Government Forms Inter-Ministerial Group to Review Royalty Payment Outflows

We have in the past covered government’s removal of restrictions on royalty payments by Indian companies to foreign collaborators in cases of technology transfers, usage of trademarks, brand names etc. and how this decision came to be misused by the foreign parent companies. As a first step towards undoing the abuse of this policy, an inter-ministerial group to examine the issue has been formed.  It is also rumoured that this move may be part of the proposed retaliatory measures against the US government’s decision to impose curbs on H-1B visas to Indians.

Just to give a quick recap, royalty outflows were earlier capped at 5% of the domestic sales and 8% of the exports in case of technology collaborations and an even lower figure in cases of trademark and brand name uses. This restriction was later on lifted and royalty payments to foreign entities came to be allowed through the automatic route. Although the move was in sync with the extant policies, it came to be misused and the Indian subsidiaries started shelling out to their foreign parent companies, royalties at a much increased rate without a concomitant increase in their net profits, resulting in diminished dividends to the minority shareholders. Prof. Umakanth had written an insightful piece on this propriety of such payments from a corporate governance standpoint.

Admittedly, government has been contemplating a re-imposition of checks on royalty outflows for a while now. While the tendency to misuse the policy to unfairly benefit the foreign parent companies needs to be curbed, whether such a move should form part of the pressure tactics against the H-1B issue is something worth thinking about.

Image from here.

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