Franchising

In the absence of franchise-specific legislation in India, a franchise arrangement is governed by various applicable statutory enactments, including:

• the Contract Act, 1872;
• the Competition Act, 2002;
• the Consumer Protection Act, 1986;
• the Trade Marks Act, 1999;
• the Copyright Act, 1957;
• the Patents Act, 1970;
• the Design Act, 2000;
• the Specific Relief Act 1963;
• the Foreign Exchange Management Act, 1999 and other foreign direct investment (FDI) policies and regulations issued by the Reserve Bank of India from time to time;
• real estate laws such as the Transfer of Property Act 1882;
• the Stamp Act, 1899;
• the Income Tax Act, 1961;
• the Arbitration and Conciliation Act 1996; and
• the Information Technology Act 2000.

Industry-specific and state legislation may also apply, depending on the relevant industry/sector and the transaction pertaining to the respective franchisee arrangement.

They apply to both foreign franchisors and domestic franchisors.

Provisions in FDI policies and the Foreign Exchange Management Act 1999 prescribe the thresholds and conditions for foreign investment and compliance in relation to outward flows of foreign exchange in the form of royalty payments, franchise fees and so on. The franchisee must make payments to the foreign franchisor through authorised dealer banks in India by submitting the relevant documents.

No.

There is no regulator for franchising in India and no voluntary code or form of self-governance. There is no code of ethics prescribed for franchising under Indian law. The principles of good faith and contract law must be adhered to in accordance with the Contract Act, 1872.

Further, industry-specific and state legislation may apply depending on the relevant industry/sector and the transaction pertaining to the respective franchise arrangement.

Many franchisors and franchisees are members of franchise associations – such as the Franchising Association of India and Franchise India – which have formulated codes of conduct or ethics that members are expected to follow, although these are not binding.

Not applicable.

There are voluntary bodies that franchisors and franchisees can become members of; however, such membership is neither compulsory nor directory in nature. There is no code of conduct for franchise agreements, but the principles of good faith and contract law must be adhered to in accordance with the Contract Act, 1872.

In the absence of a regulator or a statutory code of ethics for franchising in India, centralised data is not available. However, according to industry reports such as those published by Franchise India (2018-2019), franchising appears to contribute 2% to India’s gross domestic product and employs over 1.5 million people.

Centralised data on this is not available from any official source.

Centralised data on this is not available from any official source.

Both trends are prevalent in India.

Both the master franchising and multi-unit development models are commonly used in India.

The primary advantage of a multi-unit development model is the potential for more customers and hence higher sales.

The disadvantages include the following:

• The need to multi-task may compromise the focus of the franchisee; and
• Establishing and operating this model is more investment intensive.

The Foreign Exchange Management Act, 1999 and Reserve Bank of India (RBI) guidelines regulate the terms of payment under franchise agreements – such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees – where one party is an overseas entity, including:

• the amount to be paid; and
• the procedure for remitting these payments outside India.

As per the guidelines of the RBI, the franchisee must provide tax clearances and a certificate from a chartered accountant when remitting royalty payments to a franchisor outside India. Currently, franchise payments made by a resident to a non-resident can be made under the automatic route – that is, no approval is required and there is no ceiling on the amounts that can be remitted.

Franchise fees or royalties can be paid in any currency and there are no restrictions on the same. Payment must be effected through authorised dealer banks recognised by the RBI.

In Saghir Ahmed v State of Uttar Pradesh, the Supreme Court considered the doctrine of franchise as applicable in England and the United States, and observed as follows:

Indian law does not specifically address franchising or the definition of a ‘franchise’ per se. The courts in such cases have relied on dictionary meanings, such as that specified in Black’s Law Dictionary, which defines a ‘franchise’ as a licence from the owner of a trademark or trade name permitting another to sell a product or service under that name or mark.

A ‘franchise’ is essentially an agreement under which the franchisee is granted a representational right to sell or manufacture goods, provide services or undertake any process identified with the franchisor, regardless of whether a trademark, service mark, trade name, logo or similar symbol is involved.

• Geographical limitations: The territorial limits within which a franchisee can set up stores.
• Compliance: Compliance with applicable legal norms by the franchisee.
• Exclusivity: The franchisor’s obligation not to set up stores in the franchisee’s territory, either directly or through a third-party franchisee.
• Trademarks: The usage rights granted to the franchisee for promoting the business.
• Insurance: The franchisee’s obligation to obtain insurance against business losses and other liabilities.
• Non-compete: The franchisee’s undertaking not to sell in the territory, directly or via an intermediary, any product which competes with the products of the franchisor.
• Minimum performance standards: Any minimum performance standards set by the franchisor.
• Commercial terms: The franchising fees payable by the franchisee to the franchisor.
• Consequences of termination of the agreement: The actions to be taken by the franchisee pursuant to termination of the agreement.

Indian laws do not require the franchisor to be registered with any professional or regulatory body before entering into a franchise arrangement. However:

• where a franchise involves IP rights, it is advisable to ensure that those IP rights are registered to facilitate the smooth functioning of a franchise system; and
• where the franchise arrangement involves a lease or sub-lease, the transfer of the lease requires registration of a duly stamped deed of assignment in favour of the franchisee.

In the absence of specific franchising regulations, this issue is left to the discretion of the franchisor and franchisee and is governed by the franchise agreement. There is no code of conduct applicable to franchise agreements, but the principles of good faith and contract law must be adhered to in accordance with the Contract Act, 1872.

The foreign direct investment policies and the Foreign Exchange Management Act 1999 prescribe the thresholds and conditions for foreign investment and compliance in relation to outward flows of foreign exchange in the form of royalty payments, franchise fees and so on. The franchisor and franchisee must adhere to these norms.

Breach of the Foreign Exchange Management Act 1999 may subject an entity to a penalty of:

• up to three times the sum involved in the contravention where such amount is quantifiable; or
• up to INR 200,000 where the amount is not quantifiable.

In the case of an ongoing contravention, a further penalty of INR 5,000 may be imposed for each day after the first day on which the contravention continues.

No. The foreign direct investment policies and the Foreign Exchange Management Act 1999 prescribe the thresholds and conditions for foreign investment and compliance in relation to outward flows of foreign exchange in the form of royalty payments, franchise fees and so on.

The franchisee must make payments to the foreign franchisor through authorised dealer banks in India by submitting the relevant documents.

For a typical franchisor, the most relevant forms of business entities in India are the private limited company and the limited liability partnership. Both forms:

• have independent corporate existence;
• are well governed by a comprehensive regulatory regime;
• are amenable to foreign investment, subject to the relevant foreign exchange control norms; and
• offer protection from unlimited liability.

Other business structures – such as sole proprietorship concerns and unregistered partnership firms –are not available to foreign franchisors, as foreign investment is not permitted in these entities.

As there is no formal statutory code of conduct, the selection and recruitment of franchisees is a function of the understanding and discussion between the franchisor and the franchisee.

No.

This is determined as per the franchise agreement, in the absence of specific legislation governing pre-sale disclosure obligations in India. It is thus important for the franchisor and franchisee to explicitly include detailed disclosure requirements in the franchise agreement. However, ‘consensus ad idem’, as per the provisions of the Contract Act, is important. In addition, the following must be disclosed:

• whether any civil or criminal proceedings are pending against any of the parties;
• disclosures required under the Securities and Exchange Board of India (Listing and Disclosure) Regulations, 2015;
• disclosures required by the National Stock Exchange Board of India;
• disclosures required under the Companies Act; and
• where applicable, the code of ethics of the Indian Franchise Association (this is not mandatory in nature and applies only to voluntary members).

This is also determined as per the franchise agreement; however, common law principles with respect to entering into proposed contractual relations are applicable in such scenarios, in addition to those explained in question 6.1.

See question 6.1.

If a party makes any misrepresentations or breaches any warranties under the franchise agreement, the other party can commence:

• civil proceedings for damages; and/or
• criminal proceedings for misrepresentation of facts and criminal breach of trust.

Franchise agreements usually expressly cover indemnity rights. Thus, the franchise agreement will contain provisions for the indemnification of a party for any liabilities arising from the other party’s breach of contract. The agreement may also set out an inclusive list of situations in which the parties will be liable for indemnification. However, even in the absence of any express indemnity provision in the contract, the aggrieved party may be able to claim damages.

Information on financial strength, criminal record and so on is a good starting point when conducting due diligence.

In the absence of any specific legislation governing franchising, principles that may apply could originate from any of the existing laws which govern matters such as misrepresentation, breach of trust and cheating.

Yes.

As there is no specific legislation in India governing franchising, the terms of the Contract Act apply in this regard.

It is good practice to specify the governing laws and jurisdiction for the operation of the franchise agreement, although this is not mandatory. In case of a franchise agreement between an Indian entity and a foreign entity, the parties to the franchise agreement can designate the law of a foreign country as the governing law and submit to the exclusive or non-exclusive jurisdiction of a foreign court, provided that such foreign court has inherent jurisdiction over the dispute.

The franchisee is usually controlled by the franchisor and must run the business in accordance with accepted business practices as set out by the franchisor. The franchisor must specify the exact methods and systems (eg, uniforms, fit-out and location) and quality control measures, as these form the essence of the agreement and the conduct of control determines the nature of the relationship between the parties.

The franchisee is usually controlled by the franchisor and must run the business in accordance with accepted business practices as set out by the franchisor. The franchisor must specify the exact methods and systems (eg, uniforms, fit-out and location) and quality control measures, as these form the essence of the agreement and the conduct of control determines the nature of the relationship between the parties.

The franchisee is usually controlled by the franchisor and must run the business in accordance with accepted business practices as set out by the franchisor. The franchisor must specify the exact methods and systems (eg, uniforms, fit-out and location) and quality control measures, as these form the essence of the agreement and the conduct of control determines the nature of the relationship between the parties.

The franchisor can impose reasonable restrictions on the franchisee’s freedom to sell, transfer, assign or otherwise dispose of the franchised business. However, this must be clearly addressed in the franchise agreement with no ambiguity. Also, the restrictions should not absolutely restrain the franchisor and/or the franchisee from carrying out trade, as this would be held void under the Contract Act.

Yes. In the absence of specific legislation, the principles of good faith and contract under the Contract Act will apply.

There are no specific disclosure obligations, apart from:

• in the case of listed companies, the disclosures that must be made to the Securities and Exchange Board of India; and
• any other disclosures which may be mentioned specifically in the franchise agreement.

There are no local laws that govern the termination of the franchise agreement; this is regulated solely by the mutually agreed grounds for termination as set out in the franchise agreement.

The Foreign Exchange Management Act, 1999 and Reserve Bank of India (RBI) guidelines regulate the terms of payment under franchise agreements – such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees – where one party is an overseas entity, including:

• the amount to be paid; and
• the procedure for remitting these payments outside India.

As per the guidelines of the RBI, the franchisee must provide tax clearances and a certificate from a chartered accountant when remitting royalty payments to a franchisor outside India. Currently, franchise payments made by a resident to a non-resident can be made under the automatic route – that is, no approval is required and there is no ceiling on the amounts that can be remitted.

The payment of royalties under the franchise agreement is subject to withholding tax at a rate prescribed by the relevant Finance Act at the time of payment. Currently the effective rate is 10% of the gross amount. Tax rates may be increased by an additional surcharge subject to the benefits available under double tax avoidance treaties. If the permanent account numbers of deductees are not available to non-residents, a higher tax withholding rate may be applicable. Further, as per Section 90(2) of the Income Tax Act, 1961, a beneficial rate provided under the Income Tax Act or under an applicable double tax avoidance treaty will prevail if the overseas franchisor submits a tax residency certificate.

It is not advisable to avoid payment of withholding tax by structuring payments from the franchisee as management services fees rather than royalties, as if and when such payments are scrutinised by the income tax authorities, this may lead to heavy fines.

None, as there is no standard operating procedure or statutory provisions directly governing franchising in India.

In the absence of any specific legislation, the principles of good faith and contract law under the Contract Act will apply.

No.

A trademark is protected under the Trademarks Act 1999. On registration, the franchisor is granted the exclusive right to use the mark in connection with the relevant goods or services. A trademark registration is valid for 10 years only and must be renewed thereafter. As trademark rights are territorial in nature, it is very important for a foreign franchisor to register its trademark in India, as this affords statutory protection to the trademark in India.

Trade secrets are established between parties that stand in a contractual relationship and any disclosure thereof will be actionable. While trade secrets are not dealt with under any particular laws in India, they are covered by:

• legislation such as the Contract Act 1872 and the Copyright Act, 1952;
• the principles of equity; and
• at times, the common law action of breach of confidence, which effectively amounts to a breach of contractual obligations.

The Information Technology Act also affords protection; however, this is limited to electronic records. Appropriate terms with respect to the disclosure and protection of trade secrets may be stipulated in the franchise agreement.

Franchise agreements include explicit clauses which provide that it is the franchisee’s responsibility to:

• comply with all applicable employment laws with respect to the employment contracts that it concludes with its staff; and
• bear all legal and financial consequences resulting from the termination of these contracts – in particular, as a result of the termination or non-renewal of the franchise agreement.

Franchisees must follow all applicable Indian employment laws, including those setting out rules on:

• the minimum wage;
• working conditions; and
• employee benefits.

The franchisor must ensure that franchisees are aware of and follow these guidelines.

Yes, there may be such risks, unless the relationship between the parties is specifically mentioned in the agreement governing their relationship. Usually, there is a principal-agent or principal-principal relationship between the franchisor and the franchisee in the absence of any specific clause in this regard.

The Competition Act, 2002 prohibits arrangements relating to the production, supply, distribution, storage, acquisition or control of goods or the provision of services that cause or are likely to cause an appreciable adverse effect on competition within India. This is in an effort to ensure that large franchise arrangements do not create a monopoly.

The Competition Act prohibits agreements that directly or indirectly determine a purchase or sale price or that permit or control production, supply, markets, technical development, investment or provisions of services and so on, provided that they are likely to have an appreciable adverse effect on competition within India.

While franchisees can use e-commerce in their business in India, the concept of intermediary liability applies. The term ‘intermediary’ is defined in the Information Technology Act, 2000 as:

Intermediary guidelines have also been laid down in India.

To that extent, the terms of the franchise agreement on liability must be clearly laid down.

India has a Consumer Protection Act which governs the interests of consumers. Under this act, consumers may make complaints and take actions against either a franchisor or a franchisee, depending on the nature of the franchise agreement.

These are not specifically covered; the obligations and liabilities mentioned in the franchise agreement will govern this issue.

The Information Technology Act, 2000 has not kept pace with technological advancements. Data protection has become more complicated as the number of devices to monitor and protect continues to expand.

However, India has no specific data protection legislation currently in force.

Further to the entry into force of the EU General Data Protection Regulation, 2018, India’s Digital Personal Data Protection Bill, 2022 was finally tabled in Parliament and was approved by both the Lok Sabha and Rajya Sabha. Thereafter, the Digital Personal Data Protection Act, 2023 received the Presidential assent also on August 11, 2023. However, the Digital Personal Data Protection Act, 2023 has not yet come into force as the Indian government is in the process of finalising the rules. Among other things, it would:

• introduce compliance requirements for all forms of personal data;
• broaden individual rights;
• introduce a central data protection regulator; and
• institute limitations on the transfer of personal data to territories outside India.

See question 14.1.

Yes, the Indian courts provide remedies or relief to the franchisor or the franchisee in accordance with the applicable provisions of law and the franchise agreement (read conjointly). A foreign judgment is also enforceable in India by filing:

• an execution petition under Section 44A of the Civil Procedure Code, 1908 (if the conditions specified therein are fulfilled); or
• a suit upon the foreign judgment/decree.

It is best to agree on alternative dispute resolution (ADR) mechanisms such as arbitration, conciliation or mediation, to ensure the speedy and cost-effective resolution of any disputes that arise from the franchise agreement.

Where arbitration is adopted as an ADR mechanism, the parties may opt to sign a separate arbitration agreement between them or include an arbitration clause in the main contract. Arbitration proceedings in India are conducted in accordance with the Arbitration and Conciliation Act, 1996 and the amendments thereto.

Pre-litigation mediation is available in India. This is a formal, structured process that takes the form of negotiations between the parties before former high court judges. Many people prefer this route as:

• the negotiations are more organised, properly docketed and unbiased, as they take place through a mediator;
• it can be an effective option in situations where:
• • the initiation of legal proceedings would be a sensitive issue for the parties;
  • a lawsuit may not reap an appropriate return on investment; or
  • urgent interim relief may not be the focus of the parties; and
• it can help in testing the attitudes of the opposing side.

A request to start mediation is filed with the Delhi High Court Mediation Centre, specifically mentioning that the intention of the petitioner is to resolve the matter amicably. The adversary must agree to participate in the mediation. A mediator is then appointed, who analyses the claims of the petitioner and provides an independent report on the settlement process. The process establishes a more formal dialogue which can induce the parties to settle. As pre-suit mediation is a voluntary process, this does not jeopardise the ability to file a lawsuit at any stage.

Yes, India is a signatory to the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

The filing of class actions to protect the interests of a large number of people is not prohibited in India; however, this is not common practice. Any class action waiver clause in the franchise agreement which is considered to constitute a waiver of any law or provisions of law may not be considered as reasonable or enforceable by the Indian courts.

We understand that two class action suits are currently pending before the National Company Law Tribunal. However, as these cases pertain to separate company law issues, further discussion here is not warranted, as they are not relevant from a franchising perspective.

Currently, no legislative reforms that would directly affect the franchising landscape are expected in India.

It is imperative to identify the right franchisee for the business.

India has no specific legislation governing franchising. As there are myriad laws that apply to a franchise arrangement, it is crucial that the understanding between the parties is captured accurately in writing. Most disputes arise only where the agreement between the parties is silent on particular issues. As India also has complex industry-related laws, care must be taken by a foreign franchisor or franchisee to understand:

• how certain laws may impact a franchise agreement; and
• how they could be affected by changing government policy and decisions on foreign investment and participation in India.

One way to ensure that the franchise agreement and the relationship of the parties are fully protected and compliant is to provide for frequent renewal terms, allowing the terms of the agreement to be reviewed and updated to ensure greater compliance.