The phenomenal growth of the hotel industry in the last decade, transforming itself from static single hotel businesses, with the emergence of robust national chains and entry of major foreign brands, is perceivable from the numbers, new destinations and choices that are available.
In a sense, the hotel industry was the first to be affected by the reforms. Taking the position that the ‘state business’ model was not workable, several government hotels were sold, and only one of them, the Airport Centaur in Mumbai was embroiled in some controversy on the valuation but that petered out. All the divested ITDC hotels have gone on to do well – those who frequent the ‘Aman’, New Delhi, the erstwhile Lodhi Hotel will perceive the winds of change.
Nonetheless between 2001 and 2006, due to increasing business and tourist demand, the industry grew inspite of being subjected to stringent regulation for foreign entrants. The big Indian chains, Taj, Oberoi, ITC and later the Leela aspired at upgrading their profiles. Collaborations with foreign partners, such as, Kempinski, Hilton, and Crown Plaza flourished. ITC forged ahead with exclusivity in collaboration with the Starwood Group and their Sheraton Brand. Exclusivity was not a matter of choice, but that of the extant foreign exchange regime – readers will recall specifically the “draconian” press note number 18 that plagued investors, restricting a foreign entity from engaging in a new venture without the prior approval of the Indian government. The restriction applied irrespective of whether the sector was under the automatic or approval route. If the investor could demonstrate that the new activity would not adversely affect the existing business relationship, the permission would be considered. Press note 5/2005, which sought to temper the rigidity, failed to generate much relief by inserting a caveat that the investor could not engage in the same business as the existing collaboration, without the consent of the local partner. Negotiations on the ‘No Objection Certificates’ were often deal breakers; nonetheless, the investor had to undergo this fresh baptism by fire. Fortunately for the hotel industry, the locational factor, that of 20 kilometres distance or being located in two different cities could be a convincing argument that there could be no scope of prejudice to existing establishments in having a different franchisee or a different brand. In case the next collaboration was in the same geographical area, say Delhi, the locational difference between Lutyen’s Delhi and West Delhi was easily demonstrable. On the other hand, convincing the regulator of the subtle nuances of the differentiation in brands, the different characteristics, origin, configuration, design, business model which makes each brand unique was an uphill task. The approvals were handled by DIPP, and the Ministry of Tourism which at that time housed in the uninspiring barracks in North Block. A great deal of time and effort had to be expended between the DIPP and the Ministry of Tourism, on these explanations.
There was hope, but not too many indicators that the sector would be liberalised, particularly from the limits on royalty payments. Classified under broad heads, technical/ consultancy, franchising and marketing management fees involved a different fee structure or cap and could be remitted only with DIPP prior approval. In 2009 (press note 8) payment of royalties under Foreign Technology collaboration, including use of trademarks and brand names unceremoniously scrapped.
Freed of regulatory impediments, the Indian hotel industry is possibly today one of the most buoyant sectors, not to speak of being one of the biggest job creators, seasoned players such as Starwood hotels have introduced and consolidated most of their brands, and others are in the process.
What is interesting is that the inspite of the sector being open to 100 per cent equity investment under the automatic route, there have been very few takers for this option. Establishing and operating a hotel involves the first move of acquisition of real estate, construction and development, a space which raises many questions marks on effective regulation and transparency. In the matter of operation, there are multiple approvals and permits ranging from environmental and safety, to liquor licences. Some degree of local knowledge of ground realities is essential for operating such businesses. By and large, foreign hoteliers have avoided ownership, relying on local partners for this purpose. It’s not difficult to figure out why - the intent is to avoid liability. Liability is inherent in the nature of the activity and the customer is not the only adversary. There are suppliers, service providers, labour and workers and multiple regulators – it’s a hot seat.
Therefore, great care has to be taken in selecting the right partner by conducting stringent due diligence – and in going forward building in strong covenants and indemnification provisions in the definitive documents. Both partners should agree to have in place a code of ethics and conduct which would safeguard the interests of the hotel, the collaborators and customers.
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However, more recently Accor and Berrgnen Groups have introduced new investment initiatives in the sector – with equity and ownership with Private Equity placements. Clearly this is one sector which will remain on the growth trajectory and is justified in demanding infrastructure status, which would mean electricity at industrial rates and Capex loans at lower interest rates.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in