January 22, 2013:
Recently, the burger major McDonald's Indian venture increased the royalty payment to its US parent from 3-8 per cent of its sales in India.
The Indian government permits royalty payment up to a maximum of 5 per cent on domestic sales and 8 per cent on export sales on the ex-factory price less cost of materials imported from the self-same foreign collaborator, among others, if the collaboration involves provision of technology, besides the use of brand name and trademark.
But if the royalty is only for use of brand name and trademark, the maximum royalty allowed is 1-2 per cent, respectively, on domestic and export sales. Maruti Suzuki Ltd, the Indian company, has been paying a whopping sum by way of royalty to its Japanese parent Suzuki year after year. That this is continuing despite the parent acquiring a heightened stakes holding as much as 55 per cent in its Indian baby has raised both hackles and eyebrows. Can a father charge tuition fees from his child?
Similarly, should a foreign holding company be allowed to charge royalty from its Indian subsidiary, that too in perpetuity?
PATENT PRIVILEGE?
Foreign capital and technology are inextricably linked, with foreign companies harbouring cutting-edge technology seeking the maximum permissible equity stakes, before condescending to bring in that technology.
There have been instances of foreign companies delisting their shares in India so that their products, more specifically, the technology used therein do not come under public scrutiny, however remotely --- a major chocolate maker being the prime example in India.
While the owner of a technology has every right to protect his technology from the prying eyes of copycats through patenting and otherwise, the moot question is can he push the envelope by demanding royalty in perpetuity?
Furthermore, how can a technology holder be allowed to stretch himself beyond the patent period of twenty years assuming the technology in question is patented which more often than not, is not.
The small car technology of Suzuki has been in use in India for more than three decades now, and the government is not bothered that the company is milking its Indian baby dry.
To be fair to Suzuki, it is not alone in fleecing the Indians. The engineering major ABB, indeed a lot many others, too have been charging hefty royalties not only from their Indian affiliates, but worldwide, thus making the issue not India-specific, though our immediate concern should be to protect our own interests.
SHAREHOLDERS' DUES
For a foreign collaborator, the sky is the limit for it to reward itself without batting an eyelid and without any compunction. It is not only royalty that keeps its cash registers back home ringing. It helps itself to dividend as well.
Besides, it is de rigueur for foreign collaboration agreements to insist on the Indian party sourcing his raw materials only from the parent, with the redoubtable Coke's timeless stipulation of bottlers both in India and other countries sourcing the concentrate from its Atlanta headquarters coming readily to one's mind.
Suzuki, too, was supplying gear boxes to Gurgaon from its Japanese plant before it condescended to help set up a gear box plant in Manesar on a small scale.
The point is if foreign collaborators wolfishly devour a sizeable part of the profits of the Indian entity, pray what will be left on the table for shareholders?
Either shareholders take a cut or consumers bear the brunt. Often both take a hit. That the foreign collaborator also takes a cut in dividend along with Indian shareholders is beside the point because this loss is more than made up by the huge royalty he takes.
It is time the government stepped in and brought some sanity in the matter. Technology patented or otherwise cannot be the alibi for squeezing the Indian companies by their foreign collaborators in perpetuity.
There is no reason why the royalty should not taper off gradually. To wit, the maximum of 5 per cent on domestic sales and 8 per cent on export sales should be allowed only for the first say five years, after which it should taper off gradually, before it vanishes completely.
If this would encourage calling off of collaboration agreements after five years, so be it. The Indian partners can after all keep their eyes and ears open and absorb the technology even if the foreign partner is reluctant to transfer it out of avarice.
The BJP leader Murli Manohar Joshi's refrain 'computer chips, not potato chips', in the context of areas where foreign technology should be welcomed was rubbished as squeamish but come to think of it, there is a ring of truth in it.
What justifies the payment of royalty to a burger maker? That McDonald's had the gumption to hike it from 3-8 per cent speaks volumes of our meekness. The Indian government cannot continue to be a mute spectator.
(The author is a New Delhi-based chartered accountant)
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