Government Puts on Hold Tighter Norms for Biotechnology Cotton Seed Companies

The government puts on hold the notification which capped the trait fees or royalty and gave the government the right to fix the seed value on all new and advanced varieties of genetically modified (GM) cotton. This move which sought to further regulate the seed sector, if implemented was likely to dissuade investments in the agricultural biotechnology (Bt) sector, says India Ratings and Research (Ind-Ra). The notification dated 18 May 2016 has been withdrawn and placed as a draft for public consultation as of 23 May 2016.

The Ministry of Agriculture capped trait fees on all new and advanced varieties of genetically modified cotton at 10% of the seed price (fixed at INR800/packet) for five years, from the date of commercialisation. The seed price will now be fixed by the Central Government. Post five years, the royalties/trait fee will taper down each year by 10% of the initial trait value fixed as per the order dated 18 May 2016.

The government is determined to further regulate the Bt seed sector and striving to cap the royalty for new varieties of cotton seeds which are developed and sold by breeder companies in the Indian markets. While this is unlikely to impact the existing traits for cotton seeds which are marketed and sold in the country, Ind-Ra believes it is likely to dissuade investments in the agricultural Bt sector.

The notification also mentions that GM traits are expected to have a limited period of efficacy and those losing their efficacy will not be eligible for any trait value. Also the licensor (breeder) has to consider all applications seeking the license to obtain the GM trait and cannot deny licenses to any eligible seed company. Ind-Ra believes though this will create an environment of a level playing field among all seed companies under the fair, reasonable, and non-discriminatory licensing mechanism; it can impact the enforceability of the rights of the technology holder/licensor.

Earlier this year in March 2016, the Central Government issued a notification under the Cotton Seed Price (Control) Order, 2015 to regulate Bt cotton seed prices. It recommended a maximum sale price for Bt cotton seeds after considering the seed value, license fees including one-time and recurring royalty (trait value), trade margins and other government taxes. The price for Bt cotton seeds (for Bollgard II) was fixed at INR800/packet (1 packet contains 450g) while the trait fee was fixed at INR49/packet.

The Cotton Corporation of India in its annual report highlighted that during the cotton season 2014-15 the acreage under Bt cultivation reached 96% of the total acreage of around 12.97m hectares. Thus majority of the cotton acreage in India is catered to by Bt cotton and Monsanto Mahyco Biotech Limited (MMB) which is a joint venture between Maharashtra Hybrid Seeds Company Limited's (Mahyco) and Monsanto Holdings is the largest provider of Bt technology for cotton seeds in India.

Ind-Ra had placed Mahyco on rating watch negative on account of the uncertainty associated with the quantum of future dividend income accruing from the joint venture MMB on account of the recent central government notification in March 2016 and also due to the uncertainty with regard to the extent of deleveraging possible over the short-to-medium term. Ind-Ra believes this may affect the turnover garnered by the JV and consequently the flow of dividend income accruing to Mahyco. In FY15, dividend income accounted for 24.9% of its total turnover (FY14: 17.3%). However this is unlikely to impact Mahyco's EBIDTA margins.

Powered by Capital Market - Live News