| Govt for discussion paper on royalty payment ceiling |
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New Delhi, 28 April Amid worries over a 50 per cent rise in royalty payments by Indian firms to their foreign partners or multinational parents in four years to 2012- 13, the government is likely to bring a discussion paper for review of the present unbridled policy, after the Lok Sabha polls are over. "The discussion paper will come in the next couple of weeks," a senior official in the Department of Industrial Policy & Promotion ( DIPP) said. The last phase of elections will be over on May 12. The paper will invite comments on whether or not the royalty ceiling applicable till 2009 should be reimposed. It would be a kind of consultative process, the official added. Until December 16, 2009, lumpsum royalty payments were capped at $2 million. For the cases where there were no flat rates, royalty payment for technological collaboration was capped at five per cent of domestic sales and eight per cent of exports. For use of a brand name, royalty could be paid at up to one per cent of sales and two per cent of exports. Till these caps were imposed, royalty payments could automatically be made by Indian companies to their foreign partners. Beyond these levels, approval of the Foreign Investment Promotion Board ( FIPB) was required. However, royalty payments have increased manifold since December 2009, when the caps were withdrawn and everything was put under the automatic route. In 2009- 10, about $ 4.44 billion was paid as royalty by Indian companies. This was 13 per cent of foreign direct investment ( FDI) inflow into India that year. In 2012- 13, Indian companies' royalty payments increased to $6.99 billion, or 18 per cent of India's FDI inflows that year. These payouts have increased 57.43 per cent in the space of four years. According to a survey by Institutional Investor Advisory Services ( IiAS), a proxy advisory firm, royalty and related payments by 25 multinational companies increased 23.8 per cent to ₹ 4,952 crore in 2012- 13. Of these, five companies — Maruti Suzuki, Hindustan Unilever, Nestle India, Bosch and ABB India — remitted ₹ 3,979 crore, the bulk. Seventy- six per cent of the investors surveyed by IiAS indicated royalty and related payments were not a concern, provided these were linked to sales growth or returns on invested capital. Of those surveyed, 15 per cent indicated there should be some form of checks, so that companies were not free to increase royalty rates. However, nine per cent felt a liberal royalty regime was essential to encourage foreign investment into the country. Turn to Page 17 > LIMITS: There were various caps on royalty payments till the ceilings were lifted on December 16, 2009 SPURT IN PAYOUTS: Royalty payments by MNCs to their foreign parents surged 57% between 2009- 10 and 2012- 13 WITHHOLDING TAX: Budget 2013- 14 raised withholding tax on royalty paid to foreign companies from 10% to 25% EXEMPTION: The countries with which India has double- taxation avoidance agreements are exempt from withholding tax TAX PACTS: India has such tax treaties with about 80 nations; as such, most companies are not drawing higher tax |
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Punit Shah, co- head of tax at KPMG in India, said: "Putting a higher cap would not send the right signal. Such parameters will be against liberalisation of exchange control regulations." Shah said there were several other laws, such as the new Companies Act and the Income Tax Act, which could deal with this issue, rather than interfering in the commercial activities of two parties. " It may also have a negative impact on sharing technical knowhow," he added. To plug the loopholes, the finance ministry had increased the withholding tax on royalties paid by Indian companies to their foreign parents — from 10 per cent to 25 per cent — Budget 2013- 14. However, the countries with which India has double- taxation avoidance agreements ( DTAAs) were exempt from higher rate of tax. The fact that India has DTAAs with more than 80 countries, including the US, UK, Germany, France, Japan and Korea, implies a higher tax rate means little. The new Companies Act, however, has tightened the rules on royalty payments. Section 188 of the Act has made it mandatory that all related- party transactions be passed through a special resolution, requiring consent of 75 per cent of minority shareholders. |
| CCI shifts focus from ' legal form' to ' business rationale' |
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Given the relative nascence of the Indian merger control regime, some transactional parties are uncomfortable about subjecting their transactions to the wide- ranging powers vested in the CCI, even though the regulator has been proactive in listening to and meeting the various needs of Indian industry. The CCI has not structurally modified a single notified transaction to date, besides completing the pre- merger scrutiny within 30 days, excluding the time taken by parties to respond to queries or offer modifications. Notwithstanding this, transactional parties often take advantage of their tax or securities law- induced transactional structure to evade CCI's pre- merger review process. This is primarily done by structuring a transaction in a series of steps such that few or all of the steps, on astand- alone basis, could avail of a particular exemption from the requirement of pre- notifying the CCI even though the transaction without the disaggregation would not be able to avail of such an exemption. The CCI had an opportunity to address this issue while scrutinising Etihad Airways' recent acquisition of a 24 per cent stake in Jet Airways for $ 339 million. The CCI found that although the parties did notify it, in May 2013, of Etihad's acquisition of the 24 per cent stake in Jet, a smaller inter- connected transaction preceding Etihad's equity acquisition was consummated before the May notification. This transaction related to the sale of certain landing/ take- off slots of Jet at the London Heathrow Airport to Etihad. The parties defended the non- filing mainly on the ground that the slot- sale transaction was independent to Etihad's equity acquisition and, on a stand- alone basis, could avail of certain exemptions from CCI's pre- merger review process. Exemptions to notify a transaction to the CCI has been set out in the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination regulations). The CCI disagreed with this view on the grounds that the slot- sale transaction and Etihad's equity acquisition constituted acomposite transaction, with each transaction having a contemporaneous commercial bearing on the other. The CCI penalised the parties for ₹ 1 crore, and held that both the components of the composite transaction i. e., the slot- sale agreement and the equity acquisition, should not have been consummated without notifying the CCI. Under the terms of the Competition Act, the CCI could penalise Jet- Etihad up to one per cent of the parties' combined turnover or assets, whichever is higher, for consummating parts of the composite transaction without notifying the CCI for statutory clearance. One per cent of the combined value of turnover of Jet- Etihad is more than ₹ 400 crore and one per cent of their combined assets amounts to approximately ₹ 700 crore, and CCI could have penalised Jet- Etihad up to latter amount. However, the CCI considered certain mitigating factors in limiting the penalty to only ₹ 1 crore. Such mitigating factors included the fact that the parties had not tried to intentionally conceal the slot- sale transaction and had genuinely erred in believing that the transaction did not qualify to be notified to the CCI for pre- merger review. To close this loophole, the CCI amended its Combination Regulations, effective March 28. The amendment clarifies that in determining if a particular transaction should be notified for pre- merger scrutiny the CCI shall consider the " substantive business rationale" or the " economic linkages" of a transaction rather than its " structure" or "legal form". Therefore, structuring a transaction to acquire securities/ assets of a target entity in multiple tranches, with the intention that each tranche could avail of certain exemptions from the notice requirements, where such exemption would not be available if the acquisition was completed in a single tranche, will no longer work. The CCI will not allow a single tranche of the composite transaction to avail of an exemption if the purpose of such disaggregation is to avoid the CCI's pre- merger scrutiny. Thus, each tranche can be consummated only after obtaining clearance for the entire composite transaction or after the review period of 210 days has passed. One will have to see how the CCI will interpret this new " substantive test", but merger & acquisition lawyers and deal managers must be careful while structuring transactions to make them non- notifiable, especially if the transactional parties have plans for subsequent transactions that would breach the asset/ turnover thresholds and require pre- merger clearance from the CCI. Applications for such subsequent notifiable transactions may reveal the details of the previous transaction, which was structured to evade CCI's jurisdiction. This could then subject the transactional parties to pecuniary penalties besides complicating the merger review of the subsequent notifiable transaction. Therefore, the message is: if a transaction would ordinarily breach the asset/ turnover threshold or would not be exempted from pre- merger scrutiny by the CCI, it cannot escape such scrutiny by innovative structuring. The CCI by amending its regulations has reminded us of the old legal maxim: what cannot be done directly cannot be done indirectly. The writer is a competition lawyer with the Competition Commission of India These views are personal The competition regulator has tightened rules to prevent M& A transactions from gaming the system THINKSTOCK AVIRUP BOSE By amending its regulations the Competition Commission of India has reminded us of the old legal maxim: what cannot be done directly cannot be done indirectly |
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