FinMin rejects DIPP's proposal to put curbs on royalty payment

The finance ministry has turned down a Department of Industrial Policy and Promotion (DIPP) proposal seeking re-introduction of restrictions on royalty payments for preventing excessive outflow of foreign exchange, saying it would send a negative signal to foreign investors.

The ministry, according to sources, is of the view that imposing restrictions on royalty payments would be "retrograde step" and not in sync with the liberalised foreign direct investment (FDI) policy environment.

Worried over excessive outflow of foreign exchange as royalties and fees for technology transfer, and use of brand names, DIPP had mooted a proposed to re-introduce restrictions on such payments by companies to their parent entities.

It had argued the curbs would help increase the profits of domestic companies mainly in the automobiles sector, prevent depletion of foreign exchange reserves and protect the interest of minority shareholders. It will also increase the revenue for the government.

While turning down the proposal, the ministry has also said it would be inappropriate to impose restrictions at a time when the government is initiating measures to attract foreign investments as part of the 'Make in India' campaign.

Moreover, sources said the ministry had argued it would be very difficult to assess the right quantum of royalty to be paid by domestic companies to the foreign parent firms.

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

The outflows on account of royalty and fee for technical services, taken together, are estimated to be as high as 15-18 per cent of the FDI inflows over the periods 2009-10 and 2012-13. Royalty payments has increased from $1.7 billion in 2008-09 to $4.1 billion in 2012-13. As a percentage of FDI inflows into the country, it moved up from 1.92 per cent in 2008-09 to 2.15 per cent in 2012-13.

Royalty is paid to a foreign collaborator for transfer of technology or the usage of brand. The commerce and industry ministry, however, wants an urgent review of the matter given the current economic situation and a high quantum of outflows on this account. FDI, essential to bridge the widening current account deficit, grew 22 per cent to $18.89 billion during the April-November period of this financial year.

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