[SPICY IP] Bumpy Road Ahead

[Suchita Saigal]

The Financial Express recently reported that the Indian government has eased the norms on technology transfer from overseas firms to Indian companies, hoping that the move will encourage collaboration and effective exchange if know how. (“Tech transfer, royalty payment norms eased”)

Commenting on this move, Anand Sharma from the Commerce Ministry stated that, “Technical collaborations are commercial transactions. India needs to access the best of technologies available abroad. The caps were coming in this way. Hence we have liberalised the policy.”

According to the old policy, automatic approval was only permitted if the transfer of technology involved fees payment of up to $2 million, 5% on domestic sales of royalty and 8% for exports. Above these limits, the proposals were scrutinised by an inter-ministerial body viz. Project Approval Board (PAB) which was chaired by DIPP secretary. Automatic route was restricted on royalty from trademarks and brands upto 2% of exports and 1% of exports respectively.

The Government’s step in relaxing the norms means that the PAB is not required any more and the abovementioned regulatory framework can be done away with. New rules reflecting these changes, including rules for payments for royalty, lump-sum fee for transfer of technology, payments for use of trademark/brand name on the automatic route without any restrictions will be framed in due course. Hence, presently, no permission is required to transfer technology from foreign firms involving use of trademark, brand name as well as payment of royalty by collaborating Indian companies.

As far as a regulatory body is concerned, under the revised setup, a mechanism replacing PAB would be setup to monitor technology transfer compliance in 3 months with consultations between Dept. of Industrial Policy and Promotion (DIPP), Dept. of Economic Affairs and Reserve Bank of India (RBI).

Commenting on this new policy, Vatsala Kamat and others at Livemint write that while liberal economic policies give entrepreneurs more freedom, they can have unintended consequences for others. They critique the move on the basis that given this change would result in (possible) sharp increases in royalty outflows of listed multinational companies (MNCs), lowering their profit growth and even affecting their market valuation. Moreover, this change could also adversely affect the interests of the minority shareholders.

The main concern centers around the question: Should foreign companies charge Indian companies royalty at all? The argument is that after all, the foreign parent is the ultimate owner—even if it does not own 100%. The parent also gets dividend income and it also accounts for its share of profits. And most foreign products are adapted for local markets by the Indian company, which also invests significant sums in product and market development. They need not charge royalty to benefit from the subsidiary’s performance.

Using the following example they illustrate their point, there is a 51% foreign-owned company, with a profit of Rs100, dividend of Rs20 and royalty of Rs10. The foreign company can account for Rs51 as its share of profit, and its income is Rs81, after adding dividend and royalty. If the royalty is doubled to Rs20, lowering its profit, its total income will still be higher at Rs86. Hence, the losers will be the residual shareholders.

Their Warning: Watch out for a bump in “other expenditure” in the coming quarters—higher royalties could be the reason.

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Posted By Suchita Saigal to SPICY IP at 11/23/2009 05:25:00 AM