Authored by: CA Punit Khandelwal, CA Sunit Khandelwal and Prof. Divya Aggarwal (EMLV, France; ex-professor at IIM, Ranchi, India)
Assisted by: CA Kshitij Vashistha and Nakul Gupta
In the dynamic landscape of global business, the pursuit of intellectual property rights and the associated royalty rates have emerged as crucial determinants of value creation and commercial success. As an advisory firm specialising in valuation and financial analysis, we take immense pride in presenting this thought paper that delves into the realm of royalty rates observed in India over the past decade, across both listed and private spaces. Royalty rates for the purpose of this paper are based on the license cost as a percentage of sales, a common approach used in business valuations.
This thought paper aims to shed light on the nuances of royalty rates in India and enable a reader to draw insightful comparisons with the US market. The exploration of these two distinct economies allows us to grasp the divergent factors influencing royalty rates and their implications on innovation, intellectual property, and business strategies.
Comparing the Indian and US Markets: The Indian and US markets, while both influential and robust, exhibit significant variations in their economic landscapes and industrial priorities. Over the last decade, India has steadily emerged as a burgeoning hub for innovation and technology, attracting a diverse array of industries seeking growth opportunities. In contrast, the US has long been renowned for its emphasis on research and development (R&D), fostering a culture of cutting-edge discoveries and pioneering advancements. These divergent orientations play a pivotal role in shaping royalty rates in the two geographies.
The Elusive Nature of License Contracts in India: Throughout our research, we encountered a key challenge that has invariably influenced our analysis: the scarcity of available license contracts in India. Unlike the US, where comprehensive data on license agreements are more readily accessible, India's regulatory framework and business practices have often kept these contractual details concealed. As a result, our efforts have been devoted to navigating through limited data sources, exercising caution while interpreting findings, and striving for a comprehensive understanding of the Indian market's royalty landscape.
The Lower Royalty Rates in India: One of the central themes that have surfaced during our research is the tendency for generally lower royalty rates in India compared to developed economies. This trend can be attributed to several factors, including the prevailing emphasis on cost optimization, the evolving intellectual property framework, and the varying stages of industry maturity. Additionally, the concentration of entities in India focusing on R&D is not as pronounced as in the developed economies, leading to contrasting approaches to royalty negotiations.
Regulatory Restriction: The regulatory restrictions concerning the repatriation of funds is also one of the reasons for the disparity. In India, remittances under technical collaboration agreements necessitate the approval of the Ministry of Commerce and Industry if the royalty payment exceeds 5% on local sales and 8% on exports, or if lump-sum payments exceed USD 2 million.
Our Path Forward: With these comparative points in mind, we present this thought paper as a foundation for further exploration. Through rigorous analysis and comparison, we aim to provide practitioners, stakeholders, and investors with valuable insights into the factors shaping royalty rates in India, the challenges encountered in the valuation process, and the implications these rates hold for businesses and investors alike.
We extend our heartfelt gratitude to all contributors, researchers, and industry experts whose invaluable insights and support have made this endeavour possible. It is our hope that this thought paper will serve as a catalyst for deeper analyses and foster a greater understanding of royalty rates in India.