Liberalization: Impetus to technology collaborations

By Pankaj Agarwal and Divya Sridhar, Amarchand & Mangaldas & Suresh A Shroff & Co
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The dependence of developing countries on the technology of developed countries is widely accepted and there are various modes by which it is made available. These include collaborations comprising capital investment, licensing and franchising arrangements, turn-key arrangements and consultancy arrangements. The Indian government has frequently regulated how businesses gain access to technology from the rest of the world and has attempted to facilitate avenues for the country to obtain the latest know-how, while protecting it from undue harassment by the technology provider.

Pankaj Agarwal Principal associate Amarchand & Mangaldas & Suresh A Shroff & Co
Pankaj Agarwal
Principal associate
Amarchand &
Mangaldas &
Suresh A Shroff & Co

In the past, technology arrangements have been highly regulated. Prior to 2006, in some cases, parties were required to obtain the permission of both the Reserve Bank of India (RBI) and the government. For instance, remittances of royalies and payment of lump-sum fees under a technical collaboration agreement which was not registered with the RBI required the prior approval of the RBI. Also, if the technology collaboration agreement involved payment of lump-sum fee of more than US$2 million and royalty of more than 5% on local sales or more than 8% on exports, prior government approval was required.

In addition, before September 2004, prior approval from the RBI was required for remittances for use or purchase of trademarks and franchises in India. Later, prior approval from the RBI was restricted to remittances for the purchase of trademarks and franchises in India. Eventually in 2006, the requirement of prior approval from the RBI was done away with even for remittances for purchases of trademarks or franchises in India.

Until recently, automatic approval was given only for technology collaboration agreements involving payment of a lump-sum fee of US$2 million and royalties of 5% on local sales and 8% on exports. In addition, where no technology transfer was involved, remittance of royalties up to 2% on exports and 1% on domestic sales was allowed, under automatic route, for use of trademarks and brand names of the foreign collaborator. Remittances above these limits needed the approval of the Project Approval Board (PAB) of the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry.

In terms of press note 8 (2009) issued by the DIPP, the government has permitted payment of royalties, lump-sum fees and payments for use of trademarks and brand names under the automatic route, so these no longer need government approval.

This change has been welcomed despite the confusion caused by the rider accompanying it that technology collaboration arrangements are subject to the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Despite high levels of regularization, the number of technology sharing deals has increased steadily and with further liberalization, such deals should increase in number.

Divya Sridhar Associate Amarchand & Mangaldas & Suresh A Shroff & Co
Divya Sridhar
Associate
Amarchand &
Mangaldas &
Suresh A Shroff & Co

Indian businesses that want to enter into technology collaborations should be mindful that the know-how that becomes the subject matter of the collaboration should be suitable to and necessary for the Indian market environment. As there is usually a high premium on the technology that is being made available, it is advisable to assess its utility and necessity from all perspectives, especially business need. Accordingly, the need for the technology should be addressed in the documents that are signed by the parties. Further, the internal policies of the licensor or franchisor should be considered, while determining if the proposed collaboration will provide the desired results.

It is very important that the agreements between the parties are clear about the extent of the know-how being made available and details of how the payments are calculated. Agreements should also address how developments in the same technology will be shared and how much control the licensor or franchisor will have. The licensor’s concerns about the protection of its intellectual property (whether during or after the collaboration) need to be respected. This will ensure minimal chance of the licensor alleging that the licensee infringed his IP rights.

The method for dispute resolution should ideally be speedy and effective so as to minimize disruption to the work carried out by the collaboration. In addition, regular discussions between the collaborators would ensure smooth functioning and mitigate disputes.

Liberalization of the policy relating to technology collaborations is “sunshine” for Indian businesses. Previously, there were requirements for approvals and caps on the amounts that could be remitted to the foreign licensors of technology. With the easing of policy Indian businesses will be able to access advanced technologies and foreign licensors will be more than willing to share their technology. As a result Indian businesses can introduce technologically advanced products to the Indian market.

The development of technology, and its sharing, will be highly lucrative to Indian businesses. The liberalization of policy relating to technology collaborations, coupled with well-crafted arrangements, may continue to contribute to the growth of the Indian economy.

Pankaj Agarwal is a principal associate and Divya Sridhar an associate at Amarchand & Mangaldas & Suresh A Shroff Co. The views expressed in this article are those of the author and do not reflect the official policy or position of Amarchand Mangaldas.

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