Union
Minister of Commerce and Industry Piyush Goyal has asked automakers to curb royalty payments
to their foreign parents for use of their technology or brand with an aim
to boost local investment and reduce outflow.  

According
to a report by Reuters, Goyal met with officials of auto manufacturers last week and asked them to reduce royalty payments.

Manufacturers like Maruti Suzuki and Hyundai Motors pay millions of dollars to
their parent companies for use of their technology and brand image to make and
sell cars.

“The
concern raised during the meeting was that the outflow is high, even for old
technologies, and something should be done about it,” a source with direct
knowledge of the meeting told Reuters.

India
removed restrictions on royalty payments in 2009 with the relaxation of foreign
investment rules. However, the country has since debated the imposition of
stricter norms, including capping of royalty payments.

Last year, Indian
market regulators had suggested curbing payments that exceed 2% of annual
revenue, with the cap finally being set at 5% following concerns it may discourage
foreign companies from investing or sharing their technology.  

However, the Prime Minister Narendra Modi-led
government’s initiative of making the country a major manufacturing hub necessitates
the curbing of foreign outflows and the increase of local investment.

Although there
is no limit to the amount that can be paid as royalty in India, any amount exceeding 5%
of revenue requires shareholder approval.

Listed
companies like Maruti Suzuki and part makers such as Bosch, Schaeffler India
and Wabco India pay royalties ranging from 1% to 5% of their revenues to their parent companies overseas.

According
to its annual report, Maruti Suzuki paid $510 million to its Japanese parent
Suzuki in the fiscal year ending March 31, 2020, which amounts to 5% of its
revenue.  

Meanwhile,
Hyundai’s Indian division paid $150 million to its South Korean parent, amounting
to 2.6% of its revenue. Toyota Motors’ local unit paid $88 million or 3.4% of
its revenue, government data confirms.

Royalty
payments are key in attracting foreign investment into a number of sectors in
India, especially the auto sector, said Vaibhav Gupta, partner at tax firm,
Dhruva Advisors.

“Depending
on the form in which the government brings back such caps … it may impact the
ability of auto companies to benefit from the use of foreign brands and
technical know-how,” Gupta said.   

He further
stated that royalties are a profit repatriation strategy for many foreign
companies and that any changes to it may have implications on operating and
supply chain models from a fiscal perspective.  

Royalty
payments have been a point of concern for a number of years with minority
shareholders.

A report in
February by the firm Institutional Investor Advisory Services indicate that royalty
payments by 31 leading companies, including Maruti and Bosch, grew by 9% in the
fiscal year 2019 to a total of $1.1 billion.