Franchising In India – Legal Perspective
India does not have any franchise-specific legislation. Accordingly, such arrangements are covered under various general laws. Additionally, industry-specific and state legislation may apply depending on the relevant industry/sector writes Stuti Galiya, Partner, Khaitan & Co.
Franchise models started in India in the 1990s, with the start of the era of liberalisation. Today, the franchise industry in the country has several well-known brands operating successfully in various sectors, such as, education, food and beverages, fashion and lifestyle, health and wellness, etc. This is in addition to sectors, such as, multi brand retail where there are restrictions or conditionalities prescribed for foreign investment under the Foreign Direct Investment (FDI) policy of the Government of India.
Franchise arrangements – Applicable Laws
India does not have any franchise-specific legislation. Accordingly, such arrangements are covered under various general laws, such as, contracts laws, law of torts, etc. Additionally, industry-specific and state legislation may apply depending on the relevant industry/sector.
There is increased scope for flexibility for the franchisor and franchisee to conduct their business operations in India. However, this also requires robust understanding of the country’s regulatory structure due to the absence of comprehensive franchise-centric legislation and the multiplicity of regulations which could have a bearing on the subject.
Key Aspects to be considered
The following key aspects should be considered whilst entering into franchise arrangements in India:
(a) Stamping/registration of agreement: A franchise agreement needs to be stamped for an adequate value in India, else the agreement will not be admissible as evidence in a court of law in India, unless the requisite stamp duty along with penalties (if any) is paid. The stamp duty will need to be determined depending on the place of execution, as the rate of stamp duty varies from state to state.
There is no requirement to register a franchise agreement with any regulatory authority in India;
(b) Payment of franchise fee/royalty/technical fees: Franchise payments (in the nature of franchisee fees or royalties or technical fees) made by a resident to a non-resident are allowed under the automatic route (i.e., no government/regulatory approval is required and there is no ceiling on the amounts that can be paid) under the permissible current account transactions of the Foreign Exchange Management Act, 1999;
(c) Competition / Restrictive Trade Issues: The Competition Act, 2002 (Competition Act) prohibits transactions which would restrict free trade in India or cause an appreciable adverse effect on competition in India or result in abuse of dominant position by any entity. Under the Competition Act, tie-in arrangements, exclusive supply and distribution agreements and resale price maintenance could be regarded as anti-competitive, if such agreements cause an appreciable adverse effect on competition in
India. It is therefore relevant to analyse whether the franchising arrangement poses any concerns from the purview of competition law in India;
(d) Non-compete obligations and restraint in trade: Restraint of trade agreements are void under Indian laws. 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. However, such restrictions post termination of the contract are usually regarded as a restraint of trade and hence, are considered void;
(e) Confidentiality Issues: India does not have any specific legislation covering confidentiality and trade secrets. Therefore, any such information shared is usually preserved through contractual restrictions. Contractual restrictions in the agreement should be robust (including those that apply post termination);
(f) Data privacy Issues: Indian laws relating to ‘data privacy’ and ‘data protection’ are at a nascent stage and are still evolving. The Information Technology Act, 2000 (IT Act) is one of the primary Indian legislations that deals with ‘data privacy’ and ‘data protection’. Under the aforesaid IT Act, consent is required by any body corporate for collecting only sensitive personal data or information (SDPI) (such as, passwords or financial information). Accordingly, the franchise agreement will need to be carefully reviewed in case it involves sharing of sensitive personal information;
(g) Tax Issues: A franchising arrangement typically entails payments towards use of trademark, brand name and the right to carry on business under a franchise as well as services. Such payments towards use of intellectual property and other services are taxable in India at prescribed rates subject to the provisions of the tax treaty between India and the home jurisdiction of the franchisor. The Indian franchisee will have a corresponding withholding tax obligation. Aspects such as taxability of any reimbursements (say towards marketing spends) and taxable presence exposure for the franchisor in India should be evaluated in detail; and
(h) Governing Law & Jurisdiction: The parties to a contract are free to choose the governing law of the contract. While Indian law recognizes party’s right to choose any governing law (outside India), it may be noted that foreign judgements which are passed only by reciprocating countries (as notified under Section 44A of the Civil Procedure Code, 1908 (CPC)) are enforceable as a ‘decree’ in India. Accordingly, a judgment passed by any court in any country other than reciprocating country would not be enforceable in India and hence a fresh suit will need to be filed in India, in such a case. In franchising arrangements, we often see franchisors seek to use laws of their home jurisdictions, in which case, it would be important to check if the home country is a reciprocating territory for the purpose of CPC. Parties may additionally consider including foreign arbitration clause.
The Indian market has immense potential with rising purchasing power, changing consumer preferences, increasing aspiration amongst Indian youths for international brands and evolving lifestyles. The franchising market is expected to grow faster in the coming years. Hence, it becomes important for foreign franchisors to understand all the legal and regulatory nuances before entering into formal arrangements.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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