1. Relevant Legislation and Rules Governing Franchise Transactions
1.1 What is the legal definition of a franchise?
India does not have a specific franchise law, so the concept can be understood by referring to the Finance Act, 1999, which previously governed service tax and has been replaced by the Goods and Services Tax (GST). According to the Finance Act, 1999, a franchise can be defined as an agreement enabling the franchisee to sell or produce goods, offer services or conduct processes associated with the franchisor, regardless of whether it involves a trademark, service mark, trade name or logo.
1.2 What laws regulate the offer and sale of franchises?
Parties involved in the franchise agreement must be aware of the applicable GST and Income Tax. Generally, the offer and sale of franchises find a legal basis in laws such as:
- The Indian Contract Act, 1872.
- The Foreign Exchange Management Act, 1999 (FEMA).
- The Competition Act, 2002.
- The Trademarks Act, 1999.
- The Copyright Act, 1957.
- The Patents Act, 1970.
- The Design Act, 2000.
- The Income Tax Act, 1961.
- The Arbitration and Conciliation Act, 1996.
- The Specific Relief Act, 1963.
- The Information Technology Act, 2000.
1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a “franchisee” for purposes of any franchise disclosure or registration laws?
In India, it is common to see business arrangements where the franchisor either grants exclusive master franchise rights to a single franchisee for the entire country or opts to appoint multiple franchisees, each responsible for a designated jurisdiction.
1.4 Are there any registration requirements relating to the franchise system?
Registration is not mandatory, but it is required to obtain GST registration depending on the turnover.
1.5 Are there mandatory pre-sale disclosure obligations?
There is no legal obligation for a franchisor to disclose information to a franchisee. Typically, franchise transactions are conducted in good faith, and both parties are responsible for conducting thorough due diligence before entering into a franchise agreement. However, it is advisable to have a franchise disclosure document as best practice, as it enhances the credibility of both the franchisor and the franchisee in the arrangement.
1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?
There are no specific pre-sale disclosure obligations.
1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?
There are no specific statutory obligations to make continuing disclosure to existing franchisees.
1.8 What are the consequences of not complying with mandatory pre-sale disclosure obligations?
In the absence of specific statutes governing franchising and pre-sale disclosure obligations, any failure to comply would be addressed under the common law doctrine of equity.
1.9 Are there any other requirements that must be met before a franchise may be offered or sold?
There are no statutory requirements, but it is good practice to conduct due diligence, protect trademarks and have watertight franchise contracts in compliance with the Indian Contract Act, 1872.
1.10 Is membership of any national franchise association mandatory or commercially advisable?
There is no requirement for membership in any national franchise association.
1.11 Does membership of a national franchise association impose any additional obligations on franchisors?
As there is no mandate for membership in a national franchise association, there are no additional obligations. It is entirely up to the parties involved in franchising to decide whether or not to join any national franchise association.
1.12 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?
There is no requirement for any translation of documents into a local language. However, certain states have started asking businesses to display business names in the local language on signboards.
2. Business Organisations Through Which a Franchised Business Can be Carried On
2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?
Any franchisor from outside India who wishes to invest in an Indian company should first be aware of India’s foreign direct investment (FDI) policy. According to FDI policy, investments can be made by: non-residents in the equity shares; fully, compulsorily and mandatorily convertible debentures; and fully, compulsorily and mandatorily convertible preference shares of an Indian company through the Automatic Route or the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the Government of India for the investment. Under the Government Route, prior approval from the government of India is required. Proposals for foreign investment under the Government Route are considered by the respective administrative ministry/department. Further, payments to the overseas franchisor must conform to the Reserve Bank of India (RBI) norms and FEMA regulations.
2.2 What forms of business entity are typically used by franchisors?
There are various business structures that franchisors can opt for. A franchisor can establish a presence in India through a subsidiary or a joint venture. If a subsidiary is being set up, the franchise should follow the guidelines laid down by FDI policy and check for compliances regarding the percentage stake that a foreign national can have and the type of incorporation of the new subsidiary, i.e., as a private limited company or any other type of incorporation.
2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?
If a new business entity is created, then the new entity must be registered under a relevant business incorporation structure, i.e., a private limited company or limited liability partnership. The new entity must apply for relevant tax certificates such as GST.
3. Competition Law
3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises.
The Competition Act, 2002 deals with the prohibition of agreements that are anti-competitive and arrangements that constitute abuse of a dominant position. The Competition (Amendment) Bill, 2023, was passed by both the lower house and the upper house of the Indian parliament and came into effect on April 11, 2023. One of the important changes made in the Amendment Act is the deal value threshold. A person or business is not allowed to participate in a combination, such as a merger, acquisition or amalgamation, under the Amendment Act if it could have a significant negative impact on competition. The definition of combination has been widened by the Amendment Act to now encompass deals with a value greater than INR 2000 crore (about GBP 192 million). Additionally, transactions involving businesses that have “substantial business operations in India” must be reported.
Another important facet of the Amendment Act is with regard to IPR. According to the Act’s Section 3, an entity’s Intellectual Property Rights in Copyright, Patents, Trademarks and Designs may be utilised as a defence in cases involving anti-competitive agreements. However, this justification is not available in cases involving the abuse of a dominating position. The Amendment Act has not changed this position, and entities cannot use the protection of their IPRs as a defence in cases involving unfair/discriminatory pricing, predatory pricing, conditions in the purchase or sale of goods or services, limitations, or restrictions on the production of goods, technological or scientific development relating to goods or services to the detriment of consumers, denying other players access to the market, or any other abuse of a dominant position.
3.2 Is there a maximum permitted term for a franchise agreement?
There is no maximum or minimum term for a franchise agreement, and it is at the discretion of the franchisor and franchisee to set the terms in the agreement.
3.3 Is there a maximum permitted term for any related product supply agreement?
No, there is no maximum permitted term.
3.4 Are there restrictions on the ability of the franchisor to impose minimum resale prices?
A franchisor can control the prices at which its franchisee partner resells its products in India, provided that the terms of the agreement and price control mechanism comply with the provisions of the Competition Act, 2002. This resale price provision is referred to as resale price maintenance (RPM). Care must be taken to have RPM, as the franchisor may otherwise attract the scrutiny of the Competition Commission (CCT) by being anti-competitive.
3.5 Encroachment – are there any minimum obligations that a franchisor must observe when offering franchises in adjoining territories?
There are no minimum obligations that a franchisor must observe; however, it is based on the territory assigned in a franchise agreement. The territory assigned can differ in each agreement, i.e., it can be exclusive or non-exclusive. The territory assigned can include an exclusive territory, i.e., when a franchise is sold with an exclusive territory, it means the franchisor cannot sell other franchises in that area. The second form of territorial franchising is on a non-exclusive territory basis, i.e., where a franchise is sold in a non-exclusive territory, the franchisor can sell other franchises to people in that territory.
3.6 Are in-term and post-term non-compete and non-solicitation of customers covenants enforceable?
Both in-term and post-term non-compete and non-solicitation covenants can be enforceable if found reasonable and not a complete restraint of trade.
