With most of the market signals remaining positive with Union Budget 2010-11, consumer is happy being at the center stage of consumption story and is in a better position than a year ago. However, challenges remain. Read on to know what is in platter for for the SMEs and franchise industry.
Franchise industry has been looking forward several regulatory as well as policy reforms to facilitates its growth. A positive GST outlook by government and rise in threshold for tax compliances has been seen as a very positive move by the franchise industry. However the long impending demand of abolishing dual taxation on the franchise services has been clearly ignored by the policy makers. Presently both service tax as well as VAT are imposed upon the franchise services which distorts the franchise model completely.Morover service tax on rental proceed further makes deters the profitable feasibility. In all it has been the budget has been moderately favorable for the franchise industry. Gaurav Marya ,President, Franchise India Holding Ltd shares’’ The budget 2010-11 brings a reasonable assortment for small retailers as well as franchisors. While increased income tax exemption limits will certainly boost consumption, imposing service tax on rental property distorts retail business models by making the accessibility of retail spaces precipitously expensive, hence making it unviable to sustain profitably.'
According to D P S Kohli, Chariman, Koutons Retail India Ltd, ‘Overall, it has been a mixed budget for us. New tax slabs and rates have been introduced which would offer 60 per cent relief to the tax payers providing them with greater disposable income. This would provide the necessary boost to consumer’s spending a pre-requisite to unleash the true growth momentum of the retail sector.
In addition, reduction of surcharge on domestic companies that the finance minister has announced is sure to accelerate the expansion plans for the retail players at home. However, industry status continues to delude the retail sector. This is a disappointment since this is the first step towards reforming the sector and organising the highly unorganised sector. The hike in the excise duty is also not favorable for us since this might directly affect the quality of production.
Badrinath, Director, Accretive Global stated that the budget has both the shades of gray and white for the franchise industry he further explains detail implications
The good news
No change in service tax rates and the same continues at 10.3 per cent. The FM in his budget speech states that this proposal is “to maintain the growth momentum and also to bring about a convergence in the rates of tax on goods and services.”
Small businesses stand benefited on account of lower direct tax compliance costs. The threshold for having the accounts audited for tax has been increased from 40 lacs to 60 lacs. Further, small businesses with turnover/receipts lower than 60 lacs can also choose to be covered by the presumptive tax system. The threshold earlier was only 40 lacs.
The frequency of remittance of central excise is extended to quarterly basis from the current scheme of monthly payments for units operating under the SSI Scheme.
As a welcome step, exemption from 4 per cent special additional duty of customs is granted to mobile phones, watches and garments imported in pre-packed condition for retail sale.
The not so good news
The FM has retrospectively amended the provisions relating to levy of service tax on renting of immovable property. The judgment of the Delhi High Court in the case of Home Solutions Retail is negated by making mere renting of immovable property liable to service tax.
Further, much against the industry expectations, the FM has retained the CST at 2 per cent and the base rate of excise is increased from 8 per cent to 10 per cent.
The FM has extended service-tax on health check-up services provided to employees of a business-entity or persons covered under health-insurance-schemes if such payment is made by the business entity or insurance company. This is likely to increase the cost of healthcare services. However, if carefully managed, the franchisee in this sector could claim credits of service tax paid on various input services such as renting of immovable property and franchisee fee which is currently adding to the cost of the operations. This could reduce the net price impact for the end consumer.
As the franchise industry brings with its surge innovative new franchise business models to tap the potential of Indian consumption, it also demands a favorable ecosystem which can be realized by necessary monetary policy reforms.
Thursday, March 4, 2010
Tuesday, March 2, 2010
MAAC to add 30 training centres by March 2011
3D animation and visual arts trainer Maya Academy of Advanced Cinematics (MAAC) plans to add 30 centres by March next year.
The institute, which was acquired by IT training and education major Aptech in January this year for Rs 76 crore, at present, has 70 centres across 40 cities.
"We are planning to add 30 centres by March 2011 to strengthen our presence across tier I and II cities. We already have 70 centres, of which five are company-owned and rest through franchise," MAAC Vice-President and Head (Sales) Kuldeep Pareek told PTI.
Asked if post-acquisition, MAAC would be merged with Aptech, Pareek said: "There would be a dual branding strategy and the students would have the choice of joining either. MAAC would continue as a separate brand."
Tags:Education Franchise,Training Franchise,MAAC,Animation Franchise,IT Franchises,Maya, Aptech,Computer Franchise.
Source:Press Trust of India / New Delhi March 02, 2010, 13:44 IST
The institute, which was acquired by IT training and education major Aptech in January this year for Rs 76 crore, at present, has 70 centres across 40 cities.
"We are planning to add 30 centres by March 2011 to strengthen our presence across tier I and II cities. We already have 70 centres, of which five are company-owned and rest through franchise," MAAC Vice-President and Head (Sales) Kuldeep Pareek told PTI.
Asked if post-acquisition, MAAC would be merged with Aptech, Pareek said: "There would be a dual branding strategy and the students would have the choice of joining either. MAAC would continue as a separate brand."
Tags:Education Franchise,Training Franchise,MAAC,Animation Franchise,IT Franchises,Maya, Aptech,Computer Franchise.
Source:Press Trust of India / New Delhi March 02, 2010, 13:44 IST
Top 100 Franchise In India: India Franchise Rankings
Maverick Franchise Brands launches India Franchise Rankings 2010
Inaugural India Franchise Rankings, a first of its kind, annual exercise initiated.
Mumbai, India 2nd March 2010: With an aim to encourage and promote best practices in franchising in India, Maverick Franchise Ventures (MFV India) announced the launch of the first-of-its kind 'India Franchise Rankings 2010'- awards to honour the achievements and the entrepreneurial spirit of Indian franchisors. India Franchise Rankings 2010 is an annual exercise aimed at encouraging franchise companies.
Despite there being several initiatives to award franchise brands, none of them have the a clear methodology on the basis of which they are ranked. The current awards gauge franchise recruitment progress and is where number and expansion driven, leaving behind a lot of more important parameters, no. of franchisee locations closed, franchisee profitability and success ratios.
The franchisee - entrepreneur of today complements the core Indian values of respect, freedom and hard work. Franchising shapes the lives of 85,000 Plus Franchisees across India, these franchisee - entrepreneurs transform and mould the franchise system and spreads the same entrepreneurial idea, within their family.
Considering the undividable association of celebration and entrepreneurship, MFV India decided to salute these 'solid gold franchisors' and acknowledge their contribution to the Indian Economy.
Speaking on this occasion, Dhawal Shah, Founder of MFV India said, that, 'We are pleased to launch the inaugural India Franchise Rankings 2010. Today's franchisees and businessmen are always on the lookout for franchise and business opportunities, but are not aware of various companies. With our propreitory index, we have developed a methodology for evaluating and assessing India's leading franchise companies'.
Silvio Zannoni, one of the investors in Maverick Franchise Ventures, on this occasion said that, 'Our Partnership with Way2Franchise.com has been quite successful in helping us launch unique-first initiatives like the India Franchise Rankings, Similar to our online franchise portal in Italy, we will definitely see us increase our market share in India as well.
Since, November 2009, the MFV India Team has been constantly examining franchisors and confidentially surveying franchisees. Participation in the franchisee’s surveys is anonymous; franchisees receive codes for confidentiality. Some of them, that prefer to speak over the telephone are not asked for their identity or location. Here is how we compile this mega-list--the first, best and most comprehensive franchise ranking in India. The process began in November 2009, when we asked franchisors to participate in this year's survey. Each submission was vetted before being entered for data analysis, with 164 companies making the first cut. Of those, the top 100 companies made the Franchise 100 ranking, based on franchisee satisfaction and profitability.
Geetanjali Mehlwal, a legal expert and an experienced franchise veteran said that, 'India Franchise Rankings is a much needed initiative that will benefit everyone in the franchise industry in India as well as provide foreign franchisors with a fair idea about the performance of the Indian franchise industry'
All companies, regardless of size, are judged by the same criteria: objective, quantifiable measures of a franchise operation. The most important factors include financial strength and stability, growth rate and size of the system. We also consider the number of years a company has been in business and the length of time it's been franchising, start-up costs, percentage of terminations, and whether the company provides financing.
All the factors are plugged into our proprietary methodology, with each eligible company receiving a cumulative score. The 100 franchises with the highest cumulative scores become the India Franchise 100. Remember that the India Franchise 100 is not intended to endorse, advertise or recommend any particular franchise. It is solely a research tool you can use to compare franchise operations. MFV India stresses that you should always conduct your own independent investigation before investing money in a franchise.
The winners of the inaugural annual India Franchise Rankings 2010 Competition honoring excellence in franchising are:
1 Raymonds
2 Angel
3 Subway
4 Eurokids
5 NIIT
6 Helen O Grady
7 Siyarams
8 Aptech Computer Education
9 Coffee Day Xpress
10 Reliance Money
11 Koutons
12 Career Launcher
13 TIME
14 Motilal Oswal
15 Institute of Management Studies
16 Spykar Jeans
17 Max Mind Abacus
18 Kwality Walls
19 Bachpan Play School
20 Levis
21 ICICI Securities
22 Animaster
23 N Power
24 The Apollo Clinic
25 VETA
26 Jawed Habib Hair Xpreso
27 Podar Happy Kids
28 Golds Gym
29 Cartridge World
30 Easy Bill
31 Sharekhan
32 Suvidha
33 Academy Of Broadcasting
34 Flair English
35 India Infoline
36 Karrox
37 Snap Fitness
38 Srinathjis
39 Way2Wealth
40 Abacus Mental Mathematics Academy
41 US Dollar Store
42 Texas Chicken
43 US Pizza
44 K Lounge
45 Sykes and Ray Equities
46 Fashion and I
47 Sarva Jal
48 The Loot Store
49 VLCC
50 Institute of Computer Accountants
51 English Express
52 Sykes and Ray Equities
53 Remax
54 Go Chaatz
55 iPlayiLearn
56 LJ Hooker
57 Avalon
58 Ace Tours and Travels
59 Clipso beauty School
60 Jumbo King Foods
61 Desk to Desk Couriers (DTDC)
62 Belmonte Apparel (S. Kumars)
63 Animation Traning School (ANTS)
64 Oxford Book Store
65 Zapak Gameplex
66 Time Zone India
67 Frameboxx
68 Castol Bike Zone
69 Tanclean
70 SVK Institute of Management
71 Pizza Corner
72 Re-Feel
73 Jetking Infotrain
74 Ideal Play Abacus (IPA)
75 Comfort Securities
76 Sagar Ratna
77 Sykes and Ray Equities
78 Mahindra First Choice
79 Zee Institute of Creative Arts
80 Russell's Institute of English
81 Geetanjali Group
82 Dandy Collection
83 Adidas
84 Kaati Zone
85 Gini and Jony
86 Kidzee
87 REBI
88 Baskin Robbins
89 Java Green
90 Slice of Italy
91 ABC Montessori
92 Western Union Money Transfer
93 Multi Utility Solutions
94 Appin Knowledge Solutions
95 Talwalkar's Gyms
96 Ventura Securities
97 Reebok
98 Sharkey's Cuts for Kids
99 Tropical Sno
100 Vichare Couriers
Legal Disclaimer:
Before making any commitment, or paying any money, it is essential that prospective buyers make their own careful enquiries, discuss the franchise opportunity with any other franchisees and take appropriate professional advice from an experienced franchise consultant.we ar any of our sponsors or endorsers or related companies will be responsible or liable for losses, costs and expenses, including consequential losses and any failure of business which may result from the use of this information or the use of or reliance on data contained in it.
Inaugural India Franchise Rankings, a first of its kind, annual exercise initiated.
Mumbai, India 2nd March 2010: With an aim to encourage and promote best practices in franchising in India, Maverick Franchise Ventures (MFV India) announced the launch of the first-of-its kind 'India Franchise Rankings 2010'- awards to honour the achievements and the entrepreneurial spirit of Indian franchisors. India Franchise Rankings 2010 is an annual exercise aimed at encouraging franchise companies.
Despite there being several initiatives to award franchise brands, none of them have the a clear methodology on the basis of which they are ranked. The current awards gauge franchise recruitment progress and is where number and expansion driven, leaving behind a lot of more important parameters, no. of franchisee locations closed, franchisee profitability and success ratios.
The franchisee - entrepreneur of today complements the core Indian values of respect, freedom and hard work. Franchising shapes the lives of 85,000 Plus Franchisees across India, these franchisee - entrepreneurs transform and mould the franchise system and spreads the same entrepreneurial idea, within their family.
Considering the undividable association of celebration and entrepreneurship, MFV India decided to salute these 'solid gold franchisors' and acknowledge their contribution to the Indian Economy.
Speaking on this occasion, Dhawal Shah, Founder of MFV India said, that, 'We are pleased to launch the inaugural India Franchise Rankings 2010. Today's franchisees and businessmen are always on the lookout for franchise and business opportunities, but are not aware of various companies. With our propreitory index, we have developed a methodology for evaluating and assessing India's leading franchise companies'.
Silvio Zannoni, one of the investors in Maverick Franchise Ventures, on this occasion said that, 'Our Partnership with Way2Franchise.com has been quite successful in helping us launch unique-first initiatives like the India Franchise Rankings, Similar to our online franchise portal in Italy, we will definitely see us increase our market share in India as well.
Since, November 2009, the MFV India Team has been constantly examining franchisors and confidentially surveying franchisees. Participation in the franchisee’s surveys is anonymous; franchisees receive codes for confidentiality. Some of them, that prefer to speak over the telephone are not asked for their identity or location. Here is how we compile this mega-list--the first, best and most comprehensive franchise ranking in India. The process began in November 2009, when we asked franchisors to participate in this year's survey. Each submission was vetted before being entered for data analysis, with 164 companies making the first cut. Of those, the top 100 companies made the Franchise 100 ranking, based on franchisee satisfaction and profitability.
Geetanjali Mehlwal, a legal expert and an experienced franchise veteran said that, 'India Franchise Rankings is a much needed initiative that will benefit everyone in the franchise industry in India as well as provide foreign franchisors with a fair idea about the performance of the Indian franchise industry'
All companies, regardless of size, are judged by the same criteria: objective, quantifiable measures of a franchise operation. The most important factors include financial strength and stability, growth rate and size of the system. We also consider the number of years a company has been in business and the length of time it's been franchising, start-up costs, percentage of terminations, and whether the company provides financing.
All the factors are plugged into our proprietary methodology, with each eligible company receiving a cumulative score. The 100 franchises with the highest cumulative scores become the India Franchise 100. Remember that the India Franchise 100 is not intended to endorse, advertise or recommend any particular franchise. It is solely a research tool you can use to compare franchise operations. MFV India stresses that you should always conduct your own independent investigation before investing money in a franchise.
The winners of the inaugural annual India Franchise Rankings 2010 Competition honoring excellence in franchising are:
1 Raymonds
2 Angel
3 Subway
4 Eurokids
5 NIIT
6 Helen O Grady
7 Siyarams
8 Aptech Computer Education
9 Coffee Day Xpress
10 Reliance Money
11 Koutons
12 Career Launcher
13 TIME
14 Motilal Oswal
15 Institute of Management Studies
16 Spykar Jeans
17 Max Mind Abacus
18 Kwality Walls
19 Bachpan Play School
20 Levis
21 ICICI Securities
22 Animaster
23 N Power
24 The Apollo Clinic
25 VETA
26 Jawed Habib Hair Xpreso
27 Podar Happy Kids
28 Golds Gym
29 Cartridge World
30 Easy Bill
31 Sharekhan
32 Suvidha
33 Academy Of Broadcasting
34 Flair English
35 India Infoline
36 Karrox
37 Snap Fitness
38 Srinathjis
39 Way2Wealth
40 Abacus Mental Mathematics Academy
41 US Dollar Store
42 Texas Chicken
43 US Pizza
44 K Lounge
45 Sykes and Ray Equities
46 Fashion and I
47 Sarva Jal
48 The Loot Store
49 VLCC
50 Institute of Computer Accountants
51 English Express
52 Sykes and Ray Equities
53 Remax
54 Go Chaatz
55 iPlayiLearn
56 LJ Hooker
57 Avalon
58 Ace Tours and Travels
59 Clipso beauty School
60 Jumbo King Foods
61 Desk to Desk Couriers (DTDC)
62 Belmonte Apparel (S. Kumars)
63 Animation Traning School (ANTS)
64 Oxford Book Store
65 Zapak Gameplex
66 Time Zone India
67 Frameboxx
68 Castol Bike Zone
69 Tanclean
70 SVK Institute of Management
71 Pizza Corner
72 Re-Feel
73 Jetking Infotrain
74 Ideal Play Abacus (IPA)
75 Comfort Securities
76 Sagar Ratna
77 Sykes and Ray Equities
78 Mahindra First Choice
79 Zee Institute of Creative Arts
80 Russell's Institute of English
81 Geetanjali Group
82 Dandy Collection
83 Adidas
84 Kaati Zone
85 Gini and Jony
86 Kidzee
87 REBI
88 Baskin Robbins
89 Java Green
90 Slice of Italy
91 ABC Montessori
92 Western Union Money Transfer
93 Multi Utility Solutions
94 Appin Knowledge Solutions
95 Talwalkar's Gyms
96 Ventura Securities
97 Reebok
98 Sharkey's Cuts for Kids
99 Tropical Sno
100 Vichare Couriers
Legal Disclaimer:
Before making any commitment, or paying any money, it is essential that prospective buyers make their own careful enquiries, discuss the franchise opportunity with any other franchisees and take appropriate professional advice from an experienced franchise consultant.we ar any of our sponsors or endorsers or related companies will be responsible or liable for losses, costs and expenses, including consequential losses and any failure of business which may result from the use of this information or the use of or reliance on data contained in it.
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.
After Dominos Another Franchise Company Career Point Plans IPO.
The firm, which will be first in this space to hit the market, is looking at raising Rs 115 crore through the IPO.
Test preparation firm Career Point Infosystems Ltd is hitting the markets with a Rs 115-crore initial public offering (IPO). The firm has filed the draft red herring prospectus (DRHP) with the Securities and Exchange Board of India. The IPO would be keenly watched as the firm would become one of the first companies in the segment to go for a listing.
The firm plans to use the funds for acquisitions, besides construction and development of an integrated campus facility in Kota. The funds will also be used for expansion of classroom infrastructure and office facility besides various strategic initiatives.
Centrum Capital and JM Financial Consultants have been appointed as the book-running lead managers to the issue.
Career Point is based out of Kota in Rajasthan, and provides coaching for entrance examinations for engineering institutions like Indian Institute of Technology (IITs) and medical colleges. Its promoted by Pramod Maheshwari and has also recently forayed into education consultancy and management services, catering to K-12 and higher education segment.
For the six month period ending September 2009, Career Point had total income of Rs 34 crore and a net profit of Rs 10.3 crore.
Career Point raised Rs 50 crore from Franklin Templeton Private Equity Strategy in July 2009. This was followed by another round, where the firm raised Rs 10 crore from Infosys co-founder Nadathur S. Raghvan. It has also raised funding from Volrado Ventures in 2007.
Career Point had 24,000 enrollments last year and has a presence in 29 cities through a mix of company run as well as franchisee operations. Besides test preparation, Career Point has also entered into traditional education areas like Kindergarten to Grade-12 (K-12 School) and higher education (university).
Career Point has also tied up with Kota's Global Public School to provide Synchro-School Programme. This programme integrates studies for academic and competitive examinations, starting from Class VIII. Global Public is owned by Career Point through a trust.
The group also has a management school called ProSeed Business School, which offers courses like BBA (Bachelors in Business administration), MBA (Masters in Business administration), Hospitality and Hotel Management.
There have been several investments in the test preparation space including Matrix Partners India’s Rs 100-crore investment in FIITJEE Ltd, which also provides training for engineering entrance exams. Another was Milestone Religare's Rs 25-crore investment in IMS Learning Resources.
India's education sector has continued to attract investments this year as PE & VC players look for their share in a large non-cyclical opportunity. The private spending on education is increasing by 14% CAGR and is expected to reach $80 billion by 2012, says an IDFC-SSKI report.
Source:Madhav A Chanchani (VCCircle.com)
Test preparation firm Career Point Infosystems Ltd is hitting the markets with a Rs 115-crore initial public offering (IPO). The firm has filed the draft red herring prospectus (DRHP) with the Securities and Exchange Board of India. The IPO would be keenly watched as the firm would become one of the first companies in the segment to go for a listing.
The firm plans to use the funds for acquisitions, besides construction and development of an integrated campus facility in Kota. The funds will also be used for expansion of classroom infrastructure and office facility besides various strategic initiatives.
Centrum Capital and JM Financial Consultants have been appointed as the book-running lead managers to the issue.
Career Point is based out of Kota in Rajasthan, and provides coaching for entrance examinations for engineering institutions like Indian Institute of Technology (IITs) and medical colleges. Its promoted by Pramod Maheshwari and has also recently forayed into education consultancy and management services, catering to K-12 and higher education segment.
For the six month period ending September 2009, Career Point had total income of Rs 34 crore and a net profit of Rs 10.3 crore.
Career Point raised Rs 50 crore from Franklin Templeton Private Equity Strategy in July 2009. This was followed by another round, where the firm raised Rs 10 crore from Infosys co-founder Nadathur S. Raghvan. It has also raised funding from Volrado Ventures in 2007.
Career Point had 24,000 enrollments last year and has a presence in 29 cities through a mix of company run as well as franchisee operations. Besides test preparation, Career Point has also entered into traditional education areas like Kindergarten to Grade-12 (K-12 School) and higher education (university).
Career Point has also tied up with Kota's Global Public School to provide Synchro-School Programme. This programme integrates studies for academic and competitive examinations, starting from Class VIII. Global Public is owned by Career Point through a trust.
The group also has a management school called ProSeed Business School, which offers courses like BBA (Bachelors in Business administration), MBA (Masters in Business administration), Hospitality and Hotel Management.
There have been several investments in the test preparation space including Matrix Partners India’s Rs 100-crore investment in FIITJEE Ltd, which also provides training for engineering entrance exams. Another was Milestone Religare's Rs 25-crore investment in IMS Learning Resources.
India's education sector has continued to attract investments this year as PE & VC players look for their share in a large non-cyclical opportunity. The private spending on education is increasing by 14% CAGR and is expected to reach $80 billion by 2012, says an IDFC-SSKI report.
Source:Madhav A Chanchani (VCCircle.com)
India's Airports Aiding The Growth of Food Franchises with Low Cost Carriers Gaining Momentum
One industry doing well even in the current difficult times is the food and beverage franchise at all domestic airports. With the cost-cutting prevalent today, more travelers are opting for the LCCs (Low Cost Carriers) rather than the full service airlines.
Since food is not part of the ticket price at these airlines, passengers are opting to eat their fill at airports before boarding flights. In the last couple of years, the proportion of flights flown by LCCs has increased from 45:55 to 60:40 at present, and is expected to go up to 70:30 by the end of the year. Especially since all the LCCs including Spicejet, Indigo and Go Air are adding capacity. In these flights, food is available but the options are fairly limited with exorbitant rates sometimes charged.
As a result, the volume of business done by the retail chains and food outlets that have licensed or leased space has increased by over 30%. Cafe chain Barista that has outlets across metro airports in the country says it has seen a significant growth in F&B sales, with their outlets at the Bangalore and Mumbai airports registering 30% growth over the last year. This has also become a source of innovation. For example, BIA’s F&B partner, HMS Host, created a food offering called ‘Grab n fly’. This included a variety of light and easy packaged food products, at prices starting from Rs 50 that a passenger could carry onto the aircraft.
The business offers interesting options in terms of how airports as well as F&B outlets might shape the airport location as a retail destination in future. Pizza Corner for example has a concept called Pizza Corner Express which it offers at malls and has extended the same to its airport franchises as well.
Possibly a combination of retail lounge as well as coffee hangout might be possible in future, or a combination of coffee shop and bookstore as well as wi-fi center as is found in some of the Crossword outlets today. The possibilities are endless and only need initiative.
With airports working on the PPP model now, airport managements will be looking at alternative revenue sources to ensure adequate returns. This might be one of foodcustomers.
Since food is not part of the ticket price at these airlines, passengers are opting to eat their fill at airports before boarding flights. In the last couple of years, the proportion of flights flown by LCCs has increased from 45:55 to 60:40 at present, and is expected to go up to 70:30 by the end of the year. Especially since all the LCCs including Spicejet, Indigo and Go Air are adding capacity. In these flights, food is available but the options are fairly limited with exorbitant rates sometimes charged.
As a result, the volume of business done by the retail chains and food outlets that have licensed or leased space has increased by over 30%. Cafe chain Barista that has outlets across metro airports in the country says it has seen a significant growth in F&B sales, with their outlets at the Bangalore and Mumbai airports registering 30% growth over the last year. This has also become a source of innovation. For example, BIA’s F&B partner, HMS Host, created a food offering called ‘Grab n fly’. This included a variety of light and easy packaged food products, at prices starting from Rs 50 that a passenger could carry onto the aircraft.
The business offers interesting options in terms of how airports as well as F&B outlets might shape the airport location as a retail destination in future. Pizza Corner for example has a concept called Pizza Corner Express which it offers at malls and has extended the same to its airport franchises as well.
Possibly a combination of retail lounge as well as coffee hangout might be possible in future, or a combination of coffee shop and bookstore as well as wi-fi center as is found in some of the Crossword outlets today. The possibilities are endless and only need initiative.
With airports working on the PPP model now, airport managements will be looking at alternative revenue sources to ensure adequate returns. This might be one of foodcustomers.
KFC Franchise Expanding In India
KUALA TERENGGANU, Feb 28 (Bernama) -- Fast food operator, KFC Holdings (Malaysia) Bhd, in a move to further spread its wings overseas, will establish 10 outlets in India this year.
Its Chairman Tan Sri Muhammad Ali Hashim said KFC, which operated 540 outlets in Malaysia, Singapore, Brunei and Cambodia, would spend RM1.2 million to set up each outlet.
The franchisee of the KFC chain of restaurants invests an average RM35 million, annually, in its operations and sales had always excessed RM1 billion.
"The venture into India is a long-term move and the outlets there will only serve halal food," he told reporters after opening the KFC Graduate Enterprenuership 2010 Programme here on Sunday.
Muhammad Ali said two outlets would open in Mumbai, with one outlet operating in Pune, where several universities were located.
He also said KFC had 25,000 employees manning its outlets in Malaysia, Singapore, Cambodia and Brunei and this figure was expected to spiral further as KFC opened more outlets.
KFC Holdings, which emerged as the most profitable among KFC operations in the region for two consecutive years, opened 44 outlets last year, with seven located in Cambodia.
On the graduate entreprenuership programme, Muhammad Ali said it had given birth to 63 women entreprenuers among single mothers and graduates.
KFC Holdings hopes to realise its target of helping 1,000 single mothers become entreprenuers, next year, under the programme.
Its Chairman Tan Sri Muhammad Ali Hashim said KFC, which operated 540 outlets in Malaysia, Singapore, Brunei and Cambodia, would spend RM1.2 million to set up each outlet.
The franchisee of the KFC chain of restaurants invests an average RM35 million, annually, in its operations and sales had always excessed RM1 billion.
"The venture into India is a long-term move and the outlets there will only serve halal food," he told reporters after opening the KFC Graduate Enterprenuership 2010 Programme here on Sunday.
Muhammad Ali said two outlets would open in Mumbai, with one outlet operating in Pune, where several universities were located.
He also said KFC had 25,000 employees manning its outlets in Malaysia, Singapore, Cambodia and Brunei and this figure was expected to spiral further as KFC opened more outlets.
KFC Holdings, which emerged as the most profitable among KFC operations in the region for two consecutive years, opened 44 outlets last year, with seven located in Cambodia.
On the graduate entreprenuership programme, Muhammad Ali said it had given birth to 63 women entreprenuers among single mothers and graduates.
KFC Holdings hopes to realise its target of helping 1,000 single mothers become entreprenuers, next year, under the programme.
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