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News on Royalty payment brings cheer in new year

Kumkum Sen  |  New Delhi 

Contrary to my pessimistic mood at the year end, 2010 has been ushered in with good cheer by the announcement that all royalty payments-sectors, quantum, caps notwithstanding, will henceforth be covered by the automatic route, subject to the FEMA Current Account Transaction Rules, 2000.

Post-1991, while FDI norms were generously liberalised, the royalty reforms took time. Historically, in the emotional aftermath of Indian Independence, spearheaded by the Swadeshi approach, the Indian Government’s Policy towards foreign technology collaboration was expectedly cautious, but not discriminatory. It was the populist wave of the late sixties which espoused MRTPA, 1969 and FERA, 1973 severely restricting foreign collaborations, whether in equity, expansion or technology transfer. And for years India was caught in a time warp of poor quality utilities, non-functional telephones, withdrawal of foreign business – notably IBM and Coca-Cola. The Patent Act 1970 was conducive to methods such as reverse engineering and incremental adaptation leading to inefficient and unrealistic self reliance. This complacence was radically altered by the historical New Industrial Policy in 1991.

Technology transfer in the present economic environment has evolved far beyond the licensing arrangements of the pre-libera- lisation era, subjected as it was to equity restrictions, industrial licensing and exchange control limitations. While basic structures used are turnkey arrangements such as supply of technical know-how, design and engineering services, the availability of the automatic routes for payments, the flexibility of combining with equity or other forms of value addition such as import capital goods, manpower deployment led to a boom.

Technology transfers are broadly categorised into two broad categories – internalised and externalised transfers.

An internalised transfer accompanies FDI equity, whereby the foreign investor usually has a controlling share in the Indian company, and the relationship is governed by issues such as viable extraction of potential and transaction costs. Internalised transfers are more common in technologies which are fast changing, such as information and communication technology, whereas externalised modes are used in case of standard long-term technologies, and take place between unrelated legal entities.

In either mode, in the Indian context, technology transfer has been given the widest connotation possible to extend to every form of know-how and application, to include designs, brands, commercial information, professional and managerial knowledge. Technology is not just value addition to production process; it can be used for improving marketing and management systems. Contrary to popular belief, there is no boiler plate Technology Transfer Agreement (TTA). Since the document structure is based on the purpose and utilisation of the technology and the benefits to the players each document has to be customised. TTAs may range from assignment, usually of IP rights, licence contracts, know-how contracts, mainly of tangibles, franchise agreements for marketing / retail, consultancy arrangements, technical assistance, or a comprehensive package deal. While the scope transformed, financial returns continued to remain strictly regulated.

Pre-1991, technology fees were subjected to Government of India as well as RBI approval. Royalty payments were permitted through the automatic route only in the early nineties, but was capped to $2 million for a lump sum amount or at 5 per cent on domestic sales and 8 per cent on exports. Any payments over and above the extant limits required approval of the Project Advisory Board (PAB). There was a time that lump sum fees could be released in three specific tranches linked to signing, production commencement, and completion. Other sectors, notably the hotel industry had caps which were linked to turnover on room and services.

While, the percentage criteria had the flexibility of enhancement, at least incrementally, the $2 million cap is just out of sync Informal enquiries within the Ministry indicated this was a legacy of the times when India faced balance of payment problems, and was overlooked, while other foreign exchange regulations were liberalized, even though India’s forex reserves have burgeoned. Anyone who has had to file the Form FC / IL (SIA) will agree that it was a piece of obsolence trying to work as a cap that fits all, apart from being convoluted and user friendly. The felling of this dead wood will not have any mourners.

Kumkum Sen is a Partner at Rajinder Narain & Co., and can be reached at kumkumsen@rnclegal.com  

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First Published: Mon, January 04 2010. 00:22 IST
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