FADA calls for accountability from automakers, proposes dealers’ protection act

The Indian automotive industry has recently seen the exit of quite a few global automakers – General Motors in 2017, Harley Davidson in 2020 and most recently, Ford this year. Such exits not only affect customers with respect to after-sales services and resale value, but also the dealer partners.

Automotive dealers in India are mostly small or medium enterprises and have significantly less bargaining power than automakers. In fact, there exists a highly imbalanced power structure between automakers and dealers, and it has rarely been addressed by the former. Thus, in order to protect the interest of dealerships, the Federation of Automobile Dealers Associations (FADA) has proposed a new Automobile Dealer’s Protection Act.

• FADA has identified imbalanced power structures between automakers and dealers
• Proposes an Automobile Dealer’s Protection Act to protect interest of dealers
• Proposal draws references from foreign dealership agreements and legislative measures

FADA commissions study to explore automaker-dealer relationship

FADA undertook an in-depth study of various dealership agreements. For reference, FADA even studied foreign dealership agreements and legal protections available to dealers in countries like the US and Australia.

The findings suggest that foreign dealership agreements have definite clauses with regard to termination, indemnification and repurchase obligations, thereby offering a more balanced structure and flexibility to dealers. FADA noted that this is clearly lacking in India, which operates on a highly imbalanced power structure. Here are some of the highlights of the study.

• Dealership agreements in India do not have a standardised term with certain agreements having tenures as low as one year. Given that it takes anywhere between three to five years to recover costs, short-term agreements are highly detrimental for dealers.
• Indian dealer agreements have vague and broad grounds of termination which provide greater flexibility to automakers. This leaves dealers with little chance to negotiate in case the automaker exits, causing unemployment and affecting after-sales services.
• Dealer agreements also lack repurchase obligations, which means automakers are not mandated to buy back left over stock of vehicles and spare parts in case of termination. The losses are, thus, left to be borne by the dealer.
• Domestic dealership agreements are often vague in terms of each party’s obligation. This leads to dealers having to compensate against customer complaints, even when the liability may lie with the automaker.
• Dealers are rarely allowed any flexibility with regards to business decisions – such as deciding stock projections or targets in a particular financial year. There is very little consultation between the two parties and dealers are mostly forced to accept the stock orders that the manufacturers push on to them. This is also applicable for procurement and selling of accessories, consumables, loans and insurance policies.

Automobile Dealer’s Protection Act: what has FADA proposed?

Based on the findings of the study, FADA has now proposed the introduction of an Automobile Dealer’s Protection Act to make contracts balanced and equitable. FADA has suggested that such legislation should have robust contract enforcement and dispute settlement measures. It even calls for a special authority to be set up with adequate representation from the Government of India, FADA and SIAM.

FADA has been quite vocal in labelling the prevailing terms of agreement as extremely problematic. Drawing on learnings from foreign dealership agreements, FADA has listed out a comprehensive set of measures that will alleviate dealerships from their current plight.

This includes mandating a minimum lock-in period for the term of the agreement, having detailed termination clauses and repurchase obligations, having formal compensation procedures for dealers for the risks taken and investments made should the automaker decide to exit. It also seeks more independence in business decisions, more consultation with regard to day-to-day operations and sales forecasting and targets. There should also be clearly defined indemnification obligations for both parties.

FADA president Mr Vinkesh Gulati has said, “Many countries in the world recognise the inherent power imbalance between OEMs and dealers within the automobile sector and have enacted legislation to level the playing field. Unfortunately, the existing legal regime in India is inadequate to address these specific concerns of dealers. While OEM-dealer agreements are governed under the Indian Contract Act, the law does not contain any clear solutions for us.”

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