Bengaluru, 9th June 2010 : Kaati Zone, the first Indian fast food chain in India specializing in Kaati rolls opened its first franchise outlet at Kempapura main road, Hebbal, Bengaluru.
The brand new outlet has a seating capacity of 40 and offers dine-in, take away and delivery service to the customers. The spacious 1,200 sq ft restaurant is situated behind the Esteem Mall, near Sindhi College, in Kempapura, Hebbal. The interiors and architecture has international standard and style.
Speaking about the franchise business model, Kiran Nadkarni, CEO Kaati Zone, says "Kaati Zone is strongly differentiated in the marketplace as the only QSR brand offering Indian foods. Over 14 own restaurants in different environments, we have proven the viability of our concept. A franchise of Kaati Zone restaurant is an attractive proposition as a business idea for entrepreneurs and to generate superior returns on their capital."
Moutushi Mallik, the Hebbal Kaati Zone franchisee says, "Owning a business was a dream for many years and I looked at several options. After a lot of research, I zeroed in on Kaati Zone. The cuisine and the concept are perfect, and the company has years of experience to back my venture and a professional team to guide me at every juncture. I am very excited as the Kaati Zone business opportunity is a great fit for the change in life I was looking for."
Kaati Zone restaurants & kiosks are designed based on global trends in quick service restaurants where customers can grab a quick bite. The outlet offers the full range of items offered by Kaati Zone including Kaati Rolls, Sides, Salads, Parathas, Rice Meals, Desserts and Beverages. The outlet is open 7 days a week from 11:30am to 10:30pm.
About Kaati Zone:
Kaati Zone is the first chain of restaurants in India that specialises in Indian quick service foods. The idea of Kaati Zone was conceived by the founders as a brand of Indian quick service restaurants for customers both within India as well as overseas. Kaati Zone offers healthy and hygienic food at moderate prices and addresses the needs of busy customers in different daily environments. Presently, there are 15 Kaati Zone restaurants in Bangalore & Mumbai located at strategic locations.
For customers who want the convenience of eating a meal at home or office, Kaati Zone provides free delivery service with a dedicated call centre. Customers can call 411-22-100 to get Kaati rolls delivered at their doorstep. One can also log onto www.kaatizone.com for online ordering.
Kaati Zones in Bangalore
Church Street - S&B Towers , opposite Abu Dhabi Commercial Bank - ADCB
Indiranagar - 80 ft. Road, opposite 12th Main , adjacent to Planet M
Hebbal - Kempapura Main Road, Kempapura
Bangalore International Airport, Devanahalli - Near arrival gates
Koramangala - 5th Block, near Jyoti Niwas College and Opposite Empire Hotel
Malleswaram - 8th Main near 19th Cross, adjacent to BPCL petrol station
Banashankari - 2nd Stage, opposite BDA Complex
Total Mall - Sarjapur Road
Embassy Golf Links Business Park - Intermediate Ring Road
RMZ Infinity Tech Park - Old Madras Road
RMZ Ecospace Tech Park - Outer Ring Road
Dell Campus - Intermediate Ring Road
Accenture Campus - Bannerghatta Road
Tags:bangalore franchise, franchise bengaluru, bangalore franchising, Kaati Zone, kiosk franchise, franchise business model, kaati zone franchise, Fast Food Franchise,Restaurant Franchise,
Source:Press Release, Admanya.Com, June 14 2010.
Showing posts with label franchise business model. Show all posts
Showing posts with label franchise business model. Show all posts
Monday, June 14, 2010
Friday, June 11, 2010
Entrepreneurship & Entrepreneurs Engage India Inc For Growth.Are You Ready For Business!!
Entrepreneurship Rewards:
Identify a need and fill it is the business mantra today. It calls for a certain ability to understand requirements and match the standards of produce for the customer. The measure product requirement in the market, people orientation must be properly scaled and a study of inclination to buy the product at reasonable costs must be made. Research on its utility, acceptance, weaknesses, and competition must be identified and practically addressed.
Two kinds of people cohabit the world of business. The normal business psyche markedly differs from the employee mindset. Employees are concerned with career, position, increment, and a good take home salary; and they do not go beyond. Ambitions are limited and have boundary lines.
The business oriented people have a pattern of interests and the manifold vision and mission seem to be superior in the thought process and functioning style. One with the orientation of business not only thinks of money, but his thoughts extend beyond personal growth. The strategy is to live with good employees, build higher infrastructure, produce a superior product line, win competition, and finally be the backbone of the country’s sustained economics.
Entrepreneurship invariably has a sense of independence culminating into a desire; a desire to achieve in spite of obstacles and constraints, constantly desiring to be successful. With this comes a state of mind, which becomes strong with every passing day. This desire will sustain all hardships.
The first generation entrepreneurs are those who will have crossroads of anxieties, personal dilemmas, and conflicting ideas of birth and death of business models. They have the real spirit of adventure and a diehard attitude. Some succeed and continue to win, while some meet with an untimely end.
The success and failure in business although is very transient, the qualities and personal markings that an entrepreneur must cultivate are imminent, and let us examine them.
Attributes: Doing business does not mean that one has to be equipped with high qualifications. Qualities of aggressiveness, social exposure, networking, street smartness, ability to grasp things quickly, being good at mental mathematics, and the ability to think laterally and find solutions are the most important hallmarks of intelligence that are required to become successful in business. Above all, a person must have marketing abilities.
Attitudes: Patience and perseverance are essential attributes in doing business, the ability to compromise when things are down and striving for betterment in future are qualities of merit. Scaling down or scaling up are strategic decisions and are not stagnant processes confined to boundaries of management.
Business Ethics: Business ethics and value systems need to be in place, without which the foundations will become weak over a period of time. An organization with staunch value systems and practices would certainly consolidate its brand image and brand equity. Companies gain reputation by virtue of aggrandizing customer faith and public interests, nurturing and cultivating best business practices.
Human Value Systems: A strong HRM is a deciding platform, or the root, of any organization; it has to have fair practices, be six sigma principle driven, and keep up ethical values. Traditional companies have been very successful in consolidating human resources as opposed to non-traditional companies, which, in the name of innovation and rational approach invite more trouble.
Crisis and Risk Management: Minimizing threats, maximizing benefits, and the ability to handle crisis in organizations are other great attributes. Defining the problem or issue, looking for alternatives, methodology to resolve crisis, freezing best alternatives, and implementing orders conceived by these efforts are basic requirements. Risk management should be value driven, an integral part of organizational process, should lead to focused elimination of uncertainties, and decisions need to be taken on the basis of factual information and be tailored.
Franchise Business Opportunities
The modern business opens up innumerable opportunities for the discerning entrepreneur; one such opportunity could be the franchise model. A successful business with established brand equity may offer franchise in selected areas and in your location. Here, the business model built is preconceived and meditated to generate business from day one of operations. All that one has to do is to strictly follow the defined disciplines and comply with internal and external mechanisms. There will be a detailed franchise orientation and product or service trainings, and one must learn it from the roots.
Defined clientele and expected ROI, from familiar boundary lines are the advantages in this model. Leveraging brand capitalization business edge, with no need for extra intelligence, the principal franchisor will have everything in place and one has to learn everything with patience and perseverance.
The market survey, competitor activities, and tests and trials are all being taken care of by the franchisor. It’s with this franchise model that good companies garnish further growth and capitalize markets. Name any FMCG brand today; they will have surely taken the franchise business model for their marketing strategy.
In this scope and venue, young capitalists can take maximum opportunity to start a business, with the assurance of guaranteed and measured business outlay and strategies.
MNC brands, who are onto the franchise business model, will have very defined structures in conducting their business, advertising strategies, marketing techniques, promotional campaigns, and events. Customer services will be clearly defined and practiced. Their training camps for appointed franchisees comprise of all the facets of business management. In short, franchise business being a time-tested and proven model can assuredly generate business, with the least amount of efforts and low turnaround time. Quality assurance and supervision will be slated at every stage of the product and best quality of product is guaranteed. Consumers will have assorted international brand choice and satisfaction.
Sir M.Vishweshwaraiah once said ‘Industrialize or perish’. He saw such great need for India to become self sufficient, and encouraged total industrial revolution. Entrepreneurship does not rest at the doorsteps of businessmen but extends its benefits to a larger public welfare and society. It eases unemployment in the country and creates new frontiers of employment opportunities.
Jawaharlal Nehru contended once saying: As long as there are tears and suffering, so long our work is not over. He advised us to sacrifice, focus our efforts, and to strive hard in removing poverty and hunger.
India today is Asia’s fast growing developed economy, advancing faster on the global scenario to become a super power. India's per capita income (an indicator of collective prosperity) is $1,124, ranked 139th in the world, while its per capita (PPP) of $3,176 is ranked at 128th place. Previously a closed economy, India's trade has grown fast in the past two decades. India currently accounts for 1.5 percent of world trade according to the WTO. After taking inflation into account, the per capita income is estimated to grow by 5.4 percent to Rs. 33,540 this fiscal against Rs. 31,821 during 2008-09. Last fiscal, it grew by 5 percent.
The future of India lies with its young, strong-willed entrepreneurs and the spirit with which this community takes off decides the future standing of this great nation. For the young and agile entrepreneurs multi-skilled and tailored entrepreneurship development courses, distance learning, and e-learning methodologies are now open.
Tags:India entrepreneurs, India Entrepreneurship, Franchise Business Opportunities, franchise business model, offer franchise,appoint franchisees,entrepreneurship development,
Source:Silicon India,Entrepreneurship Rewards
Author: R.Subramanya, Associate Vice President, Educampus
Identify a need and fill it is the business mantra today. It calls for a certain ability to understand requirements and match the standards of produce for the customer. The measure product requirement in the market, people orientation must be properly scaled and a study of inclination to buy the product at reasonable costs must be made. Research on its utility, acceptance, weaknesses, and competition must be identified and practically addressed.
Two kinds of people cohabit the world of business. The normal business psyche markedly differs from the employee mindset. Employees are concerned with career, position, increment, and a good take home salary; and they do not go beyond. Ambitions are limited and have boundary lines.
The business oriented people have a pattern of interests and the manifold vision and mission seem to be superior in the thought process and functioning style. One with the orientation of business not only thinks of money, but his thoughts extend beyond personal growth. The strategy is to live with good employees, build higher infrastructure, produce a superior product line, win competition, and finally be the backbone of the country’s sustained economics.
Entrepreneurship invariably has a sense of independence culminating into a desire; a desire to achieve in spite of obstacles and constraints, constantly desiring to be successful. With this comes a state of mind, which becomes strong with every passing day. This desire will sustain all hardships.
The first generation entrepreneurs are those who will have crossroads of anxieties, personal dilemmas, and conflicting ideas of birth and death of business models. They have the real spirit of adventure and a diehard attitude. Some succeed and continue to win, while some meet with an untimely end.
The success and failure in business although is very transient, the qualities and personal markings that an entrepreneur must cultivate are imminent, and let us examine them.
Attributes: Doing business does not mean that one has to be equipped with high qualifications. Qualities of aggressiveness, social exposure, networking, street smartness, ability to grasp things quickly, being good at mental mathematics, and the ability to think laterally and find solutions are the most important hallmarks of intelligence that are required to become successful in business. Above all, a person must have marketing abilities.
Attitudes: Patience and perseverance are essential attributes in doing business, the ability to compromise when things are down and striving for betterment in future are qualities of merit. Scaling down or scaling up are strategic decisions and are not stagnant processes confined to boundaries of management.
Business Ethics: Business ethics and value systems need to be in place, without which the foundations will become weak over a period of time. An organization with staunch value systems and practices would certainly consolidate its brand image and brand equity. Companies gain reputation by virtue of aggrandizing customer faith and public interests, nurturing and cultivating best business practices.
Human Value Systems: A strong HRM is a deciding platform, or the root, of any organization; it has to have fair practices, be six sigma principle driven, and keep up ethical values. Traditional companies have been very successful in consolidating human resources as opposed to non-traditional companies, which, in the name of innovation and rational approach invite more trouble.
Crisis and Risk Management: Minimizing threats, maximizing benefits, and the ability to handle crisis in organizations are other great attributes. Defining the problem or issue, looking for alternatives, methodology to resolve crisis, freezing best alternatives, and implementing orders conceived by these efforts are basic requirements. Risk management should be value driven, an integral part of organizational process, should lead to focused elimination of uncertainties, and decisions need to be taken on the basis of factual information and be tailored.
Franchise Business Opportunities
The modern business opens up innumerable opportunities for the discerning entrepreneur; one such opportunity could be the franchise model. A successful business with established brand equity may offer franchise in selected areas and in your location. Here, the business model built is preconceived and meditated to generate business from day one of operations. All that one has to do is to strictly follow the defined disciplines and comply with internal and external mechanisms. There will be a detailed franchise orientation and product or service trainings, and one must learn it from the roots.
Defined clientele and expected ROI, from familiar boundary lines are the advantages in this model. Leveraging brand capitalization business edge, with no need for extra intelligence, the principal franchisor will have everything in place and one has to learn everything with patience and perseverance.
The market survey, competitor activities, and tests and trials are all being taken care of by the franchisor. It’s with this franchise model that good companies garnish further growth and capitalize markets. Name any FMCG brand today; they will have surely taken the franchise business model for their marketing strategy.
In this scope and venue, young capitalists can take maximum opportunity to start a business, with the assurance of guaranteed and measured business outlay and strategies.
MNC brands, who are onto the franchise business model, will have very defined structures in conducting their business, advertising strategies, marketing techniques, promotional campaigns, and events. Customer services will be clearly defined and practiced. Their training camps for appointed franchisees comprise of all the facets of business management. In short, franchise business being a time-tested and proven model can assuredly generate business, with the least amount of efforts and low turnaround time. Quality assurance and supervision will be slated at every stage of the product and best quality of product is guaranteed. Consumers will have assorted international brand choice and satisfaction.
Sir M.Vishweshwaraiah once said ‘Industrialize or perish’. He saw such great need for India to become self sufficient, and encouraged total industrial revolution. Entrepreneurship does not rest at the doorsteps of businessmen but extends its benefits to a larger public welfare and society. It eases unemployment in the country and creates new frontiers of employment opportunities.
Jawaharlal Nehru contended once saying: As long as there are tears and suffering, so long our work is not over. He advised us to sacrifice, focus our efforts, and to strive hard in removing poverty and hunger.
India today is Asia’s fast growing developed economy, advancing faster on the global scenario to become a super power. India's per capita income (an indicator of collective prosperity) is $1,124, ranked 139th in the world, while its per capita (PPP) of $3,176 is ranked at 128th place. Previously a closed economy, India's trade has grown fast in the past two decades. India currently accounts for 1.5 percent of world trade according to the WTO. After taking inflation into account, the per capita income is estimated to grow by 5.4 percent to Rs. 33,540 this fiscal against Rs. 31,821 during 2008-09. Last fiscal, it grew by 5 percent.
The future of India lies with its young, strong-willed entrepreneurs and the spirit with which this community takes off decides the future standing of this great nation. For the young and agile entrepreneurs multi-skilled and tailored entrepreneurship development courses, distance learning, and e-learning methodologies are now open.
Tags:India entrepreneurs, India Entrepreneurship, Franchise Business Opportunities, franchise business model, offer franchise,appoint franchisees,entrepreneurship development,
Source:Silicon India,Entrepreneurship Rewards
Author: R.Subramanya, Associate Vice President, Educampus
Monday, March 8, 2010
TCY adopts Franchise Fee Refunds After 1 Year If franchise Location does'nt work : Another Franchise Strategy To Woo Franchisees
TCY Scouts For Business Partners, Offers 'Zero Investment Loss Risk'
TCY is taking the risk out of franchising. Offers to refund 'License Fees' if the franchise doesn't take off.
Ludhiana, Punjab, March 8, 2010- TCY, the education services company, has unveiled a franchising model wherein a new franchisee enters the business with 'zero investment loss risk'. The company is now offering a clause in the contract wherein a new franchisee can exit the business without having to bear the licensing fee costs. TCY is currently operating more than 32 franchisees across North India and is looking for partners in Haryana, Himachal Pradesh and J&K.
Aman Bansal, the business head of franchising division of TCY said, "Franchising is a proven and replicable business model but sometimes doubts remain in the mind of the potential franchisees. With our new contractual clause, if a franchisee wants to exit the business within one year of start of operations, we will refund the entire licensing fees." The two major initial outlays of starting a franchising business are the infrastructure costs and licensing fees. In the event of a franchisee location not working out, the company will refund the licensing fees while the infrastructure will remain with the franchisee.
The company has been in the business for more than twelve years and has developed an efficient franchise business model which has proven to be robust and scalable. In fact, many franchisees that originally started out with one centre are operating multiple centres now. Another advantage for the potential franchisee is the instant brand recall that he would get by associating with an established business brand. Since TCY bears all the advertisement costs, the publicity costs are also greatly reduced for the franchisee.
Notes to Editor
About TCY
TCY, also known as Top Careers and You, is one of India's most admired educational services providers in the education franchise industry. Its English coaching arm, BetterThink, has coached more students than any other entity in India. Operating with a hybrid offline as well as online model, TCY has carved out an identity in test preparation sector. TCYonline.com, the website of the company has over 7, 50,000 students from more than 1500 cities and town of India enrolled on it. On the website, students can take free tests from more than 50 categories. National Benchmarking Test (N.B.T.), a school programme by the company, has received rave reviews from schools across India.
TCY is taking the risk out of franchising. Offers to refund 'License Fees' if the franchise doesn't take off.
Ludhiana, Punjab, March 8, 2010- TCY, the education services company, has unveiled a franchising model wherein a new franchisee enters the business with 'zero investment loss risk'. The company is now offering a clause in the contract wherein a new franchisee can exit the business without having to bear the licensing fee costs. TCY is currently operating more than 32 franchisees across North India and is looking for partners in Haryana, Himachal Pradesh and J&K.
Aman Bansal, the business head of franchising division of TCY said, "Franchising is a proven and replicable business model but sometimes doubts remain in the mind of the potential franchisees. With our new contractual clause, if a franchisee wants to exit the business within one year of start of operations, we will refund the entire licensing fees." The two major initial outlays of starting a franchising business are the infrastructure costs and licensing fees. In the event of a franchisee location not working out, the company will refund the licensing fees while the infrastructure will remain with the franchisee.
The company has been in the business for more than twelve years and has developed an efficient franchise business model which has proven to be robust and scalable. In fact, many franchisees that originally started out with one centre are operating multiple centres now. Another advantage for the potential franchisee is the instant brand recall that he would get by associating with an established business brand. Since TCY bears all the advertisement costs, the publicity costs are also greatly reduced for the franchisee.
Notes to Editor
About TCY
TCY, also known as Top Careers and You, is one of India's most admired educational services providers in the education franchise industry. Its English coaching arm, BetterThink, has coached more students than any other entity in India. Operating with a hybrid offline as well as online model, TCY has carved out an identity in test preparation sector. TCYonline.com, the website of the company has over 7, 50,000 students from more than 1500 cities and town of India enrolled on it. On the website, students can take free tests from more than 50 categories. National Benchmarking Test (N.B.T.), a school programme by the company, has received rave reviews from schools across India.
Monday, March 1, 2010
Franchise Industry Reforms Road Map : A Wish List to Govt Of India.
Franchising paves way to entrepreneurship
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Cartridge World Franchise voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
With the union budget 2010-11, the franchise industry's budget expectations would facilitate the necessary reforms and enable the sector to take the next big leap. Franchising has been a significant organiser as well as facilitator of small and medium businesses across industry verticals, thus galvanising the evolution of organised markets. Replication of structured business practices through franchising has contributed significantly in bringing a large number of business units under the tax net. However, policy makers are yet to deliver a conducive eco-system for the growth of the franchise community, which incidentally includes a new breed of Indian entrepreneurs. An intricate framework of legal policies supported by transparent tax policies as well as robust funding institutions is sought by the industry.
Franchising paves way to entrepreneurship
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start -ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun.Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Franchisee, Cartridge World voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Cartridge World Franchise voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
With the union budget 2010-11, the franchise industry's budget expectations would facilitate the necessary reforms and enable the sector to take the next big leap. Franchising has been a significant organiser as well as facilitator of small and medium businesses across industry verticals, thus galvanising the evolution of organised markets. Replication of structured business practices through franchising has contributed significantly in bringing a large number of business units under the tax net. However, policy makers are yet to deliver a conducive eco-system for the growth of the franchise community, which incidentally includes a new breed of Indian entrepreneurs. An intricate framework of legal policies supported by transparent tax policies as well as robust funding institutions is sought by the industry.
Franchising paves way to entrepreneurship
The magnitude as well as the future potential that Indian domestic consumption exhibit makes it an attractive destination for investments. However, statistical trends give a wider perspective of the potential of the Indian market. Yet the investments, both domestic as well as international have had always taken a conservative pace. Presently, liberalisation and market openings have facilitated the business dynamics to become more conducive for entrepreneurial activity. There has been a positive entrepreneurial activity in the business environment which is extremely important as the economic studies have repeatedly proven that innovation as well as entrepreneurship can propel the fiscal machinery of the nation.
India has presented a curious case as entrepreneurial activity here always had its own implication. It has been observed that 90 per cent of start -ups fail in the first year of their inception. There are many reasons for it. Firstly, the Indian market is testing waters in terms of readiness for newer business concepts and formats. Moreover, mature business systems are yet to be developed in terms of redesigning the whole process of starting a business which ideally should be a seamless process. Unfortunately, in India the burden of regulatory procedures as well as processes makes it strenuous for the entrepreneurs as well as innovators. As a result, most of the entrepreneurial activity is reduced to low involvement as well as low risk models. Franchising as an entrepreneurial route is extremely interesting and successful. The acceptability of franchising has been quite prolific amongst Indian business minds. According to the figure, 90 per cent of the franchising ventures have a huge probability of success. This attracts many investors to invest in proven business models and concepts which involve less risk as well. This however is just the tip of the iceberg, although, there is a lot more to franchising than the apparent. Also, franchising in the Indian market becomes much more intricate rather than just being a low capital expansion mode.
Industry status to franchising
India is an attractive market for franchising. The expanded market size seeks deeper as well as broader market penetration. However, the demographic variables make this expansion a risky proposition, especially in a capital constrained market like India. India, as any developing country seeks investment, technology as well as business know-how from the developed countries. Foreign investments have repeatedly done wonders in turning the market game around as it tends to make markets more competitive for IT, retail, manufacturing or service sectors.
The franchise industry in India is currently an anonymous contributor to the country's economy, which is not favourable for a sustainable growth. As Arun.Khetan, Managing Director, The New Age Knowledge Solutions (NAKS) explains, "The status will not only have a detrimental impact on further proliferation of franchising but will also deprive excellent local brands the opportunities to come up with products/services that are of relatively superior value proposition compared to many foreign brands, which are much new to the Indian turf, in terms of knowledge of local preferences and delivery mechanism, but score out heavily in terms of resource deployment and hence are able to reap away most of the benefit." He further adds , "The need of the hour is that the Indian franchising be formally recognised as an industry, which would propel the action plan and processes of the industry and set the ball rolling, that would have a cascading effect on all the interfaces that are related to it either directly or indirectly."
The policy makers must recognise the fact that this is a format segment that cuts across all the industries and that its presence in the Indian backdrop is real. Granting legitimacy would not only put an end to the shadow war but also make the world wake up to the fact that Indian policy makers are serious about the franchising business. This would have mammoth implications in terms of perception that overseas market carry about Indian franchisors and franchising products / services and bestow credibility (which, due to lack of Government sanctity currently rests mostly on private players who have forayed abroad on their own grit, merit and strength).
Remove dual taxation policy on the franchise systems
Under Notification No. 7/2003 dated 20.06.2003, service tax is payable on the gross amount charged by the franchisor from the franchisee in relation to franchise. However, the definition of franchise services flawlessly comprehends the scope of the business activity. The implementation triggers a lot of impact on the operationalisation of the format. Today, Indian franchisor is subjected to dual taxation of service tax and sales tax. Product franchising is a mode of product distribution. Therefore, from cost price to sales price, there is VAT applicability. At the same time, franchisors are liable to pay service tax on franchise service given to the franchisee. To avoid a dual tax liability, franchisors prefer to give product outright basis with advance billing rather than on consignment basis and also prefer to call their partners dealers instead of franchisees to avoid the service tax accrual. The final burden of the service tax is passed on to the franchisee, as the franchisor is unable to forgo his share of franchise fees, which dampen the entrepreneurship of the small businesses.
While, the taxes are nonetheless critical, however in a franchise operation the implication of these taxes are not justified and commonly led to situation where franchisors particularly, retail franchisors are shying to term themselves as franchisors and have diluted the business practices which are fundamental to the success of franchising format. Thus, the business practices that emerged further, complicates the franchisee-franchisor relationship, and also make the legal framework more tedious, in addition, the whole magnitude of the franchising industry is often misinterpreted.
Agreeing to the point Akhil Chaturvedi, Director, Provogue (India) Limited says, "For the franchise industry to thrive successfully, it would require the abolition of service tax currently levied on transportation, rent and commission."
Badrinath, Director, Accretive Business Consulting, said that the dual taxation status needs to be resolved. This has not only added to the cost of operations, but also has put the sector at cross roads. Further, not only retail, but also other sectors like software are facing a negative impact for the same.
Both franchisors as well franchisees across sectors believe that franchise services should not be liable to service tax. There is a strong opposition from the franchisees as the franchise system in India is yet to reach a mature stage and hence the tax policy must facilitate the format to become more competitive. Sharing his views Kundan Kashyap, an Archies Franchisee based in Ranchi says, "Service tax should be abolished as the franchisees pay full VAT and hence dual taxation should be avoided. Government should understand the franchise concept is unique in the way that the most of the resources involved are invested by the franchisee." Sharing the same view, Chander, Franchisee of Catmoss based in Sarojani Nagar New Delhi says, "Service taxes causes unnecessary burden on the franchise service formats and cause operational hurdles."
Service tax on rentals should be avoided
Real estate has become one of the most important aspects of franchise preposition or for that matter a retail success. The rental lease cost could be a significant contributor to the franchisee's running cost. With service tax plus education cess at 10.30 per cent, every tenant will now pay service tax equivalent to six weeks of rent. The industry seeks abolition of service tax on the rental leases. Badrinath, suggests, "The applicability of service tax on rentals should be clarified." With the verdict of Delhi High Court in case of home retail already being challenged by the Central Government, it would be good if the Supreme Court could hear the case and provide the ruling at the earliest. In the retail sector, rentals being one of major expenditures, a 10.30 per cent of rent therefore is significant from both, cash flow as well as margin perspective` This would be a relief for a margin centric business like retail. Lack of structured industry specific measures prevent the business to avail industry appropriate benefits. Shubhranshu Pani, MD, Retail Services, Jones Lang Lasalle Meghraj recommended that pertaining service tax on the rentals should be clarified and freed from existing ambiguity. Over the last few years, there has been an increasing tendency to indiscriminately levy tax on contracts rather than tax on services. Ninad Kapre, also believes that there should be a simple tax structure which is implemented in a fair and transparent manner.
Introduction of a flawless GST
Eliminating the current system of dual taxation, application of a uniform GST, will have its own implications. Since GST is not just VAT plus service tax but an improvement over the previous VAT and disjointed service tax, the tax incidence will come down in case of goods. Tax experts are of the view that this budget is crucial for implementation of a comprehensive as well as flawless implementation of GST nation-wide to enable the economy to become more competitive. The GST implementation should be robust to involve the extended industries. Jalan explains, "In case of services, the incidence, and coverage of tax may rise resulting in higher prices. In this context, for the franchise industry, service franchising may be less lucrative. Supply chain efficiencies will further support this phenomenon. For goods, the existing rate is more than 20 per cent, but for services, the existing rate is 10.3 per cent since GST is expected to be in the range of 12-16 per cent, the prices may rise in the services segment due to the rising tax burden."
This being the last budget to be presented before the proposed implementation of GST, this is also the last instrument for the Government to step ahead to align itself with GST implementation. Among others, the Government should use this budget to align the rates of taxes towards the proposed GST rates. Further, it should indicate the roadmap for the publishing of draft laws and constitutional changes required thereto', Badrinath adds. Baba Chandok, Franchisee, Cartridge World voices the same and says, "The industry is hopeful that implementation of GST will be breather for the retail."
Introduction of composite scheme for threshold exemption
Currently, the tax structure is certainly not conducive for a robust franchise environment. As a SME, the franchisee must be able to derive maximum benefit so that the same could be passed on to the end users. "Tax structure needs to be much more integrated with a long term approach."
Speaking on the issue of a structured taxation policy for franchising Arun Khetan explains, "For example, in education franchising, the individual service provider is not exempt from the Service Tax Registration and payment if he/she is a franchisee where the turnover of the franchisor is above the exemption limit (currently Rs 10 lakh). It is but natural that the franchisor's turnover for the entire year would exceed this and as a consequence, all the franchisees, even if their individual turnover does not reach the exemption threshold have to get registration with service tax department, collect the service tax from students and deposit the same to the Government. While, such rationale is fine for consumer goods, but seems highly dual and confused policy for education and indirectly leads in suppressing the growth of education at some point in the value chain.
Thus, a composite scheme for small business is the need of the industry to reduce the cost of compliance and hence encourage entrepreneurship. A composite scheme involving a threshold exemption of Rs 50 lakh is proposed by the industry.
Improved legal and regulatory framework
While India has no specific legislation regulating franchise arrangements, there are a number of laws that affect the franchisor-franchisee relationship. Intellectual property, taxation, labor, competition, property, and exchange control regulations all influence franchising. Lack of appropriate format for franchising agreements can have far fetching impact on the Industry. Dey agrees it is seen several times that due to absence of any franchising laws or any Government guidelines in India, franchisors tend to follow formats which are approved or followed in other countries. Also, it is seen that most of the times the franchisees do not have much bargaining/negotiating capacity in front of the giant franchisors. In view of the circumstance, it may be advisable if the Government frames certain guidelines taking care of the needs and concerns of both the franchisors and franchisees.
Adding further, she said that it is important to have mandatory disclosure requirements. This will ensure transparency. Countries with specific franchising legislations or guidelines make it mandatory for parties to a franchise agreement to disclose certain factual information pertaining to their businesses. A franchisor should be required by law, to make certain disclosures to the prospective franchisee, via details regarding pending litigation and bankruptcy history, financial position, etc. In India, in the absence of any such Government guideline, a prospective franchisee is rendered helpless as the franchisor is under no statutory obligations to make disclosures.
Facilitate an industry centric credit infrastructure
New-age small and medium businesses in India are seeing a transition from manufacturing to the service industry. There are 35 million SMB units in India of which retail sector constitutes 18 million units and service sector has 9.5 million units respectively covering almost 75 per cent of the SME sector. Franchising has been responsible for bringing structural growth and modernising the formats in both the service and retail-based small businesses. However, the mechanism for financing the franchise formats has not evolved, as the banks don't render industry specific funding options due to lack of knowledge. In order to bring an orderly growth in these sectors, it is important that the government makes a special budgetary allocation to franchising businesses in its SME finance allocated to the financial institutions. As new unit franchisees, growth in 2010 is expected to be 40 per cent. Credit is a major hurdle in the growth of franchising obtaining capital to finance single or multi-unit operations has been relatively difficult for franchisee entrepreneurs. No more than five per cent of the entire franchise financing requirement in India is met by financial institutions. Industry believes that as the risk involved in a franchise business model is optimised to a large extent, banks must offer an easy interest rate.
A sound mechanism of franchising funding is hence very essential as non-availability of third party guarantee often proves to be a hurdle to obtain required funds. Internationally, particularly in United States, U.S. Small Business Administration (SBA) financing has played a significant role in helping new or small operators secure the necessary capital to start or acquire franchise units. The SBA and its sponsored loan programs are one of the best sources of capital to open a start-up franchise unit or purchase an existing resale unit for small-business franchise operators that would otherwise experience difficulties in qualifying for conventional financing or loans. Ninad Kapre, Managing Director & CEO of Aptech Ltd recommends that a lot more effort is required to institutionalise the funding infrastructure.
Khetan agrees, "The current ambiguity in the Government's policy guidelines with respect to the franchising industry has left the franchisor and the franchisees at the mercy of the bankers /financial institutions that use their discretion to interpret and regulate the funding propositions from the franchising industry and are quite passive in their response towards franchising as a business model. This is a sad state and would be addressed immediately once the Government confers franchising with industry status."
Abolition of CST
Badrinath adds, "In terms of the initial agenda of the Central Government, CST was to be zero rated effective 1-4-07, but still continues at two per cent. It would be good for the Government to reduce the CST to one per cent and ultimately move towards a complete abolition with the introduction of GST according to the expectation of the industry. This would contribute in reducing the effective cost of inter-state purchase of goods and also in keeping the inflation at current levels, if not reduce."
Withdrawal of stimulus
Badrinath adds, "While there are much deliberations happening around the withdrawal of the stimulus granted in form of reduction in central excise and service tax rates, in the previous budget and thereafter, this does not appear to be the right time to withdraw the same. It is worthwhile to note that with the support of the Government, the businesses have demonstrated their strength to survive the recession and shown a positive trend as a year-on-year performance. While the performance from 2009 to 2010 is positive and growing, the overall growth from 2008 to 2010 does not appear impressive since the year 2009 was a slump. Hence, the stimulus should ideally be continued and help the industry completely recover from the recession. It could be withdrawn as part of the GST implementation. With the implementation of GST, the cost of tax in the supply chain is envisaged to be reduced, therefore, the cumulative impact of withdrawal of stimulus (added costs) and reduction in supply chain tax cost (benefit) is believed to be mitigated by the businesses. Withdrawal of stimulus could result in high service cost and goods and thereby, impact the growth of retail business. Further, with the inflation rate continuously rising, it does not again appear to be the right time for withdrawal of stimulus."
Pave way to FDI reforms
Historically, Indian policy makers had been skeptical about Foreign Direct Investment or FDI. A limit of 51 per cent on foreign investment in retail has brought in a lot of innovation in the market. International investors have always come up with India-centric policies. The importance of the franchising process is reflected in the retail and industries where nearly every retailer (in malls) and every major restaurant are franchisees of international as well as major national chains. Internationally, franchising is very well accepted and is entrenched deeply within USA, Western Europe, South Africa, SouthEast Asia.
Ratan Jalan, Founder and Principal Consultant, Medium Healthcare Consulting Pvt. Ltd recommends, "The expected foreign investment reform in the forthcoming budget is likely to encourage international players to enter the Indian market. Hence, it would be pertinent for the Government to ease borrowing for players interested to open outlets for these international players." Currently, there are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is considered. There are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. In the forthcoming budget, the Government would need to address some of these issues also in addition to the foreign investment reforms. Sonali Dey, Fox & Mandal shares, "Assuming that the current sectoral limit remains unchanged, FDI up to 51 per cent, may be brought under the automatic route. In addition, the prevailing ambiguity over FIIs should be clarified."
Conclusion:
The future of Indian retail markets seek organised and innovative business formats to ensure scalability which healthy franchise practices can facilitate. Hence, the policymakers must bring about industry centric reforms to unlock the potential of the SME.
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