A royalty is a payment made to the
legal owner for the use of asset or technology for e.g. patents, copyrighted
works, franchises or natural resources. Royalty is designed to compensate the
owner for the asset’s use and the transferees are legally binding. And technology
transfer means the process of inventing a new technology, securing intellectual
property protection and pursuing licensing agreements is called technology
transfer. For e.g. by sharing skills, knowledge, technologies, etc.
Government of India has done many
significant changes in the rules of Foreign Direct Investment. Liberalization
of payment of royalty in transfer of technology was one of the important steps
taken by Government of India.
In December 2009, Ministry of
Commerce & Industry, Department of Industrial Policy & Promotion (FC
Section) of Government of India issued a Press Note No. 8 (2009 Series) through
which Government of India had removed the cap and permitted Indian companies to
pay royalties to their technical collaborators without seeking prior government
approval and all such payments will be subject to Foreign Exchange Management
(Current Account Transactions) Rules, 2000.
Before this notification a prior
approval is required to be obtained from the Government of India for a lump sum
payment in transfer of technology in excess of US $ 2 million and payment of
royalty were 5% on local sales & 8% on exports.
HOW DOES TECHNOLOGY TRANSFER OCCUR?
Technology is transferred through a
license agreement in which the transferor holds ownership of the intellectual
property while the transferee obtains conditional rights to use and develop a
technology. It requires an active approach that engages researchers to promote
the newly invented technology and encourage potential industrial partners to
use the technology.
WHY DO WE NEED ROYALTY IN TRANSFER OF TECHNOLOGY?
When a new technology is
transferred from the owner/transferor to the transferee, then the transferor
has a right to get royalty (in the form of pecuniary or other interests) in
return of the transfer of technology. So the royalty is needed in that situation.
Royalty can be in both cash and equity. In short, royalty is designed to
compensate the owner for the asset’s use.
DIFICIENCY IN LIBERALIZATION OF PAYMENT OF ROYALTY IN TRANSFER OF
Royalty Outflows is the main deficiency
in liberalization of payment of royalty in transfer of technology. Royalty
outflows have been rapidly increasing after the Government of India liberalized
the payment of royalty in transfer of technology. The outflows on account of
royalty and fee for technical services taken together are estimated to be as
high as 15-18 per cent of the Foreign Direct Investment inflows over 2009-10
and 2012-13. According to Government data, royalty payment has increased from
US $ 1.7 billion in 2008-09 to US $ 4.1 billion in 2012-13.
Department of Industrial Policy and
Promotion had raised serious concerns over the increasing outflow of
such payments. The department had proposed re-introduction of restrictions on
such payments by companies to their parent entities. It had been
argued that the restriction would help to increase the profits of domestic
companies mainly in the automobile sector it will prevent depletion of foreign
exchange reserves, protect interest of minority shareholders and increase
revenue for the government.
The increase in royalty outflow is
very disturbing and has an effective negative impact on the economy of country
as a huge amount of money is going back from the nation because there are no
caps to restrict the payment of royalty in technology transfer collaborations.
And it is very difficult to assess the right amount of royalty to be paid by local
companies to foreign collaborators. After the aforesaid press note, the liberty
given by the government is being misused by the several foreign collaborators
as the Indian companies are forced to be given them royalties at a much
increased rate. Therefore, I think Government of India should put a cap to
restrict the payment of royalty in technology transfer collaborations so that
the foreign companies stopped from getting unfair advantage of law.