Friday, December 18, 2009

Foreign Collaboration and Royalty Payments

Hitherto, Indian companies were allowed to make royalty payments to their foreign collaborators under the automatic route within certain limits. These involved payment for technology transfers of a lump sum fee of US$ 2 million and royalty of 5% on domestic sales and 2% for exports. Where no technology transfer was involved, royalty of up to 1% for domestic sales and 2% for exports was allowed. Payments in excess of these limits required the approval of the Central Government.

The Government has now liberalized this policy through Press Note 8 of 2009 by allowing payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name under the automatic route without the requirement of Government approval.

While royalty payments are now brought outside the purview of government regulation and left to market determination through negotiation between the parties, it tends to aggravate certain issues involving Indian listed subsidiaries of multinational companies whereby the multinational parent may be prone to charging excessive royalties on the Indian subsidiary to the detriment of the subsidiary’s minority shareholders. Ultimately, this assumes the character of a governance problem which requires the multinational parent and the Indian subsidiary (represented by its board) to negotiate on arm’s length basis as such royalty payments generate conflicts of interest.

Hat-tip: Spicy IP

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