Auto firms urged to cut royalty to parent

• India’s commerce minister has asked automakers to find ways to reduce royalty payments to foreign parent companies for the use of technology or brand names to boost local investment and reduce outflows.
• Top­selling carmakers Maruti Suzuki and Hyundai Motor’s local unit pay millions of dollars in royalties to parent companies in Japan and South Korea for using their technology and brand to build and sell cars.
• The outflow is high, even for old technologies
• India has debated imposing stricter caps on royalty payments which spiked after 2009 when foreign investment rules were eased and restrictions on such payments were removed.
• The market regulator had suggested imposing curbs on payments exceeding 2% of revenue. The limit was set at 5% after complaints from some sectors and fears it may dissuade foreign firms from investing or sharing technology
• While India does not restrict the amount that can be paid as royalty, any payment by a locally listed company exceeding 5% of revenues needs shareholder approval.
• Listed companies such as Maruti Suzuki and parts makers including Bosch, Schaeffler India, and Wabco India typically pay royalties of between 1%­-5% to their foreign owners.
• Maruti Suzuki paid ₹38.2 billion as royalty to  Suzuki Motor in the fiscal year ended March 31, 2020, amounting to 5% of its revenue
• Royalty provision has been important in attracting foreign investments into various sectors, especially autos
• 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

Further Details

• Maruti Suzuki India is 56% owned by Suzuki Japan. Or we can say Suzuki is the parent company of Maruti Suzuki India. Or we can also say that Suzuki created a subsidiary in India named Maruti Suzuki by putting 56% capital. But both function as independent entities and all accounts are separated which means they need to make payment as per market for any sale/ purchase between them (as per law). 
• Now, Suzuki has a patented technology of car and it also has a patented name/logo "SUZUKI". Now since 'Maruti Suzuki' is a company in India and if it wants to use the patented technology of Suzuki Japan and it also wants to use the patent brand logo of SUZUKI, then it needs to pay a royalty to Suzuki Japan for both of these things. Also, Suzuki Zapan will get 56% of the profit of Maruti Suzuki India. So, foreign automakers (who have created their brand name in the international market) are interested in setting up subsidiaries in India and earn a royalty on technology,- and brand as well as profit. If an Indian businessman sets up his own in India and uses a foreign company technology or brand then they need to pay royalty only and not profit. 
• See, royalty Inyment by Maruti Suzuki India is a cost for it and if it does not pay (or pay less) royalty to Suzuki Zapan (maybe an agreement reached between them) then the profit of Maruti Suzuki India will increase and ultimately Suzuki Zapan will get this profit (that's another matter that it will get only 56%). But why royalty is then so much of an issue if the foreign owner owns the Indian company completely. This is because if üe profit of Maruti Suzuki will increase (in case of non-payment of royalty) then that money can be invested in India and there are few restrictions also on the outflow of this profit and Govt gets tax also on this profit. But if Maruti Suzuki has to make of royalty to Suzuki Zapan, then it's a cost and üere is no restriction of outflow and neither Govt. gets any tax Also, Maruti Suzuki India is bound to pay for its royalty cost to Suzuki Zapan, but the profit may or may not happen.

Some Fact: 

• There is no limit on royalty payments in India but companies in India generally pay a royalty to their foreign owners 1% to 5% of revenues. And if more needs to be then shareholders/owners' approval is required. 
• Earlier there were some caps on royalty payment but was then eased past 2009. If India brings such caps again then it may impact foreign investment and use of new technology,- in India.  

Source: The Hindu