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.