Column : Royalty runs in an MNC’s bloodstream

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Amit Tandon: Jan 25 2013, 00:57 IST

technology collaborations and royalty fees (including lumpsum payments for transfer of technology, payments for the use of trademark and brand name) under the automatic route. The liberalisation of the Foreign Technology Agreement Policy was aimed at facilitating inflow of FDI and technology transfers into the country. Foreign partners no longer had to go through administrative hoops. Importantly, this meant that ‘foreign sponsors’ who earlier required government approval for charging royalty under the various heads were now free to charge any amount as royalty from their Indian subsidiaries.

The unintended consequences of waiving restrictions on royalty payments can be seen from the gradual increase in technical know-how, royalty, consultancy fees, etc, by foreign partners since 2009, without a commensurate increase in either sales or margins.

An analysis by our firm regarding the royalty paid by Indian companies since 2007-08 shows that:

* The three highest royalty paying companies are now remitting R2,495 crore, up from R784 crore in 2007-08. While remittance has gone up 3.2 times, their revenues have gone up by only 1.8 times. Further, the margins of two of the three companies have shrunk, suggesting that market does not attribute a similar value either to the technology or the brand.

* The top 20 royalty paying companies now remit R3,601 crore as royalty payments, up from R1,196 crore five years ago. While royalty paid is up threefold, sales have grown by just over 70%.

* Companies don’t declare dividends, but pay royalty.

Companies pay royalty for the brand. This should mean that consumers grabbing at

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