Patent Licensing in India: Royalty Structures, Recordation and the FRAND Question

Patent licensing is the commercial layer that turns an Indian patent from a defensive instrument into a revenue-generating asset. The Patents Act, 1970 permits exclusive, sole and non-exclusive licensing under Section 68 read with Section 69. The Indian framework adds layers absent in many jurisdictions: recordation requirements with the Patent Office for enforceability, Foreign Exchange Management Act (FEMA) constraints on cross-border royalty flows, withholding-tax obligations under the Income-tax Act, and — for telecom and standardised-technology sectors — FRAND obligations on standards-essential patent licensing.

This guide covers the licence structures, royalty mechanics, recordation procedure, foreign-licensing considerations and FRAND specifics that Indian patent licensors and licensees should understand before negotiating any non-trivial patent agreement.

The three licence types

Indian patent practice recognises three structures:

• Exclusive licence — the licensee has the sole right to work the patent in the specified territory and field, excluding even the patentee. Section 70 of the Patents Act gives the exclusive licensee standing to sue for infringement in the licensee's own name (with the patentee joined)
• Sole licence — the licensee and the patentee can both work the patent; no third-party licensee is permitted. The licensee does not have stand-alone infringement standing — actions are brought by the patentee
• Non-exclusive licence — the patentee retains the right to license multiple licensees and to work the patent itself. The non-exclusive licensee has no infringement standing of its own

The licence agreement should specify which structure, what territory (India, sub-regions, or worldwide), what field of use (specific products, sectors, applications), and what licensable acts (manufacture, sell, import, use, sub-license).

Three licence structures. Three standing rules. The choice decides who can sue.

Recordation with the Patent Office

Section 69 of the Patents Act requires every assignment, licence or other transaction affecting a patent to be recorded with the Patent Office. The recordation is filed in Form 16 within six months of the transaction (with extensions on application). Unrecorded licences:

• Are not admissible in court as evidence of the licence in infringement and revocation proceedings
• Do not give the licensee priority against subsequent assignees or licensees who record first
• Can be discounted in compulsory-licensing or working-requirement analysis under Section 84 and Section 146

The practical compliance: every Indian patent licence should be recorded within six months. The fee is modest; the procedural protection is significant.

Royalty structures

Indian patent royalty structures typically follow one of four patterns:

• Running royalty — a percentage of net sales of licensed products. Typical rates range from 1% to 7% for industrial inventions and 3% to 15% for pharma and high-value technology
• Per-unit royalty — a fixed amount per unit sold. Common in semiconductor and consumer-electronics licensing
• Lump-sum payment — a single upfront payment in lieu of running royalties. Common for short-life inventions and design-around-targeted licences
• Milestone-based — fixed payments triggered by development, regulatory or commercial milestones. Common in biotech and pharma collaborations

Most commercial licences combine an upfront payment, milestone payments and running royalties, with a clearly-defined royalty base, audit rights and reporting cadence.

Cross-border licensing and FEMA

Royalty payments from India to a foreign patentee are governed by the Foreign Exchange Management Act, 1999 and the relevant Master Direction on Foreign Investment. Key constraints:

• Royalty up to 5% of net sales for domestic sales and 8% of net sales for export sales is permitted automatically without RBI approval, in accordance with the prescribed framework
• Lump-sum payments up to USD 2 million per agreement are also permitted automatically
• Beyond these thresholds, RBI approval is required
• Income-tax withholding applies — typically 10% to 25% depending on the treaty status and the licensee's compliance with PAN/TAN and treaty-benefit documentation

FRAND obligations on SEPs

For patents declared essential to industry standards — cellular (2G/3G/4G/5G), Wi-Fi, Bluetooth, audio/video codecs — the patentee has agreed with the standard-setting organisation to license on Fair, Reasonable and Non-Discriminatory (FRAND) terms. Indian courts in the Ericsson v. Micromax, Ericsson v. Intex and related matters have adjudicated FRAND rates and structures. The framework requires:

• Rate determination on a Fair basis — typically benchmarked against industry-comparable licences
• Reasonable terms in the licence overall — not just rate, but field of use, defensive-suspension clauses, audit terms
• Non-Discriminatory treatment compared to similarly-situated licensees

FRAND licensing in India typically follows global rate benchmarks adjusted for Indian market specifics, with the Delhi High Court as the principal adjudicating forum for unresolved disputes.

Common pitfalls

• Failure to record under Section 69 — the licence cannot be enforced in court without recordation
• Inadequate royalty base definition — disputes over what 'net sales' includes (discounts, returns, taxes, transfer-pricing) frequently arise
• Missing audit rights — without explicit audit rights, the licensor has no enforceable means to verify reported royalties
• Ambiguous field of use — broad licences without field limitations leave the licensor unable to license other players in adjacent fields
• Defective FEMA structure — royalty rates negotiated above the automatic-route thresholds without RBI approval are unlawful
• No exit / termination rights — the licensor stuck with a non-performing licensee with no termination remedy

The takeaway

Indian patent licensing combines contract drafting with regulatory compliance — Patent Office recordation, FEMA constraints, tax withholding and, for SEPs, FRAND obligations. The licence is not just a commercial document; it is a piece of regulatory architecture that determines what the patent produces commercially. The audit framework, the royalty-base definition, the field-of-use scope, and the recordation discipline together decide whether the licence is durable or dispute-prone. IPForte's patent licensing practice handles drafting, negotiation, recordation and dispute resolution across all sectors.