Franchising in India: overview
A Q&A guide to franchising in India.
The Q&A provides an overview of the main practical issues concerning franchising, including current market activity; regulation of franchising; contractual issues relating to franchising agreements (including pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination, and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.
This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.
Over the past few years, India has attracted the attention of major international brands that wish to take advantage of the unparalleled potential for franchising in India. Many multinational brands (for example, in the retail, food and beverage, health and beauty, education and consumer services sectors) are now establishing themselves in the Indian market. In addition, domestic businesses have been modernising rapidly, and franchising has become increasingly popular across the country as a business expansion method.
During 2014 and 2015, the franchise industry experienced a 35% year-on-year growth, and about 4,050 new brands adopted the franchising model.
Foreign brands that recently appointed franchisees in India include:
Truefitt & Hill.
Classic Rock Coffee Co.
Brands that have announced further franchising expansion plans include:
Jawed Habib Hair & Beauty Ltd.
Mount Litera Zee School.
Mahindra Retail's Babyoye.
Apollo Health and Lifestyle Limited.
Dr Batra's Healthcare.
Direct franchising is a commonly used method of local franchising. This allows the franchisor, who is well aware of the local market, to develop a successful franchise network and carry out due diligence of potential franchisees.
International franchisors normally appoint a master franchisee, and develop a franchise network through the master franchisee. For example, McDonalds, Toni & Guy and Krispy Kreme have granted master franchising rights for Eastern, Western, Northern and Southern India. This method is popular and efficient due to the:
Size of the country.
Size of the market and demand.
Different languages and cultures throughout the country.
Various states' regulatory issues.
Some international franchisors have also formed local companies that grant franchise rights in India. For example:
Australian Food India Pvt Ltd is a joint venture that has the master franchisee rights for Cookie Man.
The fast food chain Subway has set up a subsidiary in India (Subway Systems India Pvt Ltd in India).
Indian brands have preferred the franchising route for expanding globally primarily because it is viewed as:
An easy and less risky way of entering the global markets.
Providing profits above market levels.
Some of the key issues that Indian brands evaluate before taking a strategic decision to expand outside India are:
Whether there are specific regulations governing franchises in the relevant market.
The general regulatory and political environment.
Demand and acceptability of the relevant products and services.
The local competition.
Regulation of franchising
There is no legislation that specifically regulates franchising in India. The term "franchise" is only defined for the purposes of services tax as an agreement under which the franchisee has a representational right to sell or manufacture goods or to provide services or undertake any process identified by the franchisor, regardless of whether the agreement involves the use of a trade mark, service mark, trade name, logo or any such symbol.
There is currently no legislation specifically regulating franchising or granting protection to local agents in India. In the absence of specific legislation, the offer and sale of franchises in India is governed by a variety of statutes, rules and regulations, including:
The Indian Contract Act 1872, which governs the contractual aspects of franchise agreements.
The Foreign Exchange Management Act 1999 and the rules and regulations issued under this Act, which govern payments made and guarantees issued by Indian franchisees to foreign franchisors.
The Foreign Direct Investment Policy, which regulates any proposed investment in India and lists the sectors in which foreign investment is permitted.
The Competition Act 2002, which deals with anti-competitive agreements and abuse of a dominant position.
Real estate laws, including the:
Transfer of Property Act 1882, which governs the acquisition of immovable property (under both sale and lease agreements);
Indian Stamp Act 1899 and state legislation, which govern the administration of stamp duty;
Registration Act 1908, which contains rules on the registration of agreements;
rent control legislation, which applies to tenancies and lettings of immovable property; and
development control rules.
The Income Tax Act 1961 and double taxation avoidance agreements, which are relevant when considering the tax liability of a foreign franchisor.
Labour legislation, including the:
Industrial Disputes Act 1947;
Contract Labour (Regulation and Abolition) Act 1970; and
Employees Provident Fund and Miscellaneous Provisions Act 1952.
The Arbitration and Conciliation Act 1996, which governs arbitration proceedings and the enforcement of foreign awards.
The Consumer Protection Act 1986, which provides remedies to consumers for defective products and services.
The Information Technology Act 2000, which contains provisions relating to data protection.
Additionally, industry-specific and state legislation may apply depending on the relevant industry/sector. Therefore, a franchising business may need to obtain and maintain licences and permits under the relevant state laws.
There is no regulatory authority responsible for enforcing franchising laws. Franchise agreements are governed by various statutes, rules and regulations (see Question 5), which are enforced by the competent authorities. Any franchising dispute can be settled through mediation, arbitration or court proceedings, as agreed by the parties.
Indian laws do not require the franchisor to be registered with any professional or regulatory body before setting up a franchise system (including offering a franchise, signing up franchisees or taking payments from franchisees).
See Question 31 regarding registration requirements for licensing IP rights.
There is no code of ethics for franchising under Indian laws. However, many franchisors and franchisees are members of franchise associations such as the Franchising Association of India, which has formulated a code of conduct/code of ethics that their members are expected to follow (although this code is not binding). India is not a signatory to the European Code of Ethics for Franchising.
Pre-contract disclosure requirements
The franchisor is not subject to any pre-contract disclosure requirements in India. There is no statutory obligation imposed on the franchisor to provide any information in respect of the franchise to the prospective franchisee. It is therefore prudent for the franchisee to conduct a thorough investigation and evaluation of the franchisor, the franchise business and other aspects before concluding a franchising agreement.
However, the common law requires that the parties deal with each other in good faith and act reasonably. If the franchisor makes any misrepresentation or breaches any warranties under the franchise agreement, the franchisee can commence either or both:
Civil proceedings for damages.
Criminal proceedings for misrepresentation of facts and criminal breach of trust.
Damages generally cover actual losses only, and not indirect, remote or consequential losses.
The franchisor is not subject to any disclosure requirements. However, in order to avoid any dispute alleging misrepresentation, it is in the interest of the franchisor to make suitable disclosures of all material facts to the franchisee at the time of negotiating the arrangement.
See also Question 11.
For a contract/franchise agreement to be valid and binding, the following elements must be present (Indian Contract Act 1872):
An agreement (that is, offer and acceptance).
Lawful object and purpose.
Free consent of the parties.
Capacity of the parties.
A franchise agreement need not be executed in any specific language in order to be legal and binding. However, English is the most commonly used language.
Additionally, to be admissible in evidence, a franchise agreement must be duly stamped before its execution or within three months after it has been first received in India. The relevant stamp duty to be paid is based on the stamp laws of the relevant Indian state where the franchise agreement is executed or brought. If one of the parties is a company, the signatory will need authorisation to execute the agreement, by way of a resolution of that company.
A franchise agreement need not be notarised or registered.
When interpreting and enforcing a franchise agreement, Indian courts strictly consider the terms of the agreement that are explicit, clear and free from ambiguity (provided that the agreement is a valid contract). However, negative covenants such as non-compete clauses or tying restrictions are not enforceable unless the court considers them to be reasonable (see Question 17).
In India, the general practice is to execute a comprehensive franchise agreement, which also covers the licensing of any technology, process, know-how, trade marks and so on. However, a separate IP licence can be executed and made coterminous with the franchise agreement if the parties so wish, or if the IP vests in a different entity.
Parties' rights and obligations
Right and obligations of the franchisee
The common law requires that the parties deal with each other in good faith and act reasonably during the term of the franchise agreement.
Rights. The franchisee usually has the rights to:
Operate the franchise business in the designated territory exclusively or non-exclusively (as agreed).
Use the system developed by the franchisor.
Use the trade secrets, know-how and methods of preparation, recipes, formulas and business methods of the franchisor.
Use the trade marks/service marks.
Obligations. The franchisee must usually:
Operate the franchised business in compliance with the franchise agreement and the Operations Manual at the approved premises.
Pay the franchise fees, royalties for use of any trade marks and copyright, and advertising contribution.
Use the franchisor's IP in the prescribed manner and protect this IP and confidential information.
Carry out local advertising.
Obtain supplies from the franchisor or approved suppliers.
Train its staff and ensure that they conduct themselves in accordance with the agreed standards.
Provide regular reports, as may be agreed.
Not engage in competitive activities.
Not assign the rights and obligations under the agreement to any third party without the prior written consent of the franchisor.
As a franchise agreement is regarded as a contract, certain implied rights (such as the right to terminate or claim damages or seek specific performance in the case of breach) and obligations apply under the Contract Act 1872. However, parties can override these implied provisions or provide for additional rights and obligations. However, the following issues must be noted:
Rights and obligations of the franchisor
Rights. The franchisor usually has the following rights:
Right to approve the franchisee's premises.
Ownership of the IP, Operations Manual and confidential information.
Right to require the assistance of the franchisee in the case of any infringement of IP rights.
Right to receive payment from the franchisee of the:
royalty for use of any trade marks and copyright; and
Right of inspection.
Right of first refusal if the franchisee wishes to sell its franchise business to a third party.
Right to terminate the agreement in the case of breach of the franchise agreement by the franchisee.
Obligations. The franchisor must usually:
Train the franchisee's staff to its methods of conducting of business.
Provide the Operations Manual.
Upgrade the operations system.
Provide regular training and ongoing recommendations in relation to advertising.
Provide advertising material.
Provide guidance relating to the management, financing and promotion of the franchise business.
Supervise the franchise operations and suggest changes to comply with the system (as the case may be).
See above, Rights and obligations of the franchisee regarding rights and obligations implied in a franchise agreement.
Local law does not specify that particular provisions must be expressly included in a franchise agreement. When interpreting and enforcing a franchise agreement, Indian courts strictly consider the terms of the agreement that are explicit, clear and free from ambiguity. Therefore, a franchise agreement must clearly cover all aspects of the franchise arrangement.
It is common practice to include entire agreement clauses, which are enforceable and recognised by Indian courts. It is not common practice to include exclusion clauses in franchise agreements.
A third party cannot make claims under a franchise agreement. However, the parties can confer rights or benefits on a franchisor who is not a party to the agreement, in order to enable the franchisor to claim directly against a sub-franchisee.
Restrictions on purchasing and product tying
The Competition Act 2002 prohibits agreements that directly or indirectly determine a purchase or sale price or that permit or control the production, supply, markets, technical development, investment or the provisions of services and so on, provided that they are likely to cause an appreciable adverse effect on competition within India.
However, reasonable restrictions to protect IP rights are not considered as anti-competitive. Therefore, a franchisor can require the franchisee to buy products and services, including those for resale to the franchisee's customers, only from the franchisor or its nominated suppliers.
Product tying provisions under a franchise agreement are not per se regarded as having an appreciable adverse effect on competition in India.
Non-compete obligations and transfer restrictions
Restraint of trade agreements are void under Indian law. However, courts have held that reasonable restrictions are not considered as being in restraint of trade, and are therefore enforceable. Provisions restraining the franchisee from carrying on a competing business or restricting/limiting its activity to a given territory during the term of the agreement will normally be treated as reasonable.
There are no restrictions on the ability of the franchisor to require its prior consent to transfers of the business and/or transfers of interests in the entity owning the business. However, the parties can agree on such restrictions in the franchise agreement.
Fees and payments
The fees that are usually payable by the franchisee include the following:
Initial fee for joining the franchise network.
Periodical payments for being part of the franchise network.
Periodical payments relating to sales and production.
Guaranteed minimum amounts.
Reimbursement of travelling expenses.
Payments for other services.
Advertising and marketing costs.
There is no prescribed method for calculating or determining the fees to be paid by the franchisee. The parties are free to agree on the amount and method of payment, which will differ depending on the relevant industry.
There is no express restriction or mandatory provision relating to charging interest on overdue payments. The parties are free to include a provision for the payment of interest in a franchise agreement.
Courts can allow the payment of interest on overdue payments if a certain sum is payable either (Interest Act 1978):
At a certain time under a written instrument.
From the time of a written demand claiming the payment of interest.
Term of agreement and renewal
The parties are free to agree on the term of a franchise agreement. Indian laws do not impose a minimum or maximum term. When determining the term of a franchise agreement, the parties must take into account the following factors:
Nature of the business.
Viability of the business.
Recovery of costs and break-even point.
In India, franchise agreements typically last for ten to 20 years.
Generally, the franchise agreement includes provisions on the right of renewal and on the duration of such renewal (which can vary from the original term). The right to renew the franchise agreement can be mutual, or can be exercisable at the option of the franchisor only.
A fee is usually payable on renewal.
There are no statutory requirements relating to renewal or to charges payable on renewal. The parties are free to agree on these matters in the agreement.
There are no limitations on the right of the franchisor to terminate the agreement. The parties are free to agree on the grounds for termination.
The grounds for termination are usually expressly set out in the agreement, and include (for example):
Material breach or non-performance of any terms of the agreement (such as non-payment or default in payment, non-compliance with specific quality or other standards).
Failure to adhere to the development schedule/target.
Incapacity to perform obligations under the agreement due to any unforeseen circumstances that cannot be cured.
In the absence of a specific termination clause in the agreement, courts also recognised that an agreement can be terminated without mentioning any specific reason by giving reasonable notice.
Additionally, a party can seek termination of the agreement (but not specific performance) if it is found that termination was contrary to the law, the terms of the agreement or any understanding between the parties.
Indian law recognises the enforceability of liquidated damages, provided that they are reasonable and do not constitute a penalty.
Post-term restrictive covenants in franchise agreements (such as non-compete and confidentiality covenants) are enforceable provided that their scope, conditions of applicability and duration are reasonable.
The payment of fees to the franchisee is not a condition for the validity of post-term restrictive covenants.
There is no restriction on the franchisor or a replacement franchisee to continue to sell to the former franchisee's customers. However, the franchise agreement can expressly prohibit sales to any specific customer or party. No compensation is payable to the franchisee in this case, unless otherwise provided in the agreement.
Choice of law and jurisdiction
Generally, an Operations Manual contains information on:
The franchisor's business concept.
Standards (for example, architectural, legal or hygiene standards).
Procedures and methodology for accounting and security.
Financial targets and information.
To ensure that the franchisee complies with the Operations Manual, the franchisor can expressly reserve the rights to:
Inspect the premises of the franchisee.
Conduct periodical audits.
Require the franchisee to submit periodical reports of compliance.
There are no legal restrictions on the right of the franchisor to impose changes to the Operations Manual unilaterally. The franchisor usually has the right to amend the Manual. The Operations Manual is a crucial business document and may therefore be subject to periodical amendments/modifications as the business develops.
As the franchisee is operating under the franchisor's brand, it is likely that a consumer or a third party could make a claim against both the franchisee and the franchisor with respect to:
Defective products or services.
Breach of any terms of a contract with the franchisee.
A consumer complaint against a franchisee relating to defective products or services, which is filed in the appropriate forum under the Consumer Protection Act 1986, can also involve the franchisor. The respective liabilities of the franchisee and franchisor will depend on the allegations made in the complaint and on the findings/decision of the competent court.
Whether a franchisee can bring an indemnity claim against the franchisor (or the franchisor can bring an indemnity claim against the franchisee) depends on the provisions of the franchise agreement. Franchise agreements usually expressly cover indemnity rights. These rights can be excluded or limited by an exclusion clause that restricts the liability or rights of the parties to claim indemnity under the contract. In the absence of an indemnity provision in the contract, the aggrieved party may be able to claim damages under the law.
The relationship between the franchisor and the franchisee is governed by the franchise agreement and is on a principal-to-principal basis. A clear provision to this end in the franchise agreement will protect the franchisor against any interpretation of implied agency, which would otherwise expose the franchisor as principal for the acts of the franchisee.
All published materials (for example, all letterheads, bills, invoices, e-mails, website) and any other documents or literature (whether in paper or electronic form) employed in the franchisee's business should clearly indicate the franchisee's status as a franchisee of the franchisor.
Franchise agreements involve the licensing of IPRs. The IPRs that are typically licensed are:
Franchisors can exercise control and supervision over the exploitation/use by the franchisee of their IPRs, know-how and confidential information.
The franchisor can impose conditions and limitations in the franchise agreement on the use of IPRs, know-how and confidential information (including restrictions on the territory in which the IPRs can be used, the duration of use and so on).
There is no mandatory requirement to register licences over IPRs under Indian law.
The right to use a trade mark can either be granted under a simple licensing agreement or to a user registered with the Trade Marks Registry. While a registered user can bring infringement actions in its own name, a licensee relies on the owner of the trade mark to do so. However, the licensee can file for a passing off action in its own name.
Whether the transfer of leasehold interests requires the consent of the landlord will depend on the agreement between the franchisor and the landlord. In the absence of provisions in the agreement between the franchisor and the landlord, the franchisor must obtain the prior consent and authority of its landlord. The landlord has discretion to decide whether to give its consent to the transfer.
The transfer of a lease requires the execution and registration of a duly stamped deed of assignment in favour of the franchisee.
On transfer, the franchisee will step into the shoes of the franchisor and enjoy similar leasehold rights.
In order for the franchisor to acquire the franchisee's premises at the end of the franchise relationship, an express agreement to this effect must be recorded in writing either in the franchise agreement or separately.
Transfer of leasehold rights from the franchisee to the franchisor can be effected by way of assignment, provided that this transfer/assignment is permitted under the agreement with the landlord/lessor. In the absence of a specific provision permitting transfer/assignment, prior consent of the landlord/lessor will be required.
The franchisor need not pay any element of goodwill, unless otherwise agreed by the parties. However, stamp duty will be payable by the franchisor at the current market value based on the applicable rates.
If the franchisor is a person resident outside India, it cannot acquire immovable property without prior approval of the Reserve Bank of India, except for a lease not exceeding five years (Foreign Exchange Management Act 1999).
The franchisor can pass all costs related to the premises to the franchisee under the terms of the franchise agreement.
The rent/licence fee is normally a fixed amount, although there are no limitations on the right of the franchisor to charge its franchisee a rent expressed as a percentage of the franchisee's sales. However, this may pose problems for determining the stamp duty and taxes payable, which are calculated as a percentage of the rent and deposit (if any). It is therefore advisable to structure the payments under various heads (such as rent and franchise payments), taking into account the relevant state's property and stamp duty laws.
The Contract Act 1872 and the Competition Act 1999 prohibit certain agreements that are in restraint of trade and that are likely to cause an appreciable adverse effect on competition within India, respectively. However, certain reasonable restraints and restrictions are permitted.
See also Question 17.
In the interest of creativity and innovation, the provisions relating to anti-competitive agreements do not restrict the right of any person to impose reasonable conditions as may be necessary for the purposes of protecting any of its IP rights (Competition Act 1999). This exemption also applies in the context of franchise agreements.
Provisions restraining the franchisee from carrying on a competing business during the term of the agreement will normally be considered reasonable. Accordingly, a franchisor can prevent a franchisee from:
Having its own website presence.
Promoting its business on the internet.
Engaging in e-commerce to sell competing products or services.
See also Question 17.
India has historically been an employee-friendly jurisdiction, and there are many central and local laws protecting employees. Different labour law issues can arise depending on the nature of the franchise agreement and the amount of control the franchisor has over the franchisee's business operations.
A franchisee will not usually be regarded as an employee of the franchisor. However, in order to avoid the creation of an employment relationship, suitable provisions can be included in the franchise agreement to clarify that:
The franchisee will be acting in its capacity as an independent contractor.
Nothing in the franchise arrangement should be construed as creating an employer/employee relationship between the franchisor and the franchisee.
Cross-border franchising transactions normally provide for overseas governing laws and for dispute resolution through arbitration (as this is more cost effective). Parties usually choose an international arbitration forum to adjudicate on any disputes.
Choice of forum and choice of law provisions in a franchise agreement are enforceable and recommended. In the absence of these provisions, the parties can resort to court litigation to determine the applicable law and/or competent jurisdiction.
Franchise agreements also sometimes include an element of mediation to precede arbitration proceedings. Under Indian law, the use of mediation does not prevent the parties from subsequently bringing judicial or arbitration proceedings.
In the absence of mediation or arbitration provisions, disputes can be resolved by resorting to court proceedings in the relevant jurisdiction.
India is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), and recognises and enforces international arbitration awards. The enforcement of awards depends on whether the foreign jurisdiction either:
Is a party to the New York Convention.
Recognises foreign awards as enforceable.
Foreign judgments can be enforced through court proceedings. In India, foreign judgments can be enforced by way of a decree under the procedures set out in India's Civil Procedure Code 1908 if the foreign court in question is in a reciprocating territory, subject to certain conditions.
If the foreign court is not based in a reciprocating territory, a fresh suit must be filed in India, which will be more time-consuming.
Exchange control and withholding
Payments made between an Indian resident and a non-resident under an international franchise arrangement are subject to the provisions of the Foreign Exchange Management Act 1999 and to the rules issued under this Act.
Currently, franchise payments made by a resident to a non-resident are allowed under the automatic route (that is, no approval is required and there is no ceiling on the amounts that can be paid).
There is a withholding obligation on payments made by an Indian franchisee to an overseas franchisor. Currently, the franchisee must deduct income tax at the rate of 10% at the time of the payment of royalties and/or technical fees to the overseas franchisor.
If the franchisor is located in a jurisdiction that has a double taxation avoidance agreement with India, the taxation will be governed by the provisions of that agreement. However, the provisions of the Income Tax Act 1961 must apply if they are more beneficial to the franchisor.
Reserve Bank of India (RBI)
Description. This is the official website of the RBI, which is maintained by the RBI itself. The website is available in both English and Hindi, and the information available is up to date.
Preeti G Mehta, Partner
Kanga and Company, Advocates & Solicitors
Professional qualifications. LLB, Bombay University, 1984; Advocate, High Court, Bombay, 1984; Solicitor, Bombay and England, 1987; ; Intensive Course in Franchising, Middlesex University, UK, 2000
Areas of practice. Foreign investment; mergers and acquisitions; private equity investment; corporate law; franchising and hospitality; banking law; real estate.
Non-professional qualifications. BA, Bombay University
Languages. English, Hindi, Gujarati, Marathi, Kutchi
Professional associations/memberships. Law Committee, Bombay Chamber of Commerce and Industry; Executive Council, Franchise Association of India and (Chairing of Legal Committee).
Publications. Editorial Advisory Board Member, International Journal of Franchising Law; other publications, including in the International Encyclopaedia of Franchising Law published by Richmond Law & Tax Ltd.