sources. Europe’s dependence on Russian gas is now only 9% of its total gas imports. Sample this. Foreign Policy quotes that Germany has enough oil to ‘fully and permanently replace Russia’s gas exports once and for all’. With this Putin has no remaining leverage on this score. For Russia there are no takers for its LNG, the alternate fuel. Recently, Putin announced a ban on oil exports to countries that accepted the price cap imposed by G7. Believe it or not, the oil prices went down instead of skyrocketing! This has provided opportunities to China and India who are driving a hard bargain to buy oil cheap from Russia. And for metals, countries in North and South America and Africa are turning to their own undeveloped or underdeveloped mineral reserves. Let me quote again from Foreign Policy. “Never again will Putin be in a position to cause such chaos and disturbance in the global economy because he has permanently weakened Russia’s most powerful hand – its energy and commodities might – beyond repair”. On the economic front a victory against Putin is very much in sight and on the battleground in Ukraine, he is not winning after having lost more than sixty thousand men. This virtually unbelievable story of resilience put up by the world in dealing with a rogue player like Putin has surprised many. Energy, food and fertilizers and metals traded by Russia were supposed to be and have been affected by the war in Ukraine. But the world has managed to turn the tide against the aggressor. As per Fareed Zakaria, a renowned geopolitical analyst, the world food and fertilizer prices have fallen over the last one-year post war, however unbelievable this may seem. This has happened through concerted efforts put in by the private sector and the governments around the globe thereby denying Putin the extra money to prosecute his war against Ukraine. One has to look at this situation along with the reverses suffered by Putin on the battlefield itself. In a 1959 speech, John F. Kennedy had famously said: “When written in Chinese, the word ‘crisis’ is composed of two characters—one represents danger and one represents opportunity.” Sometimes the world needs a crisis to turn challenges into opportunities.
Thank You
Venkat R Venkitachalam
