Getting royalty wrong

May 10 2014, 04:04 IST
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SummaryThe industry ministry’s move to reintroduce curbs on royalty payments by Indian firms to their foreign partners comes at a time when the use of technology transfers

The industry ministry’s move to reintroduce curbs on royalty payments by Indian firms to their foreign partners comes at a time when the use of technology transfers, know-how, and the use of brand or trademark are helping local companies to gain traction in Indian marketplace. The government’s primary focus at this juncture should be to revive the sagging investors’ sentiment in the country and revive manufacturing growth and create employment opportunities for the youth.

It is a fact that royalty payments have gone up after 2009 when the government removed the cap on such payments. Data from the Reserve Bank of India show royalty payments increased over three times between FY09 and FY13. As a proportion of FDI, it accounts for 13% at present, up from 3.6% in FY09. But, on the other hand, companies have also benefitted from the technology transfers and know-how. For instance, Maruti Suzuki’s net sales have grown 110% between FY09 and FY13 and Hindustan Unilever’s (HUL) net sales grew 60% during the same period. In FY13, royalty payment as a proportion to net sales for Maruti Suzuki was 5.8% and for HUL it was just 1.5%. So, the quantum of royalty payments by Indian companies to their foreign partners should at best be left to shareholders to decide. If they find no value in such technology transfers, then the stock prices of the particular company will take a beating.

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