Journalism of Courage
Government must not prescribe royalty caps for foreign subsidiaries. The market is a better judge
If companies are not allowed to realise returns,or if the rate of return is to be arbitrarily decided by government,then why would a foreign entity take the risk to invest in India? The market is a much better judge of when royalty payments are excessive. For instance,the commerce ministry is probably upset that,starting from February 2013,Hindustan Unilever Ltd plans to increase royalty payments to its parent company,Unilever,from 1.4 to 3.15 per cent of turnover by 2018. However,the fact that Unilever was unable to meet its open offer buyback target to acquire 22.52 per cent of HUL it was only able to reach approximately 15 per cent,resulting in an FDI injection of $3.2 billion indicates the markets confidence in the company and its distribution network despite its royalty commitments.
Similarly,even though Maruti Suzuki India increased its royalty payments from Rs 678 crore to Rs 1,803 crore between 2008-09 and 2011-12,its R&D facility at Rohtak will see an investment of approximately Rs 2,000 crore and help make India an auto research and export hub. The commerce ministry must resist its protectionist urges. Its ill-framed rules on FDI in multibrand retail and pharma have held up investment for long enough.
