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Breakingviews

Breakingviews - India’s auto royalties deserve scrutiny

Kenichi Ayukawa, Chief Executive Officer of Maruti Suzuki India Ltd., poses with concept Futuro-e car after it was unveiled at the India Auto Expo 2020 in Greater Noida, India, February 5, 2020. REUTERS/Anushree Fadnavis

MUMBAI (Reuters Breakingviews) - Automakers are set for a rougher ride in India. Officials are pushing carmakers like the $28 billion Maruti Suzuki to reduce fees paid to foreign partners, Reuters reported on Tuesday citing two sources. Tightening up rules on such payments could help. But India’s drive for more domestic research and development will be a slow one.

Royalties are common when multinationals form local partnerships and permit them to use brands and technology developed overseas. In India, these fees generate more attention because a host of foreign companies from Monsanto to Nestle have locally-listed joint ventures.

In the auto sector, Maruti is an obvious target with over half of the market for local passenger vehicles. Institutional Investor Advisory Services (IiAS) notes that the carmaker, majority-owned by Japan’s Suzuki Motor, is one of five companies that made up over three-quarters of the $1.1 billion in royalties paid by 31 large Indian multinationals last year.

Some shareholder friendly tweaks might help officials get what they want. Maruti paid out 4.6% of its consolidated revenue in royalties in the year to March 2019 – below the 5% threshold required for shareholder approval. But because cash outflows from companies often take multiple forms, such as “technology license fees”, IiAS recommends a more encompassing definition of payments to parent companies. It also argues for calculating payments based on profitability.

Companies were already trying to make changes. Maruti decided in 2018 to make payments in rupees, rather than in yen, shifting the currency risk onto its foreign parent. And last year, Nestle India gave up on an effort to win approval in perpetuity from shareholders to pay out royalties.

Indian officials have long wanted more investment in local research and development that can create higher value jobs. Prime Minister Narendra Modi’s call for the country to be “atma-nirbhar”, or self-reliant, piles on fresh pressure. Yet all of India’s top carmakers from Tata Motors to Mahindra & Mahindra have foreign partners of sorts. Indian carmakers may struggle to remain competitive if restrictions on legitimate payments become too tight.

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