Govt considering to reintroduce restrictions on royalty payments

The government is considering to re-introduce restrictions on royalty payments for technology transfer in view of excessive outflow of such funds to overseas companies, sources said.

A proposal in this regard will soon be circulated by the Department for Promotion of Industry and Internal Trade (DPIIT) for inter-ministerial consultation, sources said.

According to the proposal, limits could be imposed on royalty payments in case of technology transfer or collaboration involving foreign entities either directly or indirectly through any firm in India.

A similar proposal was mooted by the department last year. That time it had proposed that royalty payments should be capped at 4 percent of domestic sales and 7 percent of exports for the first four years, and for the next three years, the limit should be 3 percent of local sales and 6 percent of exports.

But the finance ministry had raised objections over the proposal saying it could send a negative signal to foreign investors.

The increase in the outflow of these payments started after the government liberalized the FDI policy in 2009. It had removed the cap and permitted Indian companies to pay a royalty to their technical collaborators without seeking prior government approval.

Royalty is paid to a foreign collaborator for the transfer of technology, usage of brand or trademarks.

In April 2017, a surge in royalty outflow prompted the government to set up an inter-ministerial group to analyze payment norms and see whether there is excessive payout by Indian companies to foreign collaborators.

Proposing these restrictions, the department had argued that the curbs would help increase the profits of domestic companies, mainly in the automobile sector, prevent depletion of foreign exchange reserves, protect the interest of minority shareholders and increase revenue for the government.

Before 2009, royalty payments were regulated by the government and capped at 8 percent of exports and 5 percent of domestic sales in the case of technology transfer collaborations. They were fixed at 2 percent of exports and 1 percent of domestic sales for use of trademark or brand name.

Auto major Maruti Suzuki pays an average royalty of around 5.5 percent of its net sales to its parent Suzuki.