In an effort to boost local investment and reduce outflows, India’s Commerce Minister has asked automakers to find ways to reduce royalty payments to foreign parent companies for use of technology or brand names, according to Reuters.
In India’s competitive auto market, top-selling 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 minister Piyush Goyal, in a meeting asked officials from groups representing carmakers and auto parts manufacturers to review such payments with a view to reducing them, said people with direct knowledge of the discussions. According to the source:
“The concern raised during the meeting was that the outflow is high, even for old technologies, and something should be done about it.”
India, for years, 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 country’s markets regulator last year suggested imposing curbs on payments exceeding 2% of revenue. The limit was finally set at 5% after complaints from some sectors and fears it may dissuade foreign firms from investing or sharing technology.
Recently however, the Indian government has made a renewed push to make the country a major manufacturing hub by encouraging domestic production and curbing imports. It also wants to increase local investment and reduce foreign outflows.
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% and 5% to their foreign owners.
Government data shows Maruti Suzuki paid 38.2 billion rupees ($510 million) as royalty to its Japanese parent Suzuki Motor in the fiscal year ending March 31, 2020, amounting to 5% of its revenue, according to its annual report. Privately-owned companies such as Hyundai’s local unit paid $150 million or 2.6% of revenue as royalties to its South Korean parent in fiscal year 2019 and Toyota Motor’s India arm paid $88 million or 3.4% of revenue to its Japanese parent.