The current guidelines do not permit royalty payments by wholly-owned Indian subsidiaries to their foreign parent but an exception has been made in the case of music industry, sources said.

Polygram India, a wholly-owned subsidiary of Polygram International Holding BV of Netherlands, is the first such proposal to be cleared by the Foreign Investment Promotion Board. The board has also allowed a change in the parent company from Polygram International Holding BV to Universal Interantional Holding BV.

Polygram International Holding was recently permitted to hike its stake in Polygram India from 51 per cent to 100 per cent subject to the condition that henceforth no royalty payment would be permissible. Polygram India, however, made a representation against the royalty prohibition. The company stated in its application that it has aseparate agreement with another Polygram company, Polygram International Music BV of Netherlands, under which it has been paying copyright royalty at 15 per cent since 1970 for all recordings containing international classical and popular products.

Polygram stated that earlier the copyright royalty payments by Indian companies required approval of the Reserve Bank of India. Presently, RBI has given a general permission for payment of copyright royalty towards duplication of foreign music sold in the country.

Polygram India said in its representation to the FIPB that it was not paying royalty under any foreign technical collaboration. The Press Note 3 (1997 series) prohibits royalty by 100 per cent subsidiaries for technical collaboration.

The company, thus, sought FIPB permission to continue copyright royalty payment to Polygram International Music BV at the rate of 15 per cent for all recordings containing international classical and popular products.

The FIPB consulted RBI which, in its comments,stated that it considers companies incorporated in India as Indian companies and no disabilities/restrictions are imposed on such companies irrespective of percentage of foreign equity. The RBI stated that its permission for payment of royalty for reproduction of music will be available to Polygram India.

However, it said Polygram may also abide by any conditions specifically imposed by the government or FIPB.

The department of electronics also conveyed its no-objection to payment of royalty to artists for music recordings. The FIPB then decided that though wholly-owned subsidiaries are not allowed to pay copyright royalty to parent companies, payment of such royalty by Indian companies to artists is permitted under the RBI rules. Hence, FIPB concluded that RBI should consider the Polygram case as per its policy.