Maruti drives home impact of `higher royalties' payout

Although a Government regulation passed in December 2009 allowed for higher royalties to be paid by corporations to their overseas parent companies, the impact of it came to light only when Maruti on Saturday reported a drop in Q1 profits. Maruti reported higher royalty payments to Suzuki Motor of Japan. Stocks of companies that pay large royalties fell across the board on Monday. The Maruti and Hero Honda scrips dropped 12 per cent and 7 per cent, respectively. A technology collaboration is a lot more expensive, and those that share technology extensively, such as auto companies, will be most affected, said Dr Tirthankar Patnaik of Religare, which has brought out an analysis of BSE-500 companies on royalty payments. "Royalty payments to Suzuki are likely to go up further as Maruti introduces more new technology in its cars in India," said Mr R. C. Bhargava, Chairman, Maruti Suzuki India Ltd. Increase in royalty payments could shave off companies' margins by as much as 370 basis points, says the Religare analysis. Royalty payments are of two types. One is through a Foreign Technology Collaboration, where a company pays a certain amount as royalty to the parent for the sharing of technology. The other is when the company pays for the use of a brand name, which is often the case with FMCG companies. The companies that will not be affected by it are GM India and Toyota which are fullyowned subsidiaries of their respective parent companies. "These companies' profits can be accrued back to the parent company and this rule does not apply to them. This applies to companies such as Honda, Toyota and Ford. Also, most global automakers operating in India have not yet posted profits because of the large capital investments involved. So, GM is not paying royalties, instead GM US is investing more in India." said Mr P Balendran, Vice-President, Corporate Affairs, GM India. Source : Business Line (Online Edition)    (7/27/2010)