Editorial: Royal mess

May 05 2014, 04:52 IST
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SummaryWhy cap royalties when shareholders have a veto?

At a time when the government’s attention should be focused on how to revive the near-dead investor sentiment, it is surprising that the industry ministry should bring out the old chestnut, of how royalty payments have shot up so much, a cap needs to be re-introduced. It is true, royalty payments are up hugely, from $2 billion in FY10 to $4.2 billion in FY13—as a proportion of FDI, they are up from 5.3% in FY10 to 10.2% in the first half of FY14. But if more FDI is resulting from higher returns for investors, more so at a time when most other parameters look gloomy, should so much be made of it? From a policy perspective, the government’s only decision should be to ensure there is no arbitrage on taxation rates on royalties versus dividends, the other way for MNCs to get returns on their investments in the country.

Other than that, the decision on royalty levels has to be left to shareholders who now have a lot more power under the Companies Act and, in the ultimate analysis, to the market. Nearly half of Suzuki Motor Corp’s consolidated profits, it has been said often enough, are due to the royalty payments from the Indian subsidiary. If shareholders haven’t protested, it is because they probably see value in the technology support Suzuki is providing, as well as the opportunity to export that comes along with this—under the Companies Act, such royalty payments are related-party transactions and need to be voted by minority shareholders. Also, if the payments to Suzuki are excessive, and are not resulting in any great benefit to Maruti, surely the markets will hammer down the latter’s share prices. It is always possible to find egregious exceptions, but the industry ministry would do well to have faith in markets. In too many examples in the recent past—from the minutiae of FDI in retail to whether foreigners should be free to buy Indian pharma firms—the ministry has shown scant respect for market forces.

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