In the backdrop of a steady surge in royalty payments that cumulatively added up to outflows of over Rs 66,000 crore during the last three years, the NDA government is moving to clamp down on such payouts, made largely by subsidiaries of foreign companies in lieu of technology transfers.
An ‘Inter-Ministerial Group (IMG)’ set up on the subject ‘Outflow of Royalty’ has submitted its report that is currently under consideration and indications are that restrictions on these payments are likely to be announced shortly in light of the surging trend in outflows. This could effectively set the clock back on an easing of the royalty payout policy that started in 2009, when the government shelved the caps on these payments.
India-based MNCs (multinational corporations) essentially transfer money as royalty to their parent company abroad depending on the nature of business and agreements signed by them. The major industries from where money in the form of royalty is transferred abroad include automobile and auto parts, IT and IT enabled services, petroleum and petrochemicals, energy, electronics including computer hardware, engineering goods, cement, mining and construction, wholesale trading and food processing.
The Centre, through Press Note 8 (2009), had permitted payments for royalty, lump sum fee for transfer of technology and payments for use of trademark or brand name on the automatic route — without any approval of the government. Market regulator Securities and Exchange Board of India (Sebi) too had last year proposed a reduction in the royalty payment for listed companies, a move that some in the MNC circuit says is adversely affecting sentiments of Indian subsidiaries to list in the country’s stock exchanges as the order has created a distinction created between listed and unlisted companies.
In the last three years, the royalty paid to a foreign company or non-residents other than a company, according to data extracted from income tax returns available for last 3 assessment years, has surged sharply from Rs 16,553 crore in FY16 to Rs 27,002 crore in FY18, a 63 per cent surge over a two year period. The cumulative payout over the three year period was recorded at Rs 66,283 crore.
Industry estimates suggest that Indian units of global companies such as Maruti Suzuki, Colgate, Gillette, GSK Consumer, HUL, P&G and Nestle have royalty expenses in the range of 0.7-5.5 per cent of net sales, according to Credit Suisse data. Sebi had approved sweeping changes to the corporate governance framework for listed companies based on recommendations made by a 25-member committee headed by Uday Kotak, executive vice chairman and managing director of Kotak Mahindra Bank.
The Commerce and Industry Ministry’s proposal for limiting on royalty payments in case of technology transfer or collaboration involving foreign entities either directly or indirectly through any firm in India, which has been circulated for inter-ministerial views, entails a capping of payouts at about 4 per cent of domestic sales and 7 per cent of exports respectively for the first four years, while for the next three years, the limits could be 3 per cent of local sales and 6 per cent of exports. For the following three years, the payments are proposed to be capped at 2 per cent of domestic sales and 4 per cent of exports and thereafter at 1 per cent of local sales and 2 per cent of exports.
On the use of trade mark and brand names, the proposal stipulates a cap on royalty payments at 1 per cent of sales and 2 per cent of exports of an entity. The increase in outflow of these payments started after the Centre liberalised the FDI policy in 2009, when it shelved the cap and permitted Indian companies to pay royalty to their technical collaborators without seeking prior government approval.
Prior to 2009, royalty payments were regulated by the government and capped at 8 per cent of exports and 5 per cent domestic sales in the case of technology transfer collaborations. They were pegged at 2 per cent of exports and 1 per cent of domestic sales for use of trademark or brand name.