Guide to Vendor Onboarding in India

Posted by Written by Archana Rao Reading Time: 5 minutes

Vendor onboarding refers to the process of registering new vendors who aim to serve the same customer base as a business. For instance, e-commerce platforms like Amazon and Flipkart onboard retailers and manufacturers to reach a wider audience. Ride-hailing companies such as Uber and Ola seek to recruit more driving partners. In the fintech sector, businesses like Amazon Pay, Google Pay, and PayTm aim to attract a diverse range of merchants to use their services over competitors.

Vendor onboarding process: Best practices to consider

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The vendor onboarding process in India involves a series of steps through which a company evaluates, approves, and registers new vendors or suppliers to provide goods or services.

While the specifics can vary depending on the industry and organizational needs, the process generally includes the stages listed below.

Vendor identification

  • Market research: Companies identify potential vendors through market research, referrals, or applications, seeking those that meet specific criteria such as product quality, pricing, capacity, and reliability.
  • Request for proposal (RFP): In some cases, companies issue RFPs to solicit bids and detailed information from vendors about their products or services.

Why it matters: Clearly defining your needs and objectives ensures that you select vendors who align with your business goals and can meet your specific requirements.

Initial screening

  • Background check: This involves verifying the vendor’s legal existence, past performance, and financial stability.
  • Compliance check: Ensures that the vendor meets legal requirements, including licenses, certifications, and compliance with laws such as GST, MSME regulations, or labor laws.
  • Product/service evaluation: A preliminary assessment of the vendor’s offerings to ensure they meet the company’s standards.

Why it matters: Thorough research helps identify vendors with the right expertise, capabilities, and track record, reducing the risk of choosing a partner that may not meet your expectations.

Documentation

Submission of required documents: Vendors must submit various documents for verification, including:

  • PAN card
  • GST registration certificate
  • Company registration documents
  • Bank details and a canceled cheque
  • MSME certificate (if applicable)
  • Trade licenses and certifications
  • Compliance proof with labor laws (e.g., EPFO, ESIC registration)
  • Audited financial statements
  • Vendor Information Form (VIF): Vendors complete a VIF, providing essential data like contact details, business structure, and tax information.

Vendor evaluation

  • Site visits: For large or strategic suppliers, companies may visit the vendor’s facilities to assess operations and workforce.
  • Reference check: Contacting current customers to evaluate the vendor’s reliability, quality, and adherence to delivery schedules.

Why it matters: A structured vendor management framework helps maintain oversight, manage relationships, and ensure ongoing performance.

Approval process

  • Internal evaluation: The procurement team, along with finance, legal, and quality assurance departments, assesses the vendor’s ability to meet the company’s standards.
  • Risk assessment: Evaluating risks associated with engaging the vendor, including financial, reputational, and operational risks.

Why it matters: Effective risk management and compliance ensure that vendors adhere to legal, regulatory, and contractual obligations, reducing potential risks to your business.

Contract negotiation

  • Negotiation: Finalizing the terms of the business relationship, including pricing, payment terms, delivery schedules, quality standards, and penalties for noncompliance.
  • Contract signing: A formal agreement is signed once terms are agreed upon.

Why it matters: A well-negotiated contract establishes clear expectations and terms, reducing the risk of misunderstandings and disputes.

Vendor setup in ERP/system

  • Data entry: After approval, the vendor’s details are entered into the company’s ERP or vendor management system.
  • Vendor code creation: A unique code is generated for future transactions.
  • Banking setup: Vendor banking details are recorded for payments.

Training & compliance

  • Training: Vendors may receive training on company policies, safety standards, and operational procedures.
  • Code of conduct compliance: Vendors must adhere to the company’s ethical sourcing, labor standards, and environmental regulations.

Trial order/first transaction

  • Test orders: A trial order is placed to assess the vendor’s performance in quality, delivery, and customer service.
  • Review: The trial is reviewed, and full-scale orders are contingent on successful performance.

Ongoing monitoring and evaluation

  • Performance Tracking: Continuous monitoring of the vendor’s performance based on quality, delivery, and contract adherence.
  • Audits and Reviews: Regular financial and operational audits ensure ongoing compliance.

Recommendation: Use a vendor management system (VMS) to streamline tracking, reporting, and communication with vendors.

Payments

  • Invoice processing: Vendors submit invoices postdelivery, which are processed for payment according to agreed terms.
  • Payment: Payments are made via bank transfers aligned with the Indian financial system (e.g., NEFT, RTGS, UPI).

Renewal/termination

  • Contract review: At the end of the contract period, the vendor’s performance is reviewed to decide on renewal or termination.
  • Termination: If the vendor fails to meet requirements, the relationship may be terminated, and an alternative vendor selected.

Special considerations in India

  • MSME preference: Under the MSME Act, companies often prioritize MSMEs in procurement as part of government initiatives.
  • Regulatory compliance: Vendors must comply with local laws, including GST, e-invoicing, labor laws, and environmental regulations.

Legal considerations in India

Tax laws

  • GST compliance: Vendors must be registered under GST if their turnover exceeds the threshold and must issue compliant invoices.
  • TDS compliance: Companies deduct tax at source based on the service type, and vendors must provide PAN to avoid penalties.

Company law

  • Registration: Vendors must be legally registered entities, and the onboarding process includes verifying legal documents.
  • Financial reporting: Vendors, especially corporations or LLPs, must comply with financial reporting and auditing requirements.

Labor laws

  • EPFO compliance: Vendors employing 20 or more workers must contribute to the Provident Fund.
  • ESIC compliance: Vendors with over 10 employees and pay wages below or upto INR 21,000 per month (US$250.18) (INR25,000 or US$297.8 for employees with disability) must register with the ESIC and contribute towards the ESI scheme.
  • Contract labor compliance: Vendors employing contract labor must comply with registration and licensing requirements.

Environmental laws

  • Regulation compliance: Vendors in specific industries, such as steel, must comply with environmental regulations and hold necessary clearances.
  • Hazardous waste management: Vendors dealing with hazardous substances must adhere to the relevant rules.

Public procurement laws

  • Preference to Make in India: Government agencies prioritize domestic vendors and products under this regulation.
  • MSME Act 2006: MSMEs receive special consideration in public procurement, with government agencies mandated to procure 25 percent of total annual purchase from them.

Anti-bribery and corruption laws

  • Prevention of Corruption Act: Companies must ensure that vendors do not engage in corrupt practices.
  • Vigil Mechanism: The Companies Act requires companies to have a system to report vendor related fraud or ethical violations.

Foreign trade compliance

  • Customs laws: Vendors involved in import/export must comply with customs regulations.
  • FEMA compliance: Vendors dealing with foreign exchange must adhere to FEMA regulations.

Intellectual property laws

  • IP compliance: Vendors must comply with laws related to patents, trademarks, and copyrights and avoid infringing on others’ IP.

Data privacy and cybersecurity

  • IT Act compliance: Vendors handling sensitive data must comply with data protection and cybersecurity norms under the IT Act.
  • Data protection: Companies may require vendors to adhere to international data protection standards.

Legal contracts

  • Contract law: Vendor relationships should be governed by contracts compliant with the Indian Contract Act, including dispute resolution mechanisms.
  • Arbitration: Companies often include arbitration clauses in vendor agreements for resolving disputes.

Recommendation: Regularly review and update risk management strategies to address evolving risks and compliance requirements.

Conclusion

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Selecting and onboarding the right vendors is a critical process that can significantly impact the efficiency, quality, and success of your business operations.

By following these best practices—defining clear requirements, conducting thorough research, implementing a rigorous selection process, negotiating comprehensive contracts, onboarding effectively, establishing a vendor management framework, fostering strong relationships, and managing risks—you can build a strong network of reliable vendors that support your business goals and drive long-term success.

(US$1 = INR 83.94)

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