Ford India exit: Auto dealer body FADA calls for protection act

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Automobile dealers in India are asking for a protection act which would safeguard the business and make contracts with automakers more balanced and equitable. The Federation of Automobile Dealer Association (FADA) on October 27, released a policy brief seeking intervention by the central government to help make a level playing field for automobile distribution.

Ford’s exit added to the tally of automotive brands that have quit India in recent years. The American carmaker was the fifth brand to stop operations in India after General Motors, MAN Trucks, UM Lohia and Harley-Davidson.

Vinkesh Gulati, President, FADA said, “Many countries in the world recognize the inherent power imbalance between vehicle makers (OEM) 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 do sign a business agreement at the start of their partnership valid under the Indian Contract Act, however, the law does not contain any clear solutions for dealers.

“India should also urgently consider the introduction of an Automobile Dealers Protection Act to make contracts more balanced and equitable. Such legislation should introduce robust contract enforcement and dispute settlement measures by incorporating a special authority with adequate representation from the Government of India, FADA and SIAM,” Gulati added.

Dealership agreements in India do not have a standardized term. Certain agreements having tenures as low as 1 year. It takes anywhere between 3-5 years for a dealership business to break even. Short term of agreement is detrimental to the dealers as they do not give adequate opportunity to the dealers to recover the heavy investments made by them, FADA claims.

“Indian dealer agreements also tend to have vague and broad grounds of termination that provide greater flexibility to OEMs, in comparison to dealers. This adversely impacts dealers’ ability to negotiate during OEM exits, causes employment losses, and also affect consumers who are left with no recourse with respect to after-sales services”, FADA said in a note.

The OEM-dealer agreement in India does not cover the unsold stock and spare parts in the event of termination of the agreement, which dealers claim, adds to the costs.