First published in June 2015
Following Narendra Modi’s success in the 2014 general elections, the Indian economy continues to flourish. Yet, despite the promising predictions regarding the economic growth, India is still a very difficult market – especially for foreign companies and investors. More often than not, however, it is not the macroeconomic factors but intra-corporate issues that cause a foreign company’s revenue to stall – or even drop.
For more than 14 years, Maier+Vidorno (M+V) has supported numerous foreign companies which already had their own sales and services structures in India. Within the scope of an Operational Diagnostics Service, Maier+Vidorno analyses, primarily, market and customer segmentations as well as operational and administrative processes. In this way, M+V – on behalf of different foreign companies – has discovered several irregularities in accounting or supply chain management and has successfully optimized these processes. Moreover, administrative and human resource structures of Indian subsidiaries are also analysed and potential activities within a legal grey area are exposed.
Operational Diagnostics for Indian Organizations – With Unpleasant Surprises
In one particular case, a German tool manufacturer commissioned Maier+Vidorno to find out why its Indian subsidiary had not generated any profit for the past two years even though the sales numbers had gone up. After in-depth scrutiny, M+V ascertained that the Indian subsidiary’s managing director placed orders with at least three different companies – all of which were either owned by himself or his family. In the name of the Indian subsidiary, he paid €200,000 for the office’s interior fittings to his own company. However, there was no mention of this in the rental agreement and the price was far too high to begin with. At the same time, the Indian subsidiary paid €84,500 rent each year to a real estate firm that belonged to the director’s wife, and according to the lease agreement, the rent was to be be raised by 10% every year and the agreement could only be terminated after seven years. Furthermore, the director handled 80% of all sales activities with only one distributor which belonged to his family as well. Due to the additional interest margin, the Indian subsidiary – despite rising sales numbers – was unable to generate any profit.
Although, this is a rather drastic example, it is nonetheless recommended to not keep the management in India “on a long leash,” because once a situation as described above arises, it is often difficult to get it under control again. Even without criminal intention, the local management sometimes makes mistakes – either caused by a lack of expertise or ignorance – which can entail serious penalties that then diminish the overall revenue.
What Could Go Wrong in Your Sales Organization in India?
For instance, a lot of companies fail to properly request a Special Valuation Branch (SVB) notion with customs. Indian customs authorities generally assume that imported goods are underpriced, on the part of the foreign parent company, so that the associated Indian subsidiary might benefit from reduced customs duties. On the other hand, they presume that imported goods are always overpriced in order to transfer profits to the foreign parent company. In either case, the burden of proof lies with the importer who has to prove to the customs that the imported goods from the foreign company match the market price, and, on the other hand, prove to the Income Tax authorities that the transfer prices are “at arm’s length.” Wrongful declarations in that area can easily lead to substantial additional costs – perhaps spanning several years.
Furthermore, it is not unusual that foreign companies miscalculate their profit margin for the Indian market – for example, by selling a product in India for a price which does not adequately reflect expenditures in transportation, customs clearance, and distribution. On the other hand, discounts are far more common in India and the price structure is generally less rigid than in most European countries. Hence, without a functioning reporting system, foreign companies often lack the knowledge of or control over their own pricing policy in India.
Do you suspect that the sales volume of your Indian subsidiary is not as good as it should be? Maier+Vidorno can help you identify potential problem areas and optimize your business in India – feel free to contact us!