MUMBAI: On the final day of its Rs 11,607-crore secondary share sale, proxy advisory firm Ingovern has flagged concerns about the Rs 4,715 crore of contingent liabilities (which is as much as 73 percent of its networth, most of which relates to the huge royalty payments that LG Electronics India will have to pay to its Korean parent.
LG India’s offer for sale only primary share sale is closing Thursday. So far, the issue has attracted nearly three times more than the offer size. “Bulk of the Rs 4,717-crore contingent liabilities, which is as much as 73 percent of LG India’s networth, relate to disputed income tax, excise, and service tax demands.
A significant portion involves transfer pricing adjustments tied to royalty and technical service payments to the parent, Ingovern said in a note quoting the company’s latest filing with the regulator Sebi.
“A negative outcome in those proceedings could significantly erode future earnings or require provisions. These primarily consisting of income tax, excise, and service tax demands under disputes. The company has not made provisions for these pending proceedings, citing legal advice and ongoing appeals before appellate forums,” it said.
“The company has not made any provisions for these pending proceedings, citing legal advice and ongoing appeals before appellate forums,” it said, adding the material quantum of disputes and lack of detailed timelines introduce uncertainty for investors.
The Sebi filing discloses a fixed royalty rate of 2.3 percent of net sales for most products and 2.4 percent for LCD TVs and monitors. Royalty outflow as a share of revenue has ranged between 1.63 percent and 1.9 percent during FY23–25. On the disclosure gaps, the report says while material agreements are summarized, no independent benchmarking study or third-party pricing review for royalty payments is presented, raising potential concerns around transfer pricing transparency and arm's-length validation.
The Sebi filing flags exposure to fluctuations in raw material prices, foreign exchange risks, and competition from both domestic and international players such as Samsung and Whirlpool. On the high royalty outgo, the report says the company states that royalty payments made by them to the promoter under the license agreement or otherwise may attract regulatory scrutiny or action. As of the date of the Sebi filing, they have a contingent liability of Rs 315 crores in respect of royalty payments to the promoter.
There is no assurance that such observations will not be raised by South Korean tax authorities in respect of future periods, which could then have an adverse impact on results of operations. The proxy advisory also highlights that the promoter retains scope to raise royalty charges further, saying “the promoter can increase royalty fees up to 5 percent of annual consolidated turnover of domestically manufactured products (including OEM output) without requiring shareholder approvals, which is mandaory under Sebi listing regulations. “This provision could affect margins without minority investor oversight,” it warned.
The firm has also warned of potential cross-border scrutiny as the company has a contingent liability of Rs 315 crore in respect of royalty payments to the promoter. “There is no assurance that such observations will not be raised by South Korean tax authorities in respect of future periods, which can then have an adverse impact on results of operations,” it said.
Post-listing, LG Electronics Korea will continue to hold 85% in the Indian unit. The Sebi filing notes that the promoter “may consider the interests of its subsidiaries and affiliates” that may not align with those of minority shareholders.Ingovern feels such concentration of ownership leaves limited space for minority investor influence on board decisions, including approval of related-party transactions.Despite the risk disclosures, LG India has demonstrated strong operating metrics. For FY25, it reported consolidated revenue of Rs 24,367 crore from which it earned Rs 2,203 crore in net income. Revenue has grown at an annual rate of 10.9% in recent years, with FY25 pre-tax margins of 12.8%.
The company has a debt-free balance sheet, while return on capital employed and return on net worth indicate robust profitability. Still, Ingovern feels investors should weigh these positives against the structural risks. “Capital efficiency and earnings growth could be compromised if adverse outcomes arise from the contingent liabilities, or if royalty escalations are pursued without adequate checks,” it cautioned.
Yet, the report concludes that the IPO offers investors a chance to participate in a well-established consumer durable business with steady financial growth and a strong distribution network. However, as a pure OFS, the capital benefits flow to the promoter, and the company receives no fresh funding for expansion. Governance considerations around related-party dealings and contingent liabilities merit close attention. Financial and operational performance appears consistent with filings, alongside typical sector risks of input cost volatility and competition.
