ROY­ALTY ‘Rules’

There is ur­gent need to curb roy­al­ties and have a pol­icy frame­work which will help to de­velop and nur­ture lo­cal in­no­va­tions, R&D and IP cre­ation

Gfiles - - GOVERNANCE - The writer is Sr. Vice Pres­i­dent, ITC Ltd. The views ex­pressed here are per­sonal.

IN­DIA has been a vic­tim of eco­nomic ex­ploita­tion for cen­turies be­fore we at­tained in­de­pen­dence in 1947. This drain of wealth was so ex­ploita­tive that Will Du­rant called the Bri­tish rule in In­dia as the “the most sor­did and crim­i­nal ex­ploita­tion of one na­tion by an­other in all recorded his­tory”. Dad­ab­hai Naoroji coined the term “drain of wealth” and wrote at length on how In­dia was made to bleed for the up­keep of the Bri­tish army and civil ad­min­is­tra­tion. Ac­cord­ing to econ­o­mist An­gus Mad­di­son, In­dia in the 18th cen­tury ac­counted for 23 per cent of the world’s GDP and by the time the Bri­tish left In­dia, this plum­meted to un­der 3 per cent. Post 1947, many com­pa­nies in In­dia have been pay­ing roy­alty to their for­eign par­ent com­pa­nies. Roy­alty pay­ments are typ­i­cally charged for the use of brand name, prod­uct tech­nol­ogy or both, de­vel­oped out­side the mar­ket where the IPR is reg­is­tered. Un­for­tu­nately, many brands con­sumed on a day-to-day ba­sis are mis­taken to be our own. It is in­ter­est­ing to note that from tooth­paste to tea and from soaps to chips, most of them at­tract roy­alty and in short a sig­nif­i­cant amount of

Many brands are mis­taken to be our own – from tooth­paste to tea and soaps to chips – and at­tract roy­alty; a sig­nif­i­cant amount of money earned in In­dia is taken away by for­eign com­pa­nies ev­ery year

money earned in In­dia is taken away by these for­eign com­pa­nies ev­ery year. Un­til 2009, these roy­alty pay­ments were mon­i­tored and the out­flow was mea­sured and con­trolled hav­ing a ceil­ing of 5 per cent on do­mes­tic sales and 8 per cent on ex­ports with a lump-sum pay­ment not ex­ceed­ing $2 mil­lion in the case of IPR with­out any tech­ni­cal trans­fer and 2 per cent of ex­ports and 1 per cent of sales in case of trade­mark or brands. In De­cem­ber 2009, the gov­ern­ment lib­er­alised roy­alty and the tech­ni­cal fee reg­u­la­tion with the aim of en­cour­ag­ing multi­na­tional com­pa­nies to in­vest in In­dia and job cre­ation. This re­sulted in many MNCs re­vis­it­ing roy­alty out­flow to their brand own­ers. Roy­alty out­flows from In­dia con­sis­tently in­creased as per­cent of FDI flows, ris­ing from 13 per cent in 2009-2010 to 18 per cent in 2012-13, thus re­duc­ing the ef­fi­cacy of FDI. In fact, the roy­alty outgo of In­dian units of just 32 MNCs was up 10 per cent in FY15 when com­pared to the previous year, and sur­pris­ingly ac­counted for 21 per cent of these com­pa­nies’ prof­its. In a re­port re­leased by In­sti­tu­tional In­vestor Ad­vi­sory Ser­vices ( IiAS), it was stated that over 20102014, ag­gre­gate roy­alty and re­lated pay­ments of these 32 MNCs in­creased at a CAGR (com­pound an­nual growth rate) of 20 per cent, com­pared to a mere 7 per cent growth in their pre-roy­alty, pre-tax prof­its. IiAS rec­om­mended that these pay­ments be brought un­der the am­bit of share­holder ap­proval. Roy­alty has a ma­jor im­pact on rev­enue col­lec­tion and it also af­fects mi­nor­ity share­hold­ers by way of lower net prof­its that could be used as div­i­dend. In­ter­est­ingly, roy­alty is part of most Dou­ble Tax Agree­ments (DTAs) thereby with­hold­ing tax is

merely 10.56 per cent as against cor­po­rate profit be­ing taxed at 42.23 per cent for for­eign-owned com­pa­nies. One way of ar­rest­ing roy­alty out­flow is through the cre­ation of do­mes­tic brands. Over the years, In­dia has wit­nessed the growth of com­pa­nies like Patan­jali, Re­liance, Mahin­dra, Ko­tak, ITC, SBI, IOC, ICICI amongst oth­ers. Prof­its gen­er­ated from them and from many of their brands are re­tained in our coun­try and noth­ing is taken out by an over­seas par­ent com­pany. In ad­di­tion, com­pa­nies like ITC and Patan­jali have per­me­ated to the very bot­tom of the food and ne­ces­sity chain with prod­ucts like match boxes, soap, bis­cuits, atta, tooth­paste among oth­ers, and the dom­i­nance of MNCs for the first time since in­de­pen­dence has been truly chal­lenged. Hav­ing said this, In­dia still has a long way to go when it comes to iconic brand build­ing. If we look across the world we re­alise that all great brands have one thing in com­mon, that they dom­i­nated in their own coun­try be­fore be­ing a run­away suc­cess over­seas. McDon­alds, for ex­am­ple, in 1958 had 34 branches in the USA which in­creased to 102 in a span of just one year. The trac­tion re­ceived by the brand from the cit­i­zens of the coun­try was tremen­dous and by 2016 McDon­alds had nearly 37,000 out­lets worldwide. Sim­i­larly, Ford started out in 1896 and by 1906, it was the top sell­ing brand in USA pro­duc­ing nearly 8,800 cars. It was only in 1911 that the com­pany opened its first fac­tory out­side the coun­try. To­day, the com­pany has pro­duc­tion lines in Brazil, France, Thai­land, China, Ger­many, South Africa and many more coun­tries. Ap­ple was founded in 1976 and its prod­uct Ap­ple 2 pro­vided sig­nif­i­cant mo­men­tum and rev­enue growth for the com­pany. There­after, the com­pany went through a pe­riod of trial and tribu­la­tions till 2001, when the i-Pod was launched and it hasn’t looked back ever since. To­day, Ap­ple’s worldwide rev­enue is $229 bil­lion and the com­pany has stores all over the world. BMW, Burger King, Sam­sung, Toy­ota, Coca Cola, GE, Pepsi, HUL, and Nes­tle are all ex­am­ples of out-of-the-box in­no­va­tion and the re­sults are for all to see.

THE case in point is that if the brand is unique, if it con­nects with the peo­ple i.e. con­veys a mes­sage (this could be a top­i­cal sub­ject, so­cial mes­sage, ba­si­cally sto­ry­telling and align­ment of the brand with the cul­ture, val­ues, be­liefs and tra­di­tions), has top rate qual­ity, is com­pet­i­tively priced, stays ahead of the curve, is sen­si­tive to feed­back and re­aligns and re-in­no­vates ac­cord­ingly, then it will just about al­ways at­tract and mul­ti­ply the loy­alty of the con­sumers. These are in­trin­sic traits that a brand must ex­hibit con­sis­tently and with­out fail. There have been many brands that have been suc­cess­ful for decades but their man­age­ment did not see the chang­ing en­vi­ron­ment and tech­nol­ogy, which re­sulted in new and in­no­va­tive prod­ucts tak­ing away the en­tire mar­ket, and to­day, those brands are non-ex­is­tent. It is, there­fore, nec­es­sary to have a pol­icy frame­work which will help to de­velop and nur­ture lo­cal in­no­va­tions, R&D and IP cre­ation. This will en­sure that as con­sump­tion in the coun­try grows, the wealth gen­er­ated by the do­mes­tic pop­u­la­tion is re­tained in In­dia to strengthen the econ­omy and em­power the peo­ple of the coun­try.

In a re­port by In­sti­tu­tional In­vestor Ad­vi­sory Ser­vices (IiAS), ag­gre­gate roy­alty and re­lated pay­ments of 32 MNCs over 20102014 in­creased at a CAGR of 20 per cent com­pared to 7 per cent growth in their pre­roy­alty, pre-tax prof­its

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