Review: “Royalty Payments on Intellectual Property: A Preliminary Analysis of the Principal Policy Issues Facing India” by A. Damodaran and Mariappan S

Author: Hardik Choudhary

Citation: Damodaran, A. and S, Mariappan, Royalty Payments on Intellectual Property: A Preliminary Analysis of the Principal Policy Issues facing India (September 3, 2018). IIM Bangalore Research Paper No. 562. <https://repository.iimb.ac.in/bitstream/2074/8162/1/WP_IIMB_562.pdf >

Introduction

A study has been undertaken by the DIPP IPR Chair at IIM Bangalore under the aegis of the Department of Industrial Policy and Promotion, Government of India, to study the pattern of royalty payments made across sectors in the country from 2006-2016. The aim of the study is to analyze the payment of royalty by Indian industry for Intellectual Property Rights which have been licensed from overseas holders of proprietary IPRs, and to suggest policy changes for regulating the outflow of royalties from the country. The study has analyzed data from 11 sectors- automobile, auto ancillary, FMCG, IT-software and hardware, media, health care, pharmaceuticals, electronics, engineering, agro-chemicals and trading companies, covering a total of 231 companies.

Outflow of Royalty and low global ranking

The writers of the study assess India’s overall royalty outflow and the reasons for India’s low standing in the Global IP Index. The study has shown that in most sectors the outflow of royalty payments has increased over a 10-year period. The study reveals that in the 2015, India’s royalty payment amounted to US$ 5.0 billion which in comparison to China’s US$22 billion is significantly less. The author agrees with the assessment wherein the study points out the weakness in India’s IP framework which include: Limited protection for life sciences IP; Lengthy pre-grant opposition proceedings; Provisions of compulsory licensing for commercial and non-emergency situations; Limited participation in IP treaties; Judicial decisions such as the DU-Photocopy case.

Sector specific royalty payment

The study also focuses on sector specific trends of royalty payments. The data across all sectors shows a late surge in the outflow of royalty payments. The reasons of such growth vary from one sector to another. This surge in the outflow of royalties shows that a growing number of Indian companies are depending on overseas firms for technology. The more technology they import, the higher royalty is paid. The author believes that the lack of innovation in the local industry has become the primary reason for the above-mentioned trend. The study also shows that in most sectors, the royalty paid as percentage of net profits has shown a net increase.

Reason for growth in royalty outflow

The study analyses the general policy responsible for the growth in the outflow of royalties from India. It states that the primary reason for this growth liberalization of India’s Foreign Exchange Management Rules, 2000, in the year 2010 when the Government did away with the Commerce Ministry’s approval for royalty payments exceeding 5% on domestic sales and 8% on export sales. At that times, the removal of cap on royalty payment was done with a view to attract foreign direct investment (“FDI”) into the country. However, the study now advocates that the incidence of outflow of royalty payments from India needs to be kept under check to ensure the economic viability of technology licensee firms in India and prevent undesirable outflow of foreign exchange from the country. The study’s view is supplemented by recent proposals coming out of the Ministry of Commerce and Industry, Government of India, whereby the Government is contemplating to bring back caps on royalty payments in order to increase the profit of Indian companies and revenue for the Government of India.[1]

The author disagrees with the assessment of the study at this point and believe that such an action might be counter-productive. It is to be noted that the model of excessive regularization which was in place till 2010 did little good to India. It was only after the liberalization that the inflow of FDI increased which in turn led to an increased outflow of royalty. This outflow of royalty was an incidence of increased investment and growth of the industries. Going back to a regulatory framework might do more harm than good to the country.

Policy recommendations

Amongst many recommendations including re-introduction of cap on royalty payments as discussed above, the study advocates for Fair, Reasonable, and Non-Discriminatory (“FRAND”) licensing through Government intervention. The study further advocates for import duties and introduction of a Technology Absorption Fund to develop indigenous know-how. The author disagrees with the study in respect of Governmental intervention and import duties as these are regressive methodologies which do very little to boost the economic growth. A healthy competition fosters innovation and should be the way forward. That said, the author appreciates the idea of a fund to foster indigenous technologies. In this regard, the Government of India has recently introduced the Startup India Seed Fund Scheme under which the Central Government has approved a corpus of Rs. 945 crores for financial assistance to startups. [2]

Conclusion

The study is a comprehensive review of the overall situation regarding the outflow of royalty from India. While the study makes good recommendations regarding fostering innovation in India to generate capital, the author believes that the regressive approach of the study viz. the cap on royalty payments is a step in the wrong direction.

[1] https://timesofindia.indiatimes.com/business/india-business/govt-considering-to-reintroduce-restrictions-on-royalty-payments/articleshow/72095384.cms[2] https://www.startupindia.gov.in/content/dam/invest-india/Templates/seedfund-gazette.pdf  

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