Distribution agreement - principal to principal or agency
Bhushan K
(Querist) 03 October 2011
This query is : Resolved
Hi,
The mutual fund companies in India signs non exclusive distribution agreement with various Banks and other entities for distribution of their products. They mention in the agreement that the arrangement is Principal to Principal basis.
The Distributors act as the agent of the customer.
My query is whether such distributors can be construed as agents of such Mutual Fund by their act even if the relationship is clearly described in agreement?
Thanks
R.Ramachandran
(Expert) 03 October 2011
Dear Mr. Bhushan,
It is only to safeguard from such claims, the Mutual Fund companies have very clearly indicated in the agreement itself that the arrangement between the parties i.e. Mutual Fund Co., and the Distributors is on Principal to Principal basis.
Therefore, you cannot by any stretch of imagination say that you are Agent of the Mutual Fund Companies.
Advocate. Arunagiri
(Expert) 03 October 2011
The mutual fund companies enters agreement with the various entities for distribution of their products.
Even though they claim it is principal to principal basis, it is in the eye of the law, principal to agent only.
The person who gets commission for sales/ distribution is an agent, the person who gives the commission is the principal.
What ever name they call, it is principal Vs. Agent only.
Mr.Ramachandran and friends please comment on my opinion.
R.Ramachandran
(Expert) 03 October 2011
Dear Mr. Arunagiri,
I beg to differ with you.
If somebody appoints me as a Distributor and for whatever Distribution that I might do, I may get a commission for the work. Just because I get a commission, I will not become an agent of the Principal.
The person who appoints is a principal in his own right.
I as a distributor is a principal in my own right.
If I have an exclusive right to Distribute, I get the goods on my account. When I distribute say some goods, the goods belong to me. I am not distributing the goods as an Agent of the principal. Whatever I do I do it for myself. Not for or on behalf of anybody. Therefore, I am a principal in my own right. Just because whatever margin that I get is called as 'commission' would not ipso facto make me an Agent, unless I am appointed as an Agent in its true sense.
There are a number of persons who distribute the Pre-Paid Cards of various Telecom Companies. They are not agents of the Telecom Companies.
Arun Kumar Bhagat
(Expert) 03 October 2011
The Govt. has barred commission to Mutual funds agents. So to dodge income tax authorities word principal to principal is used. Now the intermediaries in paper acts as agents of the investors for which they may charge incentives from the customers but in fact they get commission in the shape of expenses incurred from the Mutual Funds.
Advocate. Arunagiri
(Expert) 03 October 2011
Mr.Ramachandran,
Thanks for commenting on my reply. I may be permitted to take a different stand.
Let us invite our friends also to join in this healthy debate.
Rightly pointed out by our friend Mr.Arun.
The mutual funds stopped giving commissions to the agents.
The MF previously was collecting Rs.1000 from the client and will pay Rs.50 to the agent as commission.
Latter the MF asked the agent to collect Rs.1000/- + Rs.50 from the party. Rs.1000 will go the MF and Rs.50 will go to the agent.
So, the distribution company will not and cannot do their services to the MF company. The commission or costs whatever name you call it will be given to the distributor either directly or indirectly.
For the principal agency relationship the consideration is not important. The role is important.
The person who is owning the product /service is called the principal, the person who is distributing is none another than the agent.
A person who is acting on behalf of another person is called the agent.
Whatever name you call rose is a rose, whatever name you call agent is an agent.
M V Gupta
(Expert) 04 October 2011
In a distribution agreement on principal to principal basis, the distributor does not act as agent of the MF. Such an agreement should be specifically providing that the arrangement is not an agency agreement. The distributor acts as middle man and charges the customer for the services provided by him. No reward flows from the MF in view of the ban imposed by the Govt. in view of this I am inclined to agree with Shri Ramachandran's view.
J K Agrawal
(Expert) 05 October 2011
Dear Sirs
The ultimate customer that is the investor is not a party to the Contract between MF and Distributor. So it is clear that he is not bound with the terms between them.
I can say that the investor is one party and all the channel is second party he may be called by any name.
Bhushan K
(Querist) 05 October 2011
Dear Sirs,
I wish to add here that the MFs sign distribution agreement with the distributors which clearly state that the arrangement is principal to principal and no agency relation exists.
Also for certain channels the distributor signs agreements with customers and also obtain power of attorney (discretionary or non discretionary). in other cases it may be oral agreement.
The MF pays commission to distributors for sales made. (ultimate sale is completed when MF issues units to customers)
In some cases distributor charges customers also such as advisory fees etc.
My query is whether such kind of arrangement will tentamount to principal agent relationship even if agreement says otherwise.
