6 Legal aspects you must know before you take up a franchise in India
By Priya Shetty
Indian Law does not have a separate enactment for franchise business. There is no specific law in India dealing with franchise business model and its involved parameters such as termination, non-disclosure, and other clauses.
Does this mean that franchising in India is uncontrolled? By various enactments, the franchise business model has been carefully carved out an efficient and solid base in India.
We have listed out a few laws for the benefit of our readers. These laws help resolve conflicts between franchisors and franchisees in India.
The Indian Contract Act, 1872.
The Indian Contract Act, 1872 is applicable to all franchising agreements. Under the Indian Contract Act, a “contract” is an agreement enforceable by law. Most conflicts relating to the act are as a result of Restraint of trade. This is applicable when franchisees are restricted from entering into a contract with another franchisor.
The Competition Act disallows arrangements with respect to production, supply, distribution, storage, acquisition or control of goods or provision of services that may cause an adverse effect on the competition in India (especially on local companies). The conflict involved in this law does not deal between the parties involved in the contract. It is between the franchisor and the law. This Law ensures that large franchisee arrangements do not create monopoly. This Law prohibits agreements that cause an adverse effect on competition within India.
Intellectual Property Protection
Trade secrets exist between parties standing in a contractual relationship. Any disclosure of such trade secret is actionable in the court of Law. Although trade secrets are not dealt under any particular legislation in India, they are covered under Indian Contract Act 1872, Copyright Act 1952, and the common law of breach of confidence, which in effect amounts to a breach of contractual obligation. Section 72 of the Information Technology Act 2000 also provides protection; however, the same is limited to electronic records. It is recommended that appropriate terms with respect to disclosure and protection of trade secrets may be added in the franchise agreement.
A trademark in India is protected under the provisions of Trademarks Act 1999. After the agreement, in a franchise business model, a franchisor gets an exclusive right to use the trademark of the company it enters into agreement with. Please note that the validity of a trademark registration for ten years. This must be renewed thereafter. Also it is important to be aware that the trademark right is territorial ( territory/ location specific ). In this regard, it is very important for a non-Indian franchisor to get its trademark registered in India.
Alternate dispute resolution is encouraged in India, as the courts are full of cases. In such cases, either domestic or international arbitration is possible. For adoption of arbitration as a dispute resolution mechanism, the parties must opt for a separate arbitration agreement or may include an arbitration clause in the main contract.
The Foreign Exchange Management Act, 1999
The FEMA rules and the Reserve Bank of India ‘s guidelines come into effect, if there is any involvement of foreign currency or assets. International brands having a franchise in India such as Mc Donalds,Reebok, KFC, Subway, are all controlled by this Act . It is the governing Act for all payments in foreign currency. The Indian government has lifted a number of the previously applicable restrictions . Currently , franchise payments made by a resident to a non-resident are allowed without any need for approval.
If you are considering taking up a franchisee with an Indian or an International brand, a thorough understanding of the laws related to the business of franchising is crucial.
Alternatively, you could hire a good franchise consultant who has studied these laws in depth. The franchise consultant should be well versed with the taxation laws governing a franchise arrangement. It is not advisable to avoid the payment of withholding tax by structuring payments from the franchisee as management services fees rather than royalties. If and when such payments are scrutinized by the Income tax authorities, they could lead to heavy penalties.
Franchise arrangements involves such legal aspects which needs to be considered before you make any investments.
For more laws governing franchise arrangements in India, please let us know in the comments sections . We will be happy to answer
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