It is difficult to understand why the outgoing government wants to launch an elaborate exercise of soliciting opinion for a discussion paper on whether or not it should re-impose a ceiling on royalty payments that multinational companies extract from their Indian subsidiaries. After all, the issue is a no-brainer. Royalty payments urgently need to be capped. Ever since restrictions on royalty payments were lifted in December 2009, ostensibly as a response to the global slowdown after 2008, the appropriations by multinationals from their Indian subsidiaries for "technical collaboration" and use of trademarks and brand names have grown sharply. According to the government's own data, royalty payments rose from 13 per cent of foreign direct investment in 2009-10 to 18 per cent in 2012-13. Overall, in four years, these payouts have increased 57.43 per cent. Not surprisingly, such payments have become a major revenue stream for foreign parents. A recent study by this newspaper showed that in 2012-13, 71 multinationals (for which the data were available) collectively earned Rs 4,838 crore from their Indian subsidiaries in the form of royalty and technical fees compared with their total dividend income of Rs 4,529 crore. Till 2010, dividend income for these multinationals exceeded royalty income. Nor have higher royalty payments contributed to improved performance. In the past five years, the same study shows, royalty payments by these companies have grown at a compounded annual growth rate of 31 per cent, while net sales expanded at 15 per cent annually and net profit at only 10 per cent. Since royalty payments are a cost, they also impinge on margins, and this, too, is reflected in the data. Royalty payment has been the fastest-growing item on the cost side. Operating margins declined to 14.2 per cent in 2012-13 from 16.4 per cent in 2007-08.
It is hard to escape the view that rising royalty payments reflect deteriorating corporate governance standards, since companies do not feel obliged to explain why payouts have been raised. Decisions on royalty payments are often questionable as these are taken by the top management at the behest of the foreign parents, who have a majority stake in these companies. The argument that the fall in the value of the rupee triggered the rise in royalty payments does not hold much water, since the actual increase in the royalty outgo has been far in excess of the impact of the Indian currency's depreciation. Moreover, these payouts are often made at the expense of the minority shareholder and the worker. Car maker Maruti, which tops the charts of royalty payouts, is a case in point. It has been losing market share and earnings per share. Yet, as one analysis points out, had it met workers' demands for a salary hike, its wage bill would have gone up just Rs 24 crore - compared with a royalty bill of close to Rs 2,500 crore. Hindustan Lever, Colgate Palmolive, and Holcim subsidiaries Ambuja and ACC all face similar issues. The government did try to address the problem by raising the tax rate on these payouts from 10 to 25 per cent in the 2013-14 Budget. But, since most of these companies operate under double tax treaties, this impost made little difference.
Compared to the huge problems that the incoming government will face in kick-starting the economy, reimposing the old ceilings should be no problem. They were imposed by a press note, lifted by another and can just as easily be re-imposed by a third.
