No Curbs, but Scanner Put on MNCs’ Royalty Payouts India is eyeing stricter norms to safeguard minority shareholders from being completely ignored by foreign owners that are overzealous in raising royalty payouts, but has ruled out reimposing curbs on the practice as that would hint at capital controls, something markets abhor. The finance ministry will ask market regulator Sebi to keep a close watch on royalty payments within the framework of the tough corporate governance rules approved by it that will come into force on October 1. The department of industrial policy and promotion (DIPP) had flagged high and rising royalty payments to the finance ministry, urging it to review regulations on them. The subject has received greater attention recently after institutional investors flagged large royalty payouts by India’s biggest car manufacturer Maruti Suzuki to Japanese parent Suzuki Motor Corp. “We are examining the issue of royalty payments,” a senior finance ministry official told ET. However, the official said there was no logic in reimposing curbs on these payments that were lifted in 2009. Sebi’s new corporate governance norms already have stringent provisions for related party transactions that have to be approved through a special resolution. “It is desirable that any additional regulations contemplated under Sebi and Companies Act, 2013 are in sync with existing framework,” said Sunil Jain, partner, JSA & Associates. When a company proposes a higher royalty rate, the finance ministry will ask Sebi to ensure that minority shareholders have a greater say in decision-making through stringent provisions in the shareholder agreement and will also suggest changes in the company law, to this effect. “When a company board takes up a proposal seen to be benefiting the promoter shareholder, his representatives should not participate in such a decision,” the official said. The ministry is not keen on any change in the framework for unlisted companies where shareholder agreements should govern payouts. Prior to 2009, royalty was capped at 8% of exports and 5% of domestic sales in the case of technology transfer and fixed at 2% of exports and 1% of domestic sales for use of trademarks and brand names. In a bid to make India more attractive to foreign investors, the government freed up royalty payments, but the sharp spike has caused alarm. Royalty payments comprised 18% of foreign direct investment (FDI) outflows in 2012-13 from 13% in 2009-10, according to data compiled by DIPP. Royalty payments in lieu of technology transfer or use of brand name are charged as expenditure on the balance sheet and therefore, suppress overall operating profit. A higher payout thus lowers the tax liability of companies as also dividend payments to shareholders. Over four years to 2012-13, Suzuki has Motor received about . 7,000 crore (5.7% of sales) as royalty from Maruti. To address taxation concerns, the finance ministry had increased withholding tax on such payments to 25% from the earlier 10% in the budget for 2013-14. But most companies end up paying much less because double taxation avoidance agreements provide for a lower rate of 10% for royalties.
Posted on: Fri, 14 Mar 2014 11:24:52 +0000
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