Synopsis—-There have been exits in other sectors also. But the case for the auto industry is peculiar. In the auto sector, a consumer has to come back to the dealer after buying the goods for parts, accessories and service. Dealers have little legal protection when their franchisor decides to pull the plug.
Lijee Philip and Maulik Vyas
The going was smooth and the road ahead looked clear as far as business was concerned. This encouraged Adarsh Tulshan, who was selling Harley Davidson (HD) bikes from his Kolkata dealership since 2012, to expand to Ranchi in mid-2019. HD was planning to get into mid-weight bikes and expand its range. The outlook was bullish and HD dealers were expanding their distribution network. Tulshan, 41, invested close to Rs 4 crore on the new 2,500 sqft sales and service centre.
Then, in September, the iconic US motorcycle manufacturer abruptly terminated its distribution agreements and said it was “evaluating options” about continuing in India. This was seen as HD getting ready to exit the country. The development left Tulshan in the lurch. Apart from losing his capital, he was also stuck with the inventory, spares and merchandise. All the 33 HD dealerships in the country faced a similar fate.
The company told ET Magazine it was working out a plan for customers and dealer partners. Several foreign auto brands have quit India. Such exits leave behind a trail of dealers who are forced to close service stations and let go of their employees. During a pandemic like now, the pain is compounded.
There have been exits in other sectors also. But the case for the auto industry is peculiar. In a food and beverage chain or a retail chain, for example, a consumer doesn’t have to visit the store after a purchase is made. In the auto sector, however, a consumer has to come back to the dealer after buying the goods for parts, accessories and service.
Dealers have little legal protection when their franchisor decides to pull the plug.
India does not have an evolved franchise protection law and this heightens dealers’ risk exposure. For example, when American bikemaker UM ended its venture with Lohia and decided to leave India, its spare parts’ warehouse was also shut. Customers took dealers to court claiming the defective parts and bikes were not being serviced or replaced. The dealers couldn’t do much. The closure of UM Lohia Two Wheelers cost 80 dealers across the country Rs 150 crore, says Federation of Automotive Dealers Association (FADA). About 2,500 jobs were also lost.
Dealers of General Motors faced a similar problem in 2017. When the American carmaker left India, the franchisees had to fend for themselves with issues related to spares and services. Apart from losing several crores of rupees, dealers had to let go of about 15,000 people and deal with 18,000 unsold vehicles (FADA estimates) that had no after-sales support. Customers had an even bigger problem: the resale value of GM vehicles plummeted.
There is no clear exit policy and dealership deals are often terminated without giving a proper reason, say legal experts, and sometimes even a reasonable amount of time. There is no fair compensation for the spares and infrastructure costs borne by the dealerships or for the loss of jobs, said Vinkesh Gulati, president of the FADA.
“In spite of the franchise model being a popular concept in India and several international brands operating on a franchise model, India does not have any specific law on franchise,” said Stuti Nemji Galiya, solicitor at Khaitan & Co. “The absence of a comprehensive franchise-centric legislation poses several challenges and complexities as it requires a robust understanding of the country’s regulatory structure due to multiplicity of regulations.”
Dealers are now increasingly demanding some kind of protection. Legal experts say a franchise protection act is the need of the hour, especially as dealerships agreements are highly skewed in favour of manufacturers. Dealers often have no say in the management of their retail business.
FADA has started engaging with legal experts to frame a policy on the lines of the Federal Trade Commission Franchise Rule in the USA that mandates a detailed “disclosure document” be provided to the prospective franchisee before the parties enter into a relationship. This proposed policy intends to give protection to franchise agreements across industries, say legal experts.
Anupam Sanghi, managing partner at Anupam Sanghi & Associates, says due to a disparity in the bargaining power, a franchisor’s opportunity to abuse its position to the disadvantage of the franchise is considerably high. An enactment like in the US is required in India to bring in accountability and avoid abrupt job losses and losses to dealers, adds Sanghi, who is working with stakeholders concerned to draw up an outline for the policy.
In the absence of a specific law, franchise arrangements are covered under various general laws, such as the Indian Contract Act, the Competition Act, 2002 and the Consumer Protection Act, among others.
“Perhaps, having a franchisespecific law could be considered as part of the government’s easeof-doing business manifesto,” says a lawyer who has negotiated franchise agreements on behalf of companies. “This would definitely go a long way in creating a positive impact on the franchise industry in India.”
But not everyone agrees that might be the best way forward. Given that there are so many laws in India, adding another franchise law will not make the life of investors any easy, said Neeti Shikha, academic council member at the India School of Public Policy. “What can be desirable is having model agreements wherein all the issues that have occurred in, say, the past 10 years with franchise agreements can be addressed through model clauses.