On 5 November, the Union cabinet issued a press release stating its intention to liberalize the regime relating to the payment of royalties for technology transfers and for the use of trademark and brand name of foreign companies.
Under extant foreign direct investment (FDI) policy, royalty payments for technology collaborations up to a lump sum of $2 million or 5% of domestic sales and 8% of exports are permitted under the automatic route, that is, without governmental approval. These royalty payments are calculated net of taxes and on the basis of net ex-factory sales price of the product. Current legislation stipulates that for the use of trademark and brand name, the foreign collaborator is entitled to receive royalty payments up to 1% of domestic sales and 2% of exports, also under the automatic route. Additionally, there are no restrictions on the duration of any of these payments. It is worth noting that these restrictions apply even where the collaboration is in a sector where 100% FDI is otherwise permitted.
The recent press release proposes to alter present regulation by stating the government’s intention to “freely promote the transfer of state-of-art technology into the country”. The government intends to do away with both monetary and procedural restrictions on royalty payments and subject such payments only to exchange control regulations.
Some domestic players may be quick to argue that a free hand to decide royalty payments may result in foreign companies demanding exorbitant amounts and may tilt the balance in favour of international players. Though a somewhat valid concern, it is worth noting that even under current regulation, royalty payments in addition to the prescribed limits can be made—subject, however, to government approval accorded by the project approval board. To prevent any undue advantage to foreign party’s, the proposed change requires a post facto reporting mechanism—at which stage, presumably, the parties will have to disclose and justify the formula by which the payments have been agreed.
Domestic companies should instead consider the proposed change as an opportunity that will give them access to updated technology. Sectors such as pharmaceuticals and healthcare, automobiles, infrastructure, aviation and telephony, all of which are technology-intensive, will now only stand to gain. From a social perspective, access to latest technology will help to increase India’s production and efficiency and will improve its overall “health”. In fact, under the proposed policy, India can potentially further strengthen its position as a global research and development hub, and this should hopefully lead to greater innovation in the country.
From a transaction perspective, the proposal to do away with prior governmental approval should be lauded. The approval process is usually an emotional roadblock in transactions, especially since it can be both time-consuming and one runs the risk of the application being rejected or the transaction coming under scrutiny. Hence, under the new rules, one can expect a major reduction in the transactional timing and this will also lead to simpler transaction structures. The change will also put to rest criticism that India has faced with respect to there being too many regulatory hurdles to investment.
In conclusion, the statement of the commerce minister that “India needs to access the best of technologies available abroad; the caps were coming in this way; hence, we have liberalized the policy”, lends credence to the government’s intention to further ease the FDI regime. As the global economy is showing signs of recovery, the current government appears to be making all efforts so that India can continue its position as the second most favourable investment destination in the world. In proposing these instant changes to the regulatory regime around foreign technology collaborations, the government wants to make sure that regulatory hurdles no longer stand in the way of India’s desire to achieve global excellence.
Co-authored with Ms. Komal Kalha
First Published in the Mint on November 09, 2010