India urges auto companies to cut royalties to foreign parents -sources

ZF Commercial Vehicle Control Systems India

18/08/2020 10:58

By Aditi Shah
    NEW DELHI, Aug 18 (Reuters) - 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,
two sources told Reuters, in an effort to boost local investment
and reduce outflows.
    In India's competitive auto market, top-selling carmakers
Maruti Suzuki  MRTI.NS  and Hyundai Motor's  005380.KS  local
unit pay millions of dollars in royalties to parent companies in
Japan and South Korean for using their technology and brand to
build and sell cars.
    The minister, Piyush Goyal, in a meeting last week 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.
    "The concern raised during the meeting was that the outflow
is high, even for old technologies, and something should be done
about it," said one of the sources. 
    The sources declined to be named as the talks are private.
    The ministry did not respond to a request for comment.
    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, Indian Prime Minister Narendra Modi's
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.  urn:newsml:reuters.com:*:nL4N23Y3AN
    Listed companies such as Maruti Suzuki  MRTI.NS  and parts
makers including Bosch  BOSH.NS , Schaeffler India  SCHE.NS  and
Wabco India  WABC.NS  typically pay royalties of between 1%-5%
to their foreign owners.
    Maruti Suzuki paid 38.2 billion rupees ($510 million) as
royalty to its Japanese parent Suzuki Motor  7269.T  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 2019 and Toyota Motor's  7203.T  India arm paid
$88 million or 3.4% of revenue to its Japanese parent,
government data shows.
    Royalty provision has been important in attracting foreign
investments into various sectors in India, especially autos,
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,"
said Gupta. 
    He said for many foreign companies royalties are a profit
repatriation strategy and changes to these could impact
operating and supply chain structures from a fiscal perspective.
    Maruti, Toyota and Bosch declined to comment. Hyundai,
Schaeffler and Wabco did not respond to emails seeking comment.
    Such payments have also been a long-standing issue with
minority shareholders.
    A February report by proxy firm Institutional Investor
Advisory Services showed royalty paid by 31 leading Indian
companies with foreign parents, including Maruti and Bosch, grew
9% in fiscal year 2019 to total $1.11 billion.

 (Reporting by Aditi Shah, additional reporting by Aftab Ahmed
Editing by Euan Rocha and David Evans)
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