India reportedly urges auto companies to cut royalties to foreign parents

India’s commerce minister has asked automakers to observe ways to decrease royalty payments to foreign parent companies for use of technology or brand names, two sources said according to Reuters, in an effort to increase local investment and decrease outflows.

In India’s competitive auto market, top-selling automakers Maruti Suzuki and Hyundai Motor’s regional unit pay millions of dollars in royalties to parent companies in Japan and South Korean for using their technology and brand to make and sell cars.

The minister, Piyush Goyal, in a meeting last week asked officials from groups representing automakers and auto parts manufacturers to review such payments with a view to decreasing them, said people with direct knowledge of the discussions.

“The concern raised during the meeting was that the outflow is high, even for old technologies, and something should be done about it,” said one of the sources.

The sources declined to be named due to the private nature of the talks.

The ministry has not responded to a request for comment.

India, for years, has debated enforcing stricter caps on royalty payments which spiked following the events in 2009 when foreign investment rules were eased and restrictions on such payments were eliminated.

The country’s market regulator last year suggested enforcing curbs on payments exceeding 2% of revenue. The limit was ultimately set at 5% after complaints from some sectors and fears it may discourage foreign companies from investing or sharing technology.

Recently, however, Indian Prime Minister Narendra Modi’s administration has made a renewed push to make the nation a significant manufacturing hub by encouraging domestic production and cutting imports. It also wants to boost local investment and decrease foreign outflows.

While India does not restrict the amount that can be paid as royalty, any payment by a locally listed company exceeding 5% of revenues requires shareholder approval.

Listed companies such as Maruti Suzuki, Bosch, Schaeffler India and Wabco India generally pay royalties of between 1%-5% to their foreign owners.

Maruti Suzuki paid 38.2 billion rupees ($510 million) as royalty to its parent Suzuki Motor in the fiscal year ending March 31, 2020, totaling 5% of its earning, according to its annual report.

Privately-owned companies in India such as Hyundai’s regional unit paid $150 million or 2.6% of revenue as royalties to its South Korean parent in fiscal 2019 and Toyota Motor paid $88 million or 3.4% of revenue to its Japanese parent, government data noted.

A February report provided by proxy firm Institutional Investor Advisory Services showed royalty paid by 31 leading Indian companies with foreign parents, including Maruti and Bosch, increased 9% in the fiscal year 2019 to total $1.11 billion.