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Should foreign companies charge Indian companies royalty at all?

Created by : Esha Johar, Risk Analyst, Irevna  | 11 09 2009 12:51:34 +0000
Industry : Equity Research/AnalyticsFunctional Area : India(Markets)
Keywords : indian companies royalty foreign companies
Activity:  270 views;  last activity : 07 06 2010 20:18:09 +0000

Liberal economic policies give entrepreneurs more freedom, but can have unintended consequences for others. Typically, companies that sell international brands— chiefly consumer goods companies—in India will pay royalties for trademarks. Yet others, such as automobile or industrial product firms, will also pay for technology transfer. Some industries may pay for both. The impact on profit is, even higher, which should be a cause of concern for shareholders.

                                                                       Graphics: Yogesh Kumar / Mint

 

 

 

 

 

 

 

 

 

 

Many of the MNCs are listed in the sensex because of a government diktat to divest. They rarely raise domestic equity, resorting to debt or even capital grants from the parent company when needed. Whether the market capitalization of their Indian subsidiaries goes up or down makes no difference.

So dear friends, Should foreign companies charge Indian companies royalty at all?

  
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No. It will evoke very strong responses from minority shareholders. After all, the foreign parent is the ultimate owner—even if it does not own 100%. The parent also gets dividend income and it also accounts for its share of profits. And most foreign products are adapted for local markets by the Indian company, which also invests significant sums in product and market development. They need not charge royalty to benefit from the subsidiary’s performance.
By Esha Johar, Risk Analyst, Irevna  11 09 2009 12:51:34 +0000
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Royalty payments are a way of foreign companies to recoupe some of their R&D spending for the development of the product. There is no Indian company that has an R&D budget. Product innovation is something that is alien to us and our culture. Even the Tatas when they designed the Indica, I believe had a European consultant for designing the car.

If you can come up with the R&D budget for an Indian company like the one that shows the pbit affect on Indian companies due to royalty payment then we will see that R&D's will have a bigger impact for product development than by just paying few million dollars to them to get technology. They spent billions of dollars for developing the product which we don't have to when we pay royalty.

This way we are the loosers not for paying royalty rather for complacent charecter of our Industry who cannot afford R&D, also our Academia stagnate for lack of opportunity to create entities that can innovate.

 
By Mathew Cherian, Research Associate/Analyst, Western Michigan University  | 11 09 2009 17:52:49 +0000
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They should be. Because of them, our MNCs will get more funds to invest in the market and also will get opportunities to become more globalised...
By Veena Gupta, Analyst, Blackstone Group  | 11 09 2009 12:54:51 +0000
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