Legal Matters

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I run a manufacturing company, which is engaged in the manufacture of XYZ components, which are used in the EFD Sector. As part of the manufacturing process, I foresee an increasing use of foreign technology as we try harder to stay competitive. If I want to license this foreign technology, how do I do it? Are there any registrations involved for a business?

As an aside, if I want to ensure that regular payments are made to me by overseas customers, is there any special suggestion you have?

Your question can be divided into three parts:

Regarding the licensing of technology

Essentially, if you are entering into a contract for the licensing of technology, you have to enter into what is called a Licensing Agreement.

The format of this agreement is not governed by any specific law, and will have to be drafted carefully keeping your unique needs in mind.

In addition to the licensing agreement, the foreign party will ask you to enter into a Non-Disclosure Agreement by which you agree not to reveal any business secrets, strategies, plans and proprietary practices which they have mastered over time.

If you have reasonable bargaining power, you can ask the foreign company to sign a Non-Compete Agreement so that they do not supply the same technology to your close competitors.

Registrations involved

There is no standard set of registrations involved which every business has to comply with. It entirely depends on the kind of business you are involved in.

Broadly speaking, the registrations can be divided into:

  - Company Law registrations and compliances for incorporated companies

  - If you are selling a product, you need to get Sales Tax / VAT Registration

  - If you are providing a service which is taxable, you need Service Tax Registration

  - If you are selling services in a foreign currency, you need to get FEMA Registration and clearances

  - The basic Income-Tax (PAN and TAN) Registrations have to be completed

Mechanism to ensure that payment is made regularly

One way to ensure that the payment is made periodically is to open what is called an escrow account. With an escrow account, the amount is transferred to the account right at the beginning, and it is transferred to you at periodic intervals, as and when a particular milestone is achieved.

For instance, if you have to supply a composite product, it may consist of three parts: Part A, Part B and Part C. If the total quotation for the transaction is Rs 6 lakh, you can divide it into thee milestones of Rs 2 lakh each. The entire amount of Rs 6 lakh will be transferred at the beginning to the escrow account and then as and when a milestone is completed, the amount (Rs 2 lakh) will be automatically released into your account. This can be done for service companies as well.

There are some restrictions on the opening of escrow accounts put by the RBI, but these will not apply to you, and the RBI is anyway liberalising the escrow account procedure – for instance, see RBI/2010-11/ 498A. P. (DIR Series) Circular No. 58.

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