InGovern flags tax disputes, royalty risks in LG Electronics India IPO

Mumbai: Governance advisory firm InGovern Research Services has raised several red flags for investors in LG Electronics India Limited’s initial public offering (IPO), warning that the company’s contingent liabilities, royalty payment structure, and related-party transactions could pose significant risks.

According to InGovern, LG Electronics India has disclosed contingent liabilities worth Rs 4,717 crore — equivalent to nearly 73 per cent of its net worth — mainly due to disputed tax claims under litigation.

The firm cautioned that any negative outcome in these cases could hurt the company’s future earnings or force it to make large provisions.

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The warnings come even as LG’s IPO has seen strong investor interest. The issue was fully subscribed on the first day of bidding and oversubscribed three times by the second day.

The offer, which closes today, is entirely an offer-for-sale, meaning no new funds will be raised for the company.

Most of the Rs 4,717 crore in contingent liabilities relate to disputed income tax, excise, and service tax demands.

A large part of these disputes involves transfer pricing adjustments linked to royalty and technical service payments made to its South Korean parent company.

LG has said it has not made provisions for these pending cases based on legal advice and ongoing appeals.

The company currently pays a fixed royalty rate of 2.3 per cent of net sales for most products and 2.4 per cent for LCD TVs and monitors.

Over the past three years, royalty payments have accounted for between 1.63 per cent and 1.9 per cent of revenue.

However, InGovern noted that the promoter has the flexibility to increase royalty fees up to 5 per cent of the company’s annual turnover from domestically manufactured products without shareholder approval.

The proxy firm said this could potentially impact profit margins without sufficient oversight from minority investors.

InGovern also pointed out that LG Electronics India faces a contingent liability of Rs 315 crore related to royalty payments to its promoter, warning that such issues could attract further scrutiny from tax authorities in South Korea.

Post-listing, the South Korean parent company will retain an 85 per cent stake in LG Electronics India.

InGovern warned that this high promoter holding could limit the influence of minority shareholders on key board decisions, including those involving related-party transactions.

However, despite these concerns, LG Electronics India has reported strong financial performance.

For FY25, the company posted revenue of Rs 24,367 crore and a net profit of Rs 2,203 crore, with EBITDA margins at 12.8 per cent.

The company is debt-free and has maintained healthy profitability ratios, with revenue growing at an annual rate of 10.9 per cent over recent years.