Franchising is a process where the franchisor gives the entrepreneurs an opportunity to use the franchisor’s business model for a specific period of time.

Here we discuss about the franchising laws in India:

Legal Definition and Scope:

As per the Finance Act of 1999, ‘Franchise’ is an agreement that authorises the ‘Franchisee’ to sell or manufacture goods, provide service identified with the franchisor. A franchise agreement involves a franchisor and a franchisee. While the franchisor is an entity which lends its trademark, trade name or any other form of intellectual property rights along with the business system, the franchisee refers to a person who undertakes the former’s business under the mark or name of the franchisor by paying a royalty and an initial fee.

Regulatory Framework

In India, Franchise agreements are not governed by any franchise-specific legislation. It is rather governed by various applicable statutory enactments of the country.  A few of them includes the Indian Contract Act 1872; 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; the Transfer of Property Act, 1882; the Indian Stamp Act, 1899; the Income Tax Act, 1961; the Arbitration and Conciliation Act, 1996; and the Information Technology Act, 2000.

Need for Franchisor Registration

 The Indian laws have not mandated the franchisor to be registered with any professional or regulatory body before entering into an agreement for this purpose. But the Indian Trademark Act facilitates the record of registered user of a mark.

Disclosure Norms

There are some practices where certain countries practice disclosure laws. By this, the franchisor must provide the required information to franchisees before contract sign. The applicability of pre-disclosure obligations in India is determined based on the franchise agreement by way of explicitly capturing detailed disclosure requirements in the said franchise agreement. With respect to this context, the readers may note that “consensus ad idem” as per the provisions of the Contract Act, 1857, is applicable.

The applicability of this mandate to sub-franchisees are also determined based on the franchise agreement. It is noteworthy here that common law principles concerning the proposed contractual relations are applicable.

In the absence of any disclosure requirements, no specific formats or obligations exist in connection with continuing disclosures.

Membership with Associations

It is not mandatory for a franchise to hold membership with any national franchise association, but doing so could protect the interest of the franchise owners in an improved manner.

Franchise Agreement

Barring the obvious requirements of finance, infrastructure and other essentials, a franchise agreement forms the basis of a franchise. The type of agreement for this purpose differs based on varied factors like the format, control, the type of franchisor, and the likes of it.

Franchise agreements must be in line with the provision of the Indian Contract Act, 1872. Subject to this condition, franchisees may include disclosure requirements as a part of the contract. The misrepresentation of the franchisor, in this case, facilitates the franchisee to commence civil proceedings for damages and criminal proceedings for the misrepresentation of facts and criminal breach of trust.

Translation Requirements

Franchise documents need not be translated into the local vernacular of the respective jurisdiction, except if such a requirement is specified in the franchise document.

Restrictions Imposable

The franchisor may impose reasonable restrictions on the franchisee concerning the sale, transfer, assignment or disposal of the franchised business if such provisions are included in the agreement. On the same note, these restrictions shouldn’t restrain either of the parties in the performance of trade.

The Question of Liability

Franchisors could be held liable for the acts or omission of a franchisee’s employees in the performance of the franchisee’s franchised business, except on the existence of a principal-agent relationship between the parties or if the agreement expressly states the relationship between the parties.

Cause for Termination

A franchise could only be terminated for reasonable causes. Defaults such as criminal conviction, abandonment and insolvency do not warrant an opportunity for correction.

Different laws governing various aspects of franchising in India

The Indian Contract Act, 1872.

The Indian Contract Act is the mother law governing the fundamental aspect of contractual obligations between a franchisor and a franchisee in a franchise business. It decides fundamental principles, such as offer and acceptance, consideration, breach of contracts and other root level activities.

The Competition Act, 2002.

The competition act prohibits arrangements related to production, supply, distribution, storage, acquisition or control of goods or provision of services that cause or are likely to cause an appreciable adverse effect on competition within India. This law is made for the purpose of restricting big franchise from creating a monopoly in the market.

Income Tax Act, 1961

Tax aspect of a franchise business is governed by the Income Tax Act. The income tax law makes it a point that the company taking benefit from the Indian soil pays the requisite taxes. This statute regulates the mechanism of international franchising as well. All the royalties or the franchise fee are taxed at applicable rates in India.

Consumer Protection Act, 1986

Consumer Protection Act promotes the idea of consumer and consumer interest. The Indian consumer protection law is pro-consumer. The consumer is provided with multiple safeguards against unfair trade practice. If there is any defect in the product or deficiency in services, the consumer protection law comes into action. Under the consumer protection law, a consumer can file complaint against both the franchisee as well as the franchisor.

Arbitration and Conciliation Act, 1996

Alternate dispute resolution is promoted extensively in India. Indian courts are flooded with cases and arbitration is a solution to the problem. The Arbitration and Conciliation Act expands the concept of arbitration to resolve the issues wherever possible.

The Foreign Exchange Management Act, 1999

The FEMA rules pop in wherever there is involvement of foreign currency or assets. Big time international brands, having a franchise in India such as Reebok, KFC, Subway, all are controlled by this legislation. It governs the payment in foreign currency. The Indian government has lifted a number of the prior restrictions on foreign franchisors’ ability to charge certain fees without needing governmental approval.

The Trademarks Act, 1999, Patent Act, 1970, Design Act, 2000, Copyright Act 1957

These laws govern the trademark, patent, design, copyright aspects involved in a franchise agreement. The identification of any brand is its trademark, and the same is protected in India using proper registration as mentioned under the Trademark Act. Every product has its unique recipe! No one knows how to prepare the same taste as KFC chicken at home. This aspect of products is regulated by the patent law.

Common problems faced by franchisee owners in a franchise business

Hidden Fee

In a franchisee agreement, a fixed percentage of revenue is decided which is to be given to the franchisor. Most of the time, the franchisor tends to take extra money or hidden fee for training and marketing and other miscellaneous stuff. A franchisee owner should read the entire franchise agreement carefully and understand fee structure involving a franchise agreement

Finding a great team

Franchising is not a one-man game. To survive in the franchising business, you need to have a great team to work along with. Take an example, you own a KFC franchise in your city, but you do not have people to run the business. No matter how hard you try, all your efforts will go in vain. The first step is to get to know individuals who can be used as an asset and can help to run your franchise. Having an efficient team makes it a possibility that your franchise might run well. But on the other hand, not having a good team diminishes all the existing possibility at once.

Financing

The franchisee must have a minimum amount of capital to meet the requirement of the franchisor. Any franchisor before giving a franchisee looks into this aspect very seriously. You need money for every step in any business. For marketing and training, supplies, equipment, and other purposes a franchisee cannot always depend upon the franchisor. Therefore, a minimum amount of capital must always be available with the franchise at any given point of time. A franchise must have decent credit.

Risk involving the franchise

Franchising, most of the time is a profitable investment for a franchisor. The franchisor passes the risk to the franchisee, and it is the duty of the franchise to see to it that the franchise succeeds. There is no guarantee of success in a franchising business. Multiple factors such as market, competitors, governmental regulation play a pivotal role in deciding the success rate of any franchise business. Therefore, any franchisee before starting any franchise business should keep few basic factors in mind. The basic factors are discussed below.

Business plan

Preparing a business layout is paramount. What are the expectations of the franchise owner from the franchisor? Within how many months the franchise is expected to make a profit? What will be the marketing plan? It is the duty of the franchisor to share all the relevant data from their company-owned operations in a similar market. This helps in creating a good business layout.