LG India's Hidden Royalty Trap Exposed: Huge Tax & Profit Risks Ahead

A viral LinkedIn post by Jayant Mundhra reveals significant financial risks for LG India, including increased royalty payments and twin tax disputes, which could lead to a ₹4,700 crore liability, potentially eroding shareholder value

Mundhra highlights hidden financial challenges in LG India's IPO documents and regulatory filings, which were overlooked by analysts and media, raising concerns about the company's valuation and solvency

South Korean tax authorities have ruled that LG India underpaid royalties to its parent company, leading to increased rates and a ₹315 crore penalty, which has also triggered additional tax liabilities in India

Indian tax authorities argue that LG India's substantial advertising spend should entitle it to compensation, not the Korean parent, resulting in a high-stakes dispute worth approximately ₹1,375 crore

LG India's contingent liabilities are approximately ₹4,710 crore, equivalent to 73% of its total net worth, posing a severe threat to the company's solvency if tax disputes are resolved unfavorably

Before going public, LG India signed a contract allowing the Korean parent to increase royalty charges up to 5% of annual turnover without shareholder approval, posing a profit-draining risk

The parent company has already begun exercising this control, increasing royalty rates, which raises concerns about earnings visibility being controlled from Seoul rather than India

Mundhra's post raises critical questions about why these financial risks were not highlighted in brokerage reports, and why cross-border tax disputes were not part of risk disclosures to investors

As LG India transitions to a listed company, transparency and accountability are crucial for shareholders, who must evaluate the governance and control issues impacting the company's profitability

The article underscores the importance of understanding the structural risks involved in global branding and the need for investors to scrutinize the company's financial strategies and obligations