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

The Finance Ministry has turned down a 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 overseas investors.
The ministry, according to sources, is of the view that imposing restrictions on royalty payments will be "retrograde step" and not in sync with the liberalised FDI policy environment.
Worried over excessive outflow of foreign exchange as royalty and fees for technology transfer, and use of brand names, the Department of Industrial policy and Promotion (DIPP) had mooted a proposed to re-introduce restrictions on such payments by foreign companies to their parent entities.

It had argued that the curbs would help increase the profits to domestic companies mainly in sectors including automobiles, prevent depletion of foreign exchange reserves and protect the interest of minority share holders. It will also increase the revenue for the government.
While turning down the proposal, the finance ministry has also said that 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 has argued that it would be very difficult to assess the right quantum of royalty to be paid by domestic companies to the overseas 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 royalty 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 about 15-18 per cent of the foreign direct investment (FDI) inflows over the period 2009-10 and 2012-13. The royalty payments has increased from USD 1.7 billion in 2008-09 to USD 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.
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, which is essential to bridge the widening CAD, grew by 22 per cent to USD 18.88 billion during the April-November period of this fiscal.
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.