India's market regulator is giving royalty restrictions a second thought
- India's market regulator decided to defer the roll out of restrictions on royalty payments
- The new norms have deferred till June 30 from April 1, 2019
- Restrictions on royalty payments were brought in to stop diversion of profits
Indian companies that pay a royalty for use of intellectual property, or for the use of a brand, were scheduled to be regulated by a set of norms. Most importantly, they would need the approval of shareholders if the royalty payment were to exceed 2% of sales starting April 1.
However, the market regulator, Securities and Exchange Board of India (SEBI), has deferred the rollout of the new regime to June 30, 2019. This will benefit companies like car maker Maruti that pays an annual royalty to its Japanese parent Suzuki, and Hindustan Unilever that pays a similar fee to its British-Dutch parent.
"In view of the representations received on the subject and with a view to analysing them, the board decided to defer the implementation of this provision for three months i.e. till June 30, 2019," a SEBI press release on March 27 said. Companies had lobbied hard with the government to stop the new norms, a report said last year.
The most of royalty paid by Indian companies come from the automobiles, information technology, electronics and consumption sectors.
In February this year, the promoters of Jubilant Foodworks, which holds the licence for Dominos Pizza and Dunkin Donuts, decided to draw more royalty from the company's profits. While the royalty sought by Jubilant promoters was 0.25%-- much below the 2% threshold-- this royalty was meant to be paid for the use of the 'Jubilant' brand, and not Dominos, and the board even approved it.
However, after feeling the heat from shareholders, the decision was rolled back within a few hours.
The restriction on royalty payments were proposed after a study highlighted that "policy regimes on royalty payments need careful treatment in the hands of decision makers. They should not lead to diversion of technology transfer offers from India to other emerging economies that offer more liberal royalty regimes."
In other words, the new norms were expected to stop the diversion of profits away from shareholders.
Now, once again, the country's market regulator is taking time to analyse its decision to let shareholders to decide the validity of large royalty payments.
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