Indian Policy on Royalty Payments and Foreign Collaborations Liberalized
19 December 2012
The seeds of path-breaking economic reforms were sown in India in the years 1990 and 1991 when the Indian economy went through a major financial crisis and was on the verge of bankruptcy. Government controls were dismantled in several sectors; taxes, duties and tariffs were lowered; private investment and competition was welcomed; and the doors of the Indian economy were slowly thrown open to foreign investment and technology. ‘Liberalization, globalization and privatization’ became the catchphrase of all future economic policies. The relaxation of government controls and a liberalized foreign investment regime helped India attract over US$25 billion in foreign investment in the year 2008 even as the rest of the world was in an economic slump.
While foreign investment policy was liberalized to a great extent, reforms in royalty payments and technology transfer were gradual and measured. Although the mode and manner of technology transfer evolved from a basic licensing arrangement to include transfer of rights in know how, trademarks, brands, designs, and franchise agreements, the statutory regulations and restrictions imposed on it continued without minor or no change at all.
Royalty payments by Indian partners to their foreign collaborators were subject to the approval of the Indian government. As an initial step towards liberalizing the policy on royalty payments, in or around the year 2000, the Indian government declared that payment on royalty up to 2% for exports and 1% for domestic sales on the use of trademarks and brand names of the foreign collaborators without technology transfer was allowed under the automatic route without prior government approval. Further, the payment of a lump sum fee of up to US$2 million and a royalty of up to 8% on exports and 5% on domestic sales by wholly-owned subsidiaries to offshore parent companies was allowed under the automatic route without any restriction on the duration of royalty payments. Royalty payments above the aforesaid limits or by companies other than wholly-owned subsidiaries of offshore companies were subject to prior approval of the Government of India’s Project Approval Board in the Department of Industrial Policy and Promotion.
In the year 2003, the Indian Government further liberalized the policy by making all companies, irrespective of the extent of foreign equity in their shareholding, eligible to make royalty payments to their foreign partners under the automatic route subject to the limits stated hereinabove.
Recognizing the need for a seamless transfer of know how into the country, the Indian Government reviewed the extant policy on royalty payments in the year 2009. In pursuance thereof, all payments for royalty, lump sum fees for transfer of technology and payments for use of trademarks and brand name have now been permitted with immediate effect on the automatic route, thereby scrapping the requirement of obtaining prior approval of the Government for such payment. However the payments shall be subject to the Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time. A suitable post-reporting system of such a foreign collaboration and use of a trademark or brand name will also be notified by the Government in due course.
However all such proposals in which the foreign collaborator had a previous venture or tie-up in India in the same or allied field or proposals relating to acquisition of shares in an existing Indian company by a foreign investor or proposals falling outside the sectoral limits of foreign direct investment will not be permitted under the automatic route.
This recent measure of liberalization and deregulation of foreign investment will, inter alia, enable Indian companies and, more particularly, small-scale industries to have easier access to the latest technology from around the world. The new policy will also reduce costs and time involved in obtaining prior government approvals for foreign collaborations, thereby making it more investor friendly. However, what remains to be seen is how cumbersome the post-reporting system is going to be for such ventures. The Indian Government is likely to announce the detailed post-reporting system soon. Only time will tell the real impact of the liberalized policy on the Indian economy.
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