India has made tremendous progress in building a policy environment to encourage investment. Foreign direct investment (FDI) in India is principally governed by the Foreign Exchange Management Act, 1999. In addition, the Department of Industrial Policy and Promotion (DIPP) issues various press notes from time to time, modifying the sectorial limits on FDI and specifying additional conditions for FDI in India. India has made tremendous progress in building a policy environment to encourage investment. The first hint of liberalization of the IP regulatory framework came in November 2006, prior to which the regulatory rules required the Reserve Bank of India’s (RBI’s) approval for the purchase of a trademark or franchise. This restriction was removed and the RBI took a step towards liberalization with a November 28, 2006 circular allowing an Indian entity to draw foreign exchange and freely pay for the purchase of trademarks and franchises in India without prior approval of RBI.
The”licence raj” has been largely dismantled. Restrictions on large-scale investment have been greatly relaxed. Many sectors formerly reserved to the public sector have been opened up to private enterprise. Import substitution and protectionism have been replaced by an open trade regime. Sectorial restrictions on FDI have been progressively removed and foreign ownership ceilings steadily raised. FDI approval procedures have been greatly liberalized.
Foreign exchange restrictions related to investment have been relaxed. Experimental economic zones such as the Special Economic Zones have been established to test investment liberalization measures
The next and arguably more substantial step came recently concerning the remittance of royalty and lump sum payments associated with technical collaboration or the use of trademarks and brand names. The Foreign Exchange Management (Current Account Transaction) Rules, 2000, until recently, allowed technical collaboration agreements to be entered into without prior government approval if:
(i) Any lump sum payable did not exceed $2 million.
(ii)Any royalties payable did not exceed five percent for domestic sales and eight percent for exports (applicable regardless of the duration of royalty payment)
Royalties were calculated using the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of standard and imported components, irrespective of the source of procurement, including ocean freight, insurance and customs duties.
Similarly, licensing agreements for the use of trademarks and brand names could be entered into without prior government approval if the royalties payable did not exceed two percent for exports and one percent for domestic sales.
Any payment associated with a technology transfer or licensing arrangement that exceeded these limits required government approval.
On a critical note, now that royalty payments are outside the purview of government regulation and will be determined through negotiation between the parties involved, it may compromise the bargaining position of an Indian subsidiary against; multinational parent. For example, a parent company could charge its Indian subsidiary excessive royalties, which could adversely affect the interests of the subsidiary’s minority shareholders.
In conclusion, the government has significantly liberalized the regime for foreign technology agreements and trademark licensing arrangements, which is surely a step in the right direction, leading to growth of the Indian market.
