Game of Royalty

Dr Ashwani Mahajan
Dada Bhai Naoroji in his famous book ‘Poverty and Un-British Rule in India’ has explained different routes through which wealth of India was plundered and sent to England. This plunder of resources from India in different ways, namely Profits, salaries, pensions, royalties, home charges etc., prior to independence by foreign companies and the foreign government is no secret. Time changed and India got independence and then this loot of Indian resources by the alien rulers was stopped. However, during the last two decades under the policy of liberalization and globalization, foreign companies were again invited to come and invest in India. They were offered many concessions and told that they can make a good buck by investing in India. Obviously any investor would work for maximising profits and would seek to remit the same to its home country.  Foreign investors make transfer of incomes in different forms namely dividends, interest, salaries, royalties etc. to their respective countries. Gradually transfers made by these foreign investors kept on increasing. If we look into these transfers we find that during 2002-03, seven 7 billion dollars were transferred by foreign companies as incomes, which increased to 32 billion dollars by the year 2012-13. Normally dividends, interests, salaries etc. may be considered logical, however transfers in the name of royalties, generally cannot always be justified principally.
Before and After 2009
Before 2009, branches of foreign companies could send royalties to their mother companies, but they were not allowed to make payment of royalty in the name of use of trade mark or for using the name of the company or its associates. There was a provision of payment of royalty for transferred technology. However for this payment, the branch of the foreign company had to obtain permission from the Department of Industrial Policy and Promotion. In 2009 by amending Foreign Exchange Management Act (FEMA), these conditions were withdrawn and thereafter arms of the foreign companies started making huge transfers abroad in the name of royalties. It is interesting that in the last 4 years, whereas the profits of the foreign companies have declined, transfers of royalties to their mother companies have multiplied. For instance in 2009 Maruti Suzuki used to send only 3.5 percent of its sales to Suzuki Japan, which has increased to 5 percent now. Colgate sends 5.23 percent of its sales to its mother company. ACC, a cement company, which was acquired by a foreign company some years back, now sends 1.39 percents to the foreign company. It may be noted that earlier there was no reason for ACC to send any royalty abroad.
It may be noted that royalties are not being sent by the arms of the foreign companies out of the increasing profits of these companies. In fact profits of these companies have been falling in the last few years; however the transfer of royalty has multiplied. In 2007-08 these companies earned profits at the rate of 11 percent, which declined to 7.6 percent in 2011-12, whereas transfer of royalties has increase from Rs. 1130 crores in 2007-08 to 3500 crores in 2011-12.
Double Loss to the Nation
If royalties are sent by these companies abroad, nation loses on two counts. Firstly precious foreign exchange is sent abroad and in the process, our current account deficit widens. Before the amendment in FEMA Act, in 2007-08, merely $ 2.3 billion were transferred in the name of royalties, whereas in 2011-12, it increased to $4.5 billion. As a consequence of this, already stressed rupee further weakened. It is notable that rupee dollar exchange rate, which was rupees 40 per $ increased to 68.8 per $ by September, before coming down to rupees 62 in October 2013.
Another disadvantage of royalty is to the exchequer. By showing royalties payments, taxable profits are under estimated, and thereby tax revenue is reduced. To curb this tendency, the Finance Minister increased the tax on royalty transfer to 25 percent, in Union Budget 2013-14, rising from 10 percent earlier. This may partially address the problem of losses due to royalty transfers; however the problem of loss in terms of foreign exchange would continue to haunt the nation.
Loss to Shareholders
By sending royalty to foreign masters, distributable profits for shareholders are reduced forthwith, as a big chunk of profits are already chopped out by the company in the name of royalty payment. In this context mention of Maruti-Suzuki can help us understanding the severity of the problem.
Before 2006-07, Govern- ment of India and Suzuki (Japan) were partners with equal stakes. As a precondition for technology transfer, government of India had to shed some stake and Suzuki’s share holding increase to more than 50 percent. By virtue of majority votes, Suzuki could force increase in payment of royalty from 3.5 percent to 5 percent. The position now is that whereas, company’s profits  were rupees 1631 crores in 2011-12;  outgo on royalty payment was rupees 1803 crores.
Imperative to Impose Restrictions on Royalty
In view of the rising fiscal deficit on the one hand and depreciating rupee (due to huge CAD) on the other, it is imperative that effective restrictions are imposed on the payment of royalty by the arms of foreign companies in India. It is expected from the government to make corrections/amendments in rules and effectively impose the same. Official circles do talk about such actions; but there are people within, opposing such actions. They argue that any such restriction on payment of royalty may be a ‘retrograde’ step and may send ‘wrong’ (negative) signals to the foreign investors and investment climate may get vitiated.
We should understand that allowing unjust transfers of the kind, which is prevalent today, is no healthy way of encouraging investment in the country. If billion of dollars of invaluable foreign exchange is transferred abroad is the name of brand use, name use or even frivolous transfer of technology, it would not be in the best interest of our development and would amount to sell off.

Follow our WhatsApp channel