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Tuesday, 24 December 2013 01:48
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There is no case whatsoever for restrictions on royalty

Commerce and industry minister Anand Sharma is right when he points to a doubling of royalty payments from India as a proportion of inwards FDI over the years, but he needs to put it in perspective; more important, writing to the finance ministry to find some way to address the issue only lends credence to the view that his ministry is increasingly looking protectionist. So, it was the commerce ministry that was against the Mylan $1.8 billion acquisition of Strides Arcolabs’ Agila Specialties on grounds that Indian pharma units were being gobbled up by MNCs—it even put out a Cabinet note on restricting FDI acquisitions in pharma—and the ministry dragged its feet on the FDI in multi-brand retail fine print for so long, global retailers almost gave up on India.

In the case of royalty payments also, a favourite issue of investor advisory firms, there is the issue of the data that can be looked at differently, and there is the question of the mindset. Outflows on royalty and technical fees, broadly classified as ‘intellectual property charges’ in RBI data have risen from $2 billion in FY10 to $4.2 billion in FY13—this works out to a rise from 7.9% of FDI inflows to 19.1%; for the first half of FY14, the proportion is 15.1%. But once you add the reinvested earnings of foreign firms—and that is the globally accepted standard to calculate FDI—the numbers fall, to 5.3% in FY10 and 10.2% in the first half of FY14.

Even that, it can be argued, is a large amount, but only if looked at in isolation. If there are no returns for investors—whether from dividends, royalty or technical fees—why would they invest in India? If India welcomes a Unilever investing $3.2 billion to buy back its shares in India, it cannot complain if HUL wants to increase royalty payouts from 1.4% of sales to 3.15% by March 2018—a testimony to how investors view HUL despite the royalty hike is that the company’s $5.4 billion buyback offer was only 60%subscribed. If the payments were as excessive as the investment advisory firms make them out to be, surely the markets would punish HUL and another firm would rise to take its place—the fact that HUL has the largest distribution network across the country and its seven-day credit is the mainstay of kiranas has to count for something. Similarly, Maruti Suzuki may have raised its royalty payments from 2.8% of sales in FY08 to 5.2% in FY12—and this may comprise 47% of parent Suzuki’s global PAT—but it is Suzuki’s investment in Maruti that made the latter a player to reckon with in the small car segment globally. In this case too, were the royalty payments as steep as made out, or as uncalled for, some other company would have unseated Maruti from the top slot in the industry. If the commerce and industry ministry, whose job is to usher in FDI, is to look so protectionist, it is going to scare investors away.

 

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