Written By: Gouri Ghosh

The franchise industry’s value is around seven lakh crore in India. Lots of entrepreneurs are looking new types of franchise option everyday.

The main benefit is its straightforward business model. You get the brand recognition, systems, and reputation.

The franchise India market is constantly growing. According to experts' opinions, there are more than 4,500 franchisors and more than 200,000 franchise units in India.

Yet joining a franchise chain is also a legal act. Everyone is concerned about expenses and earnings. The legal aspect gets no attention at all. That is why knowing about franchise law in India can be helpful. Many investors believe that there is a Franchise Act in India. But there is none. Franchises are regulated by various legislation. These are contract, trademark, tax, and intellectual property legislation. You will know everything about franchise laws and investment from this blog.

Franchise Law in India

Legal Understanding of Franchising

Franchising is an arrangement entered into by two parties. Franchise and franchisor.

Franchisor give you some rights like using their brand name, logo and product. You have to apy fees and royalties.

Does India Have a Franchise Law?

One of the first questions that new investors ask is whether India has its own franchise law.

The answer is no.

There is no specific Franchise Act in India. In contrast to the US and Australia, India does not have a specific law that regulates franchising.

In India, franchising is regulated through business laws in the country. These business laws regulate the franchisor-franchisee business relationship.

Reasons for the Absence of a Franchise Act

India considers franchising as just another form of contractual business.

These laws include:

• Laws governing business transactions between franchisors and franchisees.
• Trademarks and the use of trademarks.
• Laws for protecting intellectual property.
• Franchise fee taxation.

Disputes arising from business or contractual disagreements.

The Regulatory Framework of Franchises in India

There are several laws that govern franchises in India. The laws provide protection to both franchisors and franchisees as well as your rights and obligations as a franchisee.

Indian Contract Act, 1872

The Indian Contract Act is one of the most significant legislation applicable to franchise owners. It covers all the contracts that fall within the legal purview in India, Franchise Agreement included.

The Act defines:

• The procedure for making a contract.
• Rights and duties of both parties.
• Consequences of the breach of contract.
• Remedies available in the case of disputes.

It is of importance to investors because Franchise Agreement is a contract. As soon as you sign the agreement, you will have to abide by the terms and conditions of the deal.

To put it simply, franchise disputes in India are usually settled on the grounds of Indian Contract Act.

Trade Marks Act, 1999

The Trade Marks Act is aimed at protecting brand identity.

Trademarks can consist of such elements as:

• Brand name.
• Logo.
• Tagline.
• Symbol.
• Product name.

By purchasing a franchise, you get the rights to use the existing brand, which is usually registered with the Trade Marks Act.

Investors need this law for the following reasons:

• Protection of the brand through which investment is made.
• Prevention of imitation of the same brand.
• Ability of the franchisor to legally license the trademark to the franchisee.

When you buy a franchise make sure the treadmark of the brand is registered.

Copy right act, 1957

It protects the original creations of the work.

In franchising, this may involve:

• Training manuals.
• Standard Operating Procedure Manuals.
• Marketing material.
• Computer software and programs.
• Video and training material.
• Handbook for employees.

This law is important for the investor as they will be dealing with proprietary materials used by the franchise system. These can be used only according to the Franchise Agreement.

Competition Act, 2002

This act shows clear and fair competition in the market. It want to ensure that companies can not do any activities that can effect competitiors .

For franchise owners, this act can be applicable in areas like:

• Unfair territorial restrictions.
• Anti-competitive agreements.
• Abuse of dominant position.
• Unfair pricing.

Franchisors can take any kind of restriction  to safe their brand.

But, they must not enforce any restrictions that conflict with competition acts.

This act maintains a balance between the protection of a brand and fair trade practices.

GST and Tax Laws

Each franchisor needs to know tax laws.

When it comes to tax in the franchise business, it can be levied on:

• Franchise fees.
• Royalties.
• Marketing fees.
• Licensing fees.
• Sales of goods.

GST usually applies to most of the franchise business dealings.

So, when it comes to investors, this requires that you know about:

• GST registration process.
• GST rates.
• Tax liabilities.

The advantages of input tax credits.

FEMA and Foreign Franchises

FEMA is the abbreviation for Foreign Exchange Management Act 1999.

The FEMA act is legislation that controls foreign exchange transactions in India.

This act basically work when in invest in any foreign brand for franchise.

In case of investments, the FEMA act may come into play when:

• Fees are paid to the foreign company.
• Royalties are paid outside India.
• There is a licensing agreement between foreign parties.
• There are foreign business transactions being done.

Foreign franchises are normally subjected to more regulations than their Indian counterparts.

Other Rules Involved While Investing in an International Franchise Brand

Whenever you are investing in a foreign franchise brand, then you may be subjected to other rules and laws.

Some of them include:

• Foreign royalties to be paid to the parent company.
• Foreign licensing agreements.
• FEMA foreign exchange transaction.
• Some cases you require govt approval

Read : What are the legal requirements for opening a franchise in India?

Types of Franchise Models in India

Understanding the Franchise Agreement

Franchise-Agreement

It is a legal agreement between franchise and franchisor. It is a outline about their rights and obligations.

 This is the most crucial document of the franchise.

Elements of a Franchise Agreement

• Grant of Franchise Rights: Outlines what kind of business rights you have been granted by the franchisor.
• Territory Rights: Specifies what territory you have the right to operate.
• Franchise Fees and Royalties: Specifies all the fees that you have to pay.
• Training:  You will get training and support
• Marketing Obligations: All about advertising and marketing.
• Use of Intellectual Property
• Details on how you can use the brand names, logos etc.
• Performance Standards: What standards you need to meet.
• Renewal Rights: Details on the renewal of the agreement.
• Termination Clauses: When the agreement can be terminated.
• Exit Provisions: How the exit from the franchise should be done.

Rights of a Franchisee & Franchisor

Rights of a Franchise Owner

Right to use the Brand & Trademark

You get the right to use the brand name, logo, trademark, and other brand-related materials of the franchisor. This will ensure that you take advantage of the good reputation of the brand.

Access to Business Systems

You are entitled to utilize the proven business model, procedures, and technology of the franchisor.

Training & Support

Maximum franchisor provides training to the franchise owners.  The support may be in the form of training of employees, operations, marketing, and business help.

Territory Right

Some franchise agreements contain the right to a specific territory. It means that the franchisor is not allowed to establish another outlet of the brand within your territory.

Rights of a Franchisor

Brand Standards Enforcement

The franchisor may compel the franchisees to comply with brand standards, quality standards, and operational processes.

Compliance Monitoring

Some times franchisor do audit to be sure that franchisees follow all kind of their term and condition as per agreement.

Royalty Payments Collection

The franchisor is entitled to collect the franchise fees, royalties, and other payments.

Franchise Agreement related Key Clauses

Legal Issues Facing New Franchise Owners

Purchasing a franchise is an excellent venture. But there have some legal risk that you have to know.

Financial Obligation Issues

Besides the franchise fee, there are other financial obligations you might incur. Some of them include royalties, marketing fees, software costs, and renewal fees.

Territorial Rights

Don't assume that the territory is all yours. Determine if there are any limitations on opening a second store. It must be stated explicitly in the agreement.

Trademark-Violation-Problems

As a investor you can use brand , logo of the franchisor. Using the trademark incorrectly will cause legal issues.

Non-Compete Clauses

These clauses restrict your ability to own a competing business during and even after the term of the franchise agreement.

Termination Issues

If you do not meet some conditions in the agreement, the franchisor can terminate the contract at an earlier date than the expiration date.

Steps that Need to be Taken by New Franchisees

Being compliant with franchise law in India begins before the signing of the Franchise Agreement and extends all through your franchising journey.

Before Agreement Signing

• Due-Diligence: Investigate the franchisor, their brand and business model properly.
• Trademark-Registration: Make sure the brand trademark is properly registered
• Franchise-Agreement-Responsibilities: Know your rights and fees correctly in the agreement.

After Agreement Signing

• Business Process Compliance: Adhere to the business processes of the franchisor.
• Documentation: Keep proper records of sales, expenses, and royalty payments.
• Financial Reporting Requirements: Provide the reports and financial information as required by the franchisor.

Continuing Compliance Obligations

• Brand Standards: Comply with the brand's standards relating to quality, services and marketing.
• Regulatory Compliance: Be in compliance with the franchise laws in India.
• Contractual Obligations: Adhere to all the commitments made in the Franchise Agreement.

Read more : Franchise Agreement Clauses That Decide Your Profit

Conclusion

Franchising is an excellent option for establishing a business. But it is essential to comprehend the legal aspects before investing. As explained in this article, there is no Franchise Act, but different laws regulate franchise law in India.

Don’t overlook the franchise agreement point before you invest. Before making any investment, spend more time on research, understand their brand, their rights, and talk to other experienced franchise investors.

The better you comprehend the rules and regulations of franchising in India, the more prepared you are as a franchise owner.

Faqs

Is franchising legal in India?

Yes, franchising is fully legal in India.

Does India have a Franchise Act?

No, India doesn’t have any Franchise Act.

Can I negotiate the agreement?

Yes, the agreement can be negotiated to an extent.

What should I do in case of contract breach?

Legal steps can be taken as per the agreement.

Can I terminate the agreement early?

Yes, depending upon termination terms of the agreement.

Disclaimer: The brands mentioned in this blog are the recommendations provided by the author. FranchiseBAZAR does not claim to work with these brands / represent them / or are associated with them in any manner. Investors and prospective franchisees are to do their own due diligence before investing in any franchise business at their own risk and discretion. FranchiseBAZAR or its Directors disclaim any liability or risks arising out of any transactions that may take place due to the information provided in this blog.