NBFCs may be allowed to pay royalty to foreign partners

Rupali Mukherjee

New Delhi, Dec 2: The government is formulating a policy which may allow the payment of royalty by non-banking finance companies (NBFCs) to their foreign collaborators. The matter is at present being studied by a group of ministers (GoM) on foreign direct investment and a decision is expected soon.

The government has been receiving various proposals from NBFCs seeking payment of royalty. Recently, Credit Information Bureau (India) promoted by State Bank of India and Housing Development Finance Corporation (HDFC) has sought approval to pay royalty to its overseas collaborators.

Credit Information Bureau (CIB) in collaboration with Trans Union International is engaged in providing credit information and risk analysis services in the Indian banking and financial services sector and in licensing and customisation of their respective core credit reporting software and provision of technical services.

The company has proposed to make a consolidated payment of $987,000 each to Trans Union International Inc (TUI) and Dun & Bradstreet International Ltd (D&B) towards software customisation charges. In addition, it has also asked to make a royalty payment of five per cent commencing with the second year after the sale of the first report and payable quarterly to each TUI and D&B on CIB’s annual consumer and commercial credit reporting revenues respectively and ending in the seventh year after the sale of the first report.

However, if the aggregate consumer credit reporting gross revenues received by CIB in any twelve month period equals $20 million, the royalty percentage payable to TUI will be 2.5 per cent on all revenues exceeding $20 million.

At present, the foreign equity in the company is 10 per cent. The company in its original proposal to the government submitted earlier this year had proposed a foreign direct investment (FDI) and a payment of recurring royalty of five per cent commencing with the second year after the sale of the first report and payable quarterly to Trans Union and Dun & Bradstreet each on CIB’s annual consumer and commercial credit reporting revenues. The Foreign Investment Promotion Board (FIPB) had rejected the company’s request.

This time, however, the company has approached the government saying that it has already got a clarification from the Reserve Bank that it should not be treated as an NBFC defined under Section 45-I (C) (read with Section 45-I(F) of the RBI Act, 1934.)

The company has requested the FIPB not to treat it as an NBFC. The company has also stated that it has no plan to accept public deposits, nor does it has intentions of engaging in dispensing of any form of credit.

Sources said that the administrative ministry department of economic affairs had rejected the proposal on the ground that payment of royalty by NBFC is not allowed. The sources added the FIPB has deferred the proposal till a policy is formulated by GoM.