India is a largely dynamic and a fast-growing country having brains so brilliant that they come up with fresh new ideas very day. These ideas then go on to set up successful businesses and expand to the whole of India. The best way to further develop their businesses is to expand their market and venture into the global markets.
Indian businesses can enter the global markets in various ways. They could set up shops globally or appoint a third party that carries out their business operations. Direct control could be established by the incorporation of a subsidiary, joint venture, Liaison office, Project office or Branch office while the appointment of a third party could be through distribution agreements, third party manufacturing under license or outright sale of product via export.
FEMA comes into play when we look into the indirect control method of expansion into the global markets since the venturing leads to inflow of foreign exchange.
Overseas Distribution
Overseas distribution can be done in various ways such as forming distribution agreements with a third party, appointing sale agents connect your products to the markets that you want to be part of, and by outsourcing the manufacturing of your products to a third party.
The quickest way to achieve the same would be to sign distribution agreements with a third party who, being a local resident, could help in entering the target market and reaching the consumers in a much faster and effective way.
They allow the distributor to sell, market, and profit from the sales of a manufacturers or wholesaler’s product in bulk.
Advantages of Distribution Agreements
Distribution agreements can be very advantageous as they provide the company with an opportunity to branch out and expand their operations. The benefits of doing the same are:
- They enable you to enter the local markets easily while avoiding many logistical issues and other trade-related problems.
- It is normally the distributor who is responsible for the shipment of goods and their accompanying custom formalities and paperwork.
- The entry of a new brand becomes comparatively easier as an established distributor is the one to introduce the same to their customers.
- It would be easier for a distributor with an established reputation to introduce a new brand to the market.
- The marketing of the product is generally a concern for the distributors themselves and their methods tend to be more effective.
Procedure for establishing overseas distribution
The procedure for establishing a distribution agreement is fast, depending on the type of agreement you want. The steps that are required to be followed are:
Step 1. Set an appointment with the manufacturer
Step 2. Negotiate the distribution terms
Step 3. Review specifics, such as promotional literature
Step 3. Hire a lawyer to help you draft the terms
Step 4. Sign or renegotiate the contract
Step 5. Begin executing the agreement as contained within provisions
However, the major concern in this process is the type of distribution agreement you want to get into. The type of distribution agreement depends upon the type of transaction that you plan on engaging in. It’s important to choose the right agreement that suits your arrangement as it guarantees to protect the rights of both contracting parties.
There are four distribution agreement types including:
- Exclusive distribution agreements, where the supplier will give exclusive rights to the distributor to sell the products or services.
- Wholesale distribution agreements, where definite terms and conditions are adopted based upon the territory they work with.
- Distribution agreements for commissions, where sales decide the amount of compensation of the distributor.
- Developer distribution agreements, where the software and application developers decide upon the method of distribution.
Things to keep in mind when entering a Distribution Agreement
At Ab Initio, we work to help overcome any point of concern that may arise with the dealing of the Distribution Agreement and are eloquent in drafting all sorts of business agreements.
- Exclusive Distributor
It is primary to decide whether there will be a sole distributor appointed to sell the goods in the specified region/regions or whether there would be multiple distributors.
- Pricing
There are various ways in which the pricing of the product may be fixed and the same should be specified in the agreement along with the ceiling and floor pricing.
- Term of the Agreement
The terms of the agreement can fix a time period upon the distributorship. It could be fixed for one year, or a couple or years, or it could also be on automated renewal basis.
- Marketing rights
The marketing boundaries should be capped and floored so that both the parties are in consensus with the basics of how the marketing would be done going forward.
- Trademark licensing
There should be a proper framework in place that defines the use or restriction on the use of trademarks and other intellectual properties by the distributor to promote the product.
- The geographical territory covered by the agreement
It is foremost for any distribution agreement to define the territorial limits of the distributor so as to avoid any and all kinds of territorial disputes that could take place.
- Performance
The sales volume that are to be achieved by the distributor must be discussed well in advance and there should be an option of termination available with the same.
- Termination
All the circumstances and instances that could lead to a termination of contract should be discussed well in advance and both the parties should be very clear on them.
Role played by FEMA
The Foreign exchange Management Act, 1999 (FEMA) has been formed to regulate the inflow and outflow of foreign exchange in the country. When a company forms any sort of trade agreement with a body present outside India, the inflow or outflow of foreign exchange attracts the attention of FEMA.
According to FEMA, if the inflow of foreign currency is corresponding in the statement of accounts, then there are no problems regarding the exchange and no stoppages on the same.
Conclusion
Seeing as the trends go, a Distribution Agreement might be the most feasible way of expanding into foreign markets and growing as a company. The motive of a business should be categorically informed to the distributors so that the strategy is built around the objective of business. Even after all the precautions still a business can feel trapped under red tape or irritating and lengthy procedures. However, this is the game of profit. Once you are into it, you start enjoying it too, as the gain is always more than the pain.
We at Ab Initio aim to simplify the process and aid you throughout your business processes so that the passage of work is smooth and fruitful.
