Compared to other parts of the world, the franchise sector in India is at a nascent stage and the general feeling at the moment is that there is no need for franchise-specific legislation. As a consequence, franchising in India is governed by a number of statutes, rules and regulations
The Contract Act
The contractual relationship between the franchisor and the franchisee is governed by the Indian Contract Act, 1872 (the Contract Act). There is no specific requirement under Indian law as regards a particular language; however, English is customarily accepted as the standard language.
Under the Contract Act, a "contract" is an agreement enforceable by law. A franchise agreement would be enforceable under Indian law since it would meet the criteria of a valid contract. However, care needs to be taken to ensure that the agreement does not contain any provisions that render the contract void or voidable.
"There is a growing trend to regulate distribution of goods and services through franchise agreements providing for grant of franchise by the franchisor on certain terms and conditions to the franchisee. Such agreements often incorporate a condition that the franchisee shall not deal with competing goods. Such a condition restricting the right of the franchisee to deal with competing goods is for facilitating the distribution of the goods of the franchisor and it cannot be regarded as in restraint of trade."
Consumer protection and product liability
The Consumer Protection Act, 1986 seeks to provide remedies to consumers in case of defective products or deficiency in services and holding the manufacturers and service providers liable.
Monopolies and restrictive practices law and competition law
The Monopolies & Restrictive Trade Practices Act, 1969 (MRTP Act) prohibits the imposition of restrictions in respect of sources of supply and pricing of products. It must be ensured that the terms of the franchise agreement are not construed as monopolistic or restrictive. If found to be otherwise the MRTP Commission could grant an injunction preventing such trade practices and may also award compensation to the complainant for any losses or damages suffered.
Restrictive trade practices
The MRTP Act orders the registration of agreements considered to contain restrictive trade practices. Those that are relevant in the context of a franchise include: exclusive supply provisions; exclusivity in product dealing; restrictions on methods used; and resale price-fixing conditions.
Irrespective of whether the agreement has been registered or not, the MRTP Commission has the right to investigate if it is of the opinion that the agreement is prejudicial to the public interest.
Following the globalization and liberalization of India's economy, competition law has shifted its focus from curbing monopolies to promoting healthy competition. Accordingly, the Competition Act, 2002 (the Competition Act) replaces the MRTP Act. Though some of its provisions have yet not been made effective, the provisions with respect to anti-competitive agreements and abuse of dominant position have recently entered into force.
Intellectual property rights
The Trademarks Act, 1999 prescribes the procedure for registration of trademarks and service marks. Validity of registration is for a period of 10 years from the date of application and subject to renewal at the expiry of validity.
There are three courses of action that can be initiated against trademark infringement:
- an injunction under statute;
- an infringement or a passing off action, depending on whether the trademark is registered or not; and
- criminal action for an offence of falsifying a trademark.
Foreign exchange regulations
The Foreign Exchange Management Act, 1999 and the relevant rules and regulations govern payments in foreign exchange. Franchise arrangements would normally include payments such as a franchise fee, royalty for use of trademarks and the system, training expenses, advertisement contributions, etc, which can be remitted to the foreign franchisor without any approvals provided the appropriate nomenclature is used to denote such payments.
Single brand retailing
In 2006, the government allowed up to 51 per cent of foreign direct investment in "single brand product retailing" subject to prior approval of the Foreign Investment and Promotion Board (FIPB) and certain prescribed conditions, such as, the products should be sold under the same brand internationally.
In view of the above regulatory regime, the use of a franchise as a business model has gained tremendous momentum, resulting in foreign franchisors such as Mother care and Next entering the market. It should be noted, however, that other central and state legislation, such as labor laws and property laws should also be considered.
Franchising in various sectors in India
Food and beverages
Some of the well-known brands in this sector that have received an overwhelming response in India include Baskin Robbins, Subway, McDonald's, TGI Friday’s, Taco Bell, Pizza Hut, Domino’s Pizza, Ruby Tuesdays, Barista, Costa, Wetzel Pretzel, Papa John's and KFC.
A study has revealed that more than one third of new food outlets are operated through the franchise system. The rapid development of mall culture has also encouraged the growth of food and beverage franchises. Fine dining restaurants, quick service restaurants, cafes and juice bars are among the leading franchised food segments in India.
The increased acceptance of the importance of education by the Indian population and the proven success of education franchising in India has led to a boom in the amount of business owners wanting to expand their education brands using the franchise route. According to a recent survey, India is one of the largest markets for education in the world in terms of the number of students, offering vast franchising opportunities. Currently, out of the 1,200 franchises in the country, 32 per cent are in the education sector. Professional and vocational courses in the fields of aviation, hospitality, retail, financial services and insurance capture almost a third of the total share of education provided through franchises, followed by training in the IT sector. Franchising in the pre-school sector has grown particularly in the past decade.