Royalty Payments Pose Dilemma for Indian Government

India’s government is reviewing the issue of large royalty payments made by some of the country’s companies to their overseas parents, according to local press reports. However Narendra Modi’s administration, which swept to power in May this year, has not yet decided whether to put a cap on them.

The previous United Progressive Alliance (UPA) government considered reinstating such limits that were in place until 2009. Previously, companies could only remit royalties involving foreign technology transfer up to 5% on domestic sales and 8% on exports, and up to 1% for domestic sales and 2% for exports when no technology transfer was involved, such as on account of brand value.

Payments above these limits needed approval by the department of industrial policy and promotion, until the caps were abolished in December 2009.

Reintroducing the royalty cap could affect Indian domestic and multinational companies that remit significant amounts overseas under the guise of royalties. These payments have been criticised by minority shareholders. The five biggest royalty-paying companies in 2012-13 were Maruti Suzuki India, Hindustan Unilever, Nestle India, Bosch India and ABB India, according to a report of Institutional Investor Advisory Services (IIAS) released in September 2013.

According to the report, royalty and related payments for India’s 25 highest royalty-paying listed companies grew by nearly 24%, while the growth in earnings as net sales and profits showed increases averaging 15% and 13.1%, respectively.

The Modi government is reportedly reluctant to reintroduce a royalties cap however, which it believes would be viewed by many as a retrograde step. “There is a lot of discussion going on, but we have not taken a final call,” said Nirmala Sitharaman, commerce and industry minister.

Local reports quoted Mudigonda Vishweshwar, a partner at Deloitte Haskins and Sells, who commented: “Investors are very positive about the new government and the steps it has taken to bring an investor-friendly regime. But capping the royalty payment will have a bearing on investor confidence. Investors will feel that the control regime for foreign currency payments is back.

“After the government removed the caps, many companies have increased their royalty rates to be on par with what is paid by other subsidiaries globally.”

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