In this article we look at the various warehousing models currently used in India, the common challenges they face, and some suggestions on how to overcome the odds.
Warehousing is coming of age in India. This has largely to do with increased industrial and retail activity as well as increased cross-border trade and commerce. At the same time there is an urgent need for greater number of warehousing facilities across the different warehousing models in the country. In this article we discuss the most prominent warehousing models, and reflect on the typical challenges faced during setting up of a warehouse in India. In the next article in the series, we will look into the key commercial terms of a warehouse agreement that is entered into between the operator of the warehouse and the user.
Warehouses can be any of one or more models: (i) Public, (ii) Private, (iii) Bonded, (iv) Government, (v) CFS/ICD, or (vi) Cold chain.
Public: Public warehouses in India are typically established by the government and are licensed to private third party players (including co-operative societies). Public warehouses are used by the general public to store goods. These are usually set-up near transportation lines e.g. railway, highways, waterways, etc. and are typically used by small manufacturers, wholesalers, exporters, importers, government agencies for receipt and dispatch of their goods.
Public warehouses provide short term or long term storage on month to month basis. The storage fees can be charged either on per-pallet basis, or on the basis of the square footage of space that has been taken. These warehouses may also charge inbound and outbound transaction fees. Since public warehouses are managed by third party operators, the customers do not need to employ their own warehouse staff, or maintain inventory software or warehouse equipment. These are taken care of by the warehouse operator. Due to the relatively low costs involved in storing goods in a public warehouse (as opposed to a private warehouse) these are an excellent option for small business owners.
Private: Private warehouses are setup by private enterprises typically for their own specific purpose. They may be established for the products owned, manufactured, imported on their own behalf. These warehouses are strategically located to address the requirements of manufacturing and commercial units. Private warehouses are highly flexible in nature, and can be customised for storage and placement of products on the basis of the nature of the products.. Essentially, private warehouses are occupied by a sole enterprise. These would typically be large enterprises with massive warehousing requirements. Private warehouses can be either self-operated, or may be operated by a third party logistics provider (3PL) for and on behalf of the enterprise.
Bonded: Bonded warehouse are authorised by government to receive and store goods till the duty on them have been paid. These warehouses enable importers to make deferred payment towards duties over goods, thereby reducing the investment required to carry on trade since the duty is payable only when the goods are sold, and not if they are taken back/ returned. These warehouses can be owned and operated both by the government as well as private parties. Traders store goods under an undertaking (a bond), and the stored goods are released only once the duty on the goods have been paid. Bonded warehouses are typically situated near ports of entry (e.g. shipping or air ports).
Government: Government warehouses, as the name suggest, are owned and operated by central or state governments, local authorities, public corporations. These warehouses are typically meant for use by the government or government-owned enterprises, but private parties may also use these warehouses for their goods.
CFS/ICD: Container freight stations (CFS) and Inland container depots (ICD) are essentially custom-bonded facilities located either near the service port (in the case of CFS), or inland (as in the case of ICD). These facilities also come equipped with warehousing facilities, as well as the required handling equipment and IT infrastructure equipment. Both warehouses act as consolidation point for cargo, and provide for transit storage locations. However, CFS is located off-dock to free up dock space, and they are largely expected to deal with break-bulk cargo originating/terminating in the immediate hinterland of a port. CFS may also deal with rail traffic to and from inland locations.
The primary purposes of CFS/ ICD are (i) receipt and dispatch/delivery of cargo, (ii) stuffing and stripping of containers, (iii) transit operations by rail/road to and from serving ports, (iv) customs clearance, (v) consolidation and desegregation of LCL cargo (i.e. cargo load requiring less than a full container), (vi) temporary storage of cargo and containers, (vii) reworking of containers, and (viii) maintenance and repair of container units.
Cold chain: A cold storage is a temperature-controlled warehouse for perishable cargo. These warehouses typically cater to industries such as agriculture, horticulture, fisheries and aquaculture, dairy and processed food.
Challenges:
All of the aforementioned facilities have one thing in common. They require vast tracts of land upon which they are situated. For example the minimum acreage required for a CFS warehouse is one hectare; for an ICD its 4 hectares of land. Warehouses are typically situated either near (i) a port, or (ii) an industrial area, or (iii) at the outskirts of a major city. This is to ensure that they are situated within a reasonable distance from where the goods can be received or dispatched. Large tracts of land availability in the country is typically in the nature of agricultural land. Operators setting up a warehouse will find procuring agricultural land significantly challenging for two reasons (i) high cost of land acquisition, and (ii) unclear title to land that have been passed down through generations, and which may have been subject to partition among family members.
Due diligence on agricultural lands in India is particularly challenging. This is partly to do with the non-centralised nature of land records at district levels, as well as local customs relating to recording of land transfer and ownership. Typical title search on an agricultural land should look into ownership and transfer records of at least the previous 30 years. This is to ensure that one is able to piece together a coherent title chain over the various land parcels that will eventually be used for establishing the warehouse. Care must be taken to ensure that each land parcel forming the larger land mass (including any smaller land fragment that may have been sold/ gifted/ partitioned etc.) have been accounted for. Care must also be taken to ensure that land parcels that have joint ownership have been/ are being transferred in the chain jointly. Land parcels required for construction of warehouse facility may require negotiating with multiple land owners. In such cases there may cases wherein one of more land-owners hold-out with the expectation of a better compensation.
Other considerations would include ensuring that the land parcel is in an even-shape (preferably a square or a rectangle). This is to ensure optimum utilisation of the land parcel as any odd-shaped portions may not be easily reconciled into the warehousing footprint, and will result in a high level of land wastage. Levelling a land parcel is also an added cost, and operators should ensure that the land requires minimal levelling prior to the start of construction. Naturally, it is always advisable to undertake a physical verification of the proposed land parcels before purchasing the same. Since warehouses are places for receipt and dispatch of goods, they also need access to roads having adequate width to handle container trucks. They also need access to utilities such as electricity and water supply.
This post has been authored by Sayanhya Roy, Principal Associate with inputs from Anirudh Rastogi (anirudh@ikigailaw.com), Managing Partner at Ikigai Law. For more on the topic, please feel free to reach out to us at contact@ikigailaw.com.
Disclaimer: This article is meant for general informational purpose only and is not a substitute for professional legal advice. This article is based on the laws applicable in India as on the date of publication.
