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Guide to Appoint Distributors in India

Guide to Appoint Distributors in India

Consulting | Mar, 2020

Distributors are a vital part of the supply chain cycle. They link the producers/manufacturers with the retailers and ensure that finished goods reach the consumers on time. Additionally, with the growing demand for product specific entities from the consumer side, the role of distributors has become even more paramount in the present competitive landscape.

There are several benefits of employing distributors.  For instance, in wholesale business, you can limit your produce to only a certain market segment, while with the help of distributors, you can penetrate larger markets and build a wide consumer base. The biggest benefit, however, is knowledge about the ecosystem of local market where they operate. They pass on this key knowledge back to the producers and acquaint the market players with evolving customer demands and expectations. This drives the producers/manufacturers to innovate in order to stay ahead in the competitive market.

Recommended criteria for choosing the Right Distributor:

1) Financially Strong

Large amount of capital is required for the smooth functioning of business, and a financially strong distributor can use this for stockpiling the products from the manufacturers. Therefore, an upfront investment is required for the purchase the desired type and quantity.

A distributor must have sound financial means as a lot of upfront investment is required to keep the supply chain moving. Finance is an important criterion due to the following reasons:

a. A distributor is responsible to stockpile the products from the manufacturer.

b. A distributor is required to provide credit to retailer and other related institutions.

c. A distributor is also required to continually invest in its infrastructure which will support the entire distribution process.

2) Experience

There is no substitute for experience, and it is always preferable to go for an experienced distributor and this should be done for the reasons listed below:

a. When compared with inexperience or novice distributor, a seasoned distributor has contacts and is aware about the market and products which gives him/her a competitive edge over others. Also, an experienced distributor can build faster relationships with retailers and other institutions.

3) Infrastructure

Distributors need to have a strong infrastructural backing, in terms of vehicle fleet for the transportation of goods, warehouses to store products and adequate skilled manpower, to ensure seamless supply of goods between producers and retailers. The key components of infrastructure specific to a distributor include:

4) Reputation

A distributor with a good reputation can not only serve as a better advisor for local regulations but also help the producers with relevant contacts. Another important aspect is the relationship a distributor has with retailers.

5) Awareness to Technology

Distributors should be technologically aware in order to ensure smooth operations and save costs. There are various software and applications which can help a distributor ease his logistics and chain of distributions and better manage people and processes.

6) Positive attitude

A distributor with right attitude can make a business flourish in every possible way. A distributor is also a manager. He centrally manages the entire chain of operations and oversees lot of people and sub managers. Good negotiation skills with the producer and transparency and communication with employees are indispensable attributes of a distributor.

7) An eye for the future

It is a good thing to understand the future plans a distributor has for his distribution business and the methods he is going to adopt to expand the distribution networks and introduce cost effective techniques.

 

Appointing Distributors in India

Whether you are foreign or an Indian supplier, if you want to setup distribution in India, there are certain guidelines you should know.

Laws and government agencies which regulate the relationship between a supplier and its distributor.

The Indian Contract Act, 1872 (Contract Act) establishes the relationship between a supplier and a distributor. There is no specific industry which governs this relationship between the supplier and distributor. Certain local government agencies, nevertheless, put on the regulatory role. They address issues based on specific legal issues whereas government agencies enforce legislative laws where applicable. One example is the competition law which is enforced by the Competition Commission of India (CCI). This law ensures that any contractual arrangement between parties doesn't disturb the overall competition landscape and doesn't act as a barrier for new players.

Likewise, the Foreign Exchange Management Act (FEMA) of 1999 governs the involvement of foreign currency and payments related to imports of goods into India. Reserve Bank of India (RBI) regulates the entire sequence of operations. Issues related to risks, warranties and ownership of goods fall under the purview of Sale of Goods Act 1930.

Consumer Protection Act of 1986, governs the quality of goods and trade practices and also safeguards against unfair trade practices, defects and deficiency in goods and services.

The Patents Act of 1970 and Trademark Acts of 1999 protects intellectual property against plagiarism and unauthorized usage. 

The Distribution Structure in India

For the distribution of products in India, multiple structures are present. The same can be chosen depending on the manufacturer's objectives and nature of products. Listed below is the standard distribution structure followed in India:

a)      Distributors

The suppliers generally appoint a distributor and enter into a detailed distribution agreement. The suitability of distributor model depends upon the level of control the supplier wants to have on the distribution and sales activities. It is important to consider competition laws while setting up the distribution model. Factors such as resale, exclusivity, territorial regulations are important components in the distribution model.

b)      Agency

In this model, the supplier appoints agents and the supplier retains control over the product sale and price. The supplier in this case is legally responsible for every action of the agent. The agent gets paid on the basis of volume of sale he/she generates. The agency model works best in the case of products like Pharmaceutical devices and medical devices where it is legally required for suppliers to have certified agents.

c)       Franchises

The supplier can also choose to adopt a franchise agreement to distribute its products in India. The technical know-how is exchanged and business method and model is replicated in the franchise. Many foreign suppliers have taken the franchise approach to market and sell their products in India.

Licensing Agreement

Suppliers can also enter the market with a trademark licensing agreement. In this method, they would license their trademark receipt of negotiated payments from the party holding the license. The products under these agreements are usually manufactured in India and a royalty fee is levied on the associated products.

Strategic Alliances

Companies also enter into joint ventures with local partners. One example is the entry of Starbucks in India with Tata. Such strategic alliances draw upon the local expertise of the partner and penetrate the market in an effective manner while reducing risks.

Restrictions to Market the Product

The supplier or the distributor can advertise the product. However, there shouldn't be any violation of laws in India. In addition, there are specific laws on advertising of products such as cigarettes, alcohol, tobacco, food products, etc.

Additionally, there is no legal prohibition on a supplier who passes advertisement cost to its distributors. The agreement is private between the supplier and the distributor.

 

The Supplier Intellectual Property protection safeguarding by distributors or third parties.

The creators of original works are covered under Copyright protection. India is a signatory to Berne Convention for the Protection of Literary and Artistic works. Nevertheless, it is advisable to register the copyright in India as well. The Patents are mandated to be registered in India.

Apart from patents and copyrights, information such as trade secrets, non-disclosure and non-compete clauses also form a part of the distribution agreement. This distribution agreement can protect the supplier against any infringement done on the intellectual property. Moreover, the supplier can grant a limited license to the distributor. This limited license will enable the supplier to use the product under certain terms and conditions. Also, technological transfer agreements are also common in India and they are legally enforceable too.

Legal Requirements Related to Recall of Distributed Products

India has no general legislation, which governs the recall of products distributed in the market. Nevertheless, there are many legislative mandates which are established to serve the purpose.

For e.g., the Food Safety and Standard Regulations, established by Food Safety and Standards Authority of India sets up guidelines for products which are unsafe. Similarly, the automobile industry is guided by voluntary code on vehicle recall. This code was established by the Society of Indian Automobile Manufacturers (SIAM). Nevertheless, it must be noted that this code is not legally binding but voluntary. It is also left to the parties to come to an agreement related to the terms and conditions associated with recall such as cost absorption, supplier and distributor responsibilities etc.

Tax Considerations for Foreign Suppliers

In addition to the corporate income tax, the Double Taxation Avoidance agreement is required between India and the country of the supplier. Other taxes like Goods and Services Tax (GST), custom duty (for imports) are applicable too.

For interest owning and local shareholding, taxes applicable are dividend distribution tax and capital gain tax.

Regulation related to Foreign Investments

Foreign Direct Investment (FDI) policy governs and regulates the foreign investment in India. In most business sectors, FDI is allowed up to 100 percent without government or RBI permissions. However, for certain sectors, there is only a limited percent up to which foreign investment is involved. One such example is Retail.

Compensation in case of Termination without Cause

The compensation paid by one party to another is only paid if the contract was terminated unlawfully and the terms and conditions stipulates that a compensation be paid. There is no such statutory requirement for a party to pay compensation. In the absence of agreements, the compensation amount is determined by the courts.

Conclusion

The distribution setup in India is governed by set of guidelines and models which makes it easier for suppliers to establish their distribution networks. Setting up a distribution network is a mutually beneficial relationship between the supplier and distribution.  The network provides great scope for suppliers to market and increase their product portfolio and for distributors to expand their footprint. 

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