Written By: Bandana Gupta

Expansion of franchising opportunities across India:

Franchising is growing fast in India, with the industry getting about 30% bigger each year. Well-known Indian and international brands are using this model to reach more customers. This rise is driven by more people wanting reliable, branded services, supportive government policies, and India’s expanding economy. However, to succeed, both the franchisor and the franchisee must clearly understand India’s legal requirements, like signing a proper franchise agreement, following business and tax laws, and protecting brand rights. Without this legal understanding, even a strong franchise can face problems.

For example, sectors like food, healthcare, education, and retail are seeing major franchise growth. Brands like Dr. Lal PathLabs, Subway, and Kidzee are using franchises to grow across cities and towns.

Evaluation of the Legal Prerequisites and Requirements for Establishing a Franchise in India:

In India, both franchisors (the brand owners) and franchisees (the business partners) need to understand the legal side of franchising, especially because there’s no special law made just for franchises.

Here’s a simple breakdown:

• What is a franchise? A franchise is a legal agreement where a business (the franchisee) gets permission to sell products, offer services, or follow business methods using the name, logo, or system of another company (the franchisor).
• What laws apply? India doesn’t have one single law for franchises. Instead, different existing laws (like contract law, trademark law, and tax laws) are used to handle franchise-related matters.

So, before starting a franchise, it's smart to learn these rules or get legal advice to avoid problems later.

Know about the main laws that regulate how franchise businesses operate in India:

Indian Contract Act, 1872:

Since India has no franchising law, the 1872 Indian Contract Act is crucial. . This law helps decide if a franchise agreement is valid and can be enforced. It looks at things like:

• Both sides agreed to the deal
• A clear offer and acceptance
• A legal reason for the agreement (called "consideration")
• Whether the law lets both sides legally make and sign a contract

Because the franchise agreement is the foundation of the relationship between the brand (franchisor) and the person running the business (franchisee), it's very important to make it clear and detailed. If the agreement is unclear or poorly written, it can lead to misunderstandings and disputes later, especially if each side expects different things. So, having a well-written contract helps avoid problems and keeps things smooth for both sides

Competition Act, 2002:

Franchising is all about keeping things the same across different locations, but it’s also important to follow fair business rules. The Competition Act of 2002 makes sure no one uses unfair methods that harm other businesses or limit customer choices.

For example:

• If a franchisor tells a franchisee not to work with any competitors
• Or sets fixed prices for how much customers should pay

These rules might be seen as unfair or anti-competitive.

Even things like giving one franchisee full control over a large area (exclusive territory) can be a problem if it stops others from entering the market or limits options for customers. So, it's important to check these terms carefully to stay within the law and keep business fair for everyone.

Intellectual Property Laws:

In a franchise, using the brand’s name, logo, and business methods is a big part of the deal—this is called intellectual property (IP), and it needs strong legal protection.

So, when a franchisor allows a franchisee to use their brand name, logo, tagline, designs, or software, it must be clearly written in the franchise agreement. This permission is usually given through a license.

Here’s why it matters:

• For franchisors: If someone uses their brand or logo without permission, they can take legal action under trademark law.
• For franchisees: They must make sure they have official, written rights to use the brand’s identity. Using it without proper documents—even by mistake—can lead to trademark infringement, legal trouble, and business loss.

To avoid confusion or disputes, the agreement should clearly state what IP is being shared, how it can be used, for how long, and what happens if the franchise ends. This keeps both parties safe and protects the brand’s value.

Foreign Exchange Management Act (FEMA), 1999:

This law controls how international franchisors bring money into India and send money (like royalty or franchise fees) back to their country. For example, if a US-based brand opens franchises in India, FEMA rules guide how it receives payments and repatriates profits.

Income Tax Act, 1961:

This law decides how much tax must be paid on income earned through franchise agreements. Franchisors must pay tax on royalties or fees received, and franchisees must deduct tax (TDS) when making these payments.

Consumer Protection Act, 2019:

This act ensures that customers have the right to good-quality products and fair service. If a franchise outlet gives poor service or sells faulty products, the franchisor is also responsible—not just the franchisee—because it’s the franchisor’s brand.

Arbitration and Conciliation Act, 1996:

This law provides a way for franchisors and franchisees to settle disputes privately through arbitration, rather than going to court. For example, if there’s a disagreement over territory or payments, both parties can agree to use an arbitrator to solve the issue faster and more confidentially.

Ending or Renewing a Franchise Agreement :

A franchise agreement in India clearly explains how and when the agreement can end (terminate) or is extendable. This helps both the franchisor and franchisee avoid confusion or legal issues later.

Here’s what it should include:

1. Termination terms: This part lists the reasons why the agreement ends early. For example, if the franchisee breaks the rules, doesn’t pay fees, or doesn’t follow the brand’s standards, the franchisor may have the right to cancel the agreement.

2. Renewal terms: This tells how the franchisee can keep running the business once the first contract time is over. It should mention if the franchisee needs to pay any extra fees, meet certain conditions, or sign a new agreement to keep running the franchise.

• Transfer of Business: If the franchise can be sold or handed over to someone else, the agreement should clearly explain how to transfer things like property, money owed, and responsibilities to the new owner.
• Protecting Secret Information: Franchisors need to make sure that important business information (like recipes, methods, or plans) stays private—even after the franchise ends.
• Customer Data Safety: A new data protection law is coming soon, and it will likely bring stricter rules on use and storage of customer information, especially in areas like healthcare or finance.
• GST on Fees: Franchise fees and royalty payments are under GST, so both parties need to factor that into their costs. 

Legal aspects - requirements to understand before entering a franchise agreement in India:

1. Franchise Agreements:

A well-drafted franchise agreement usually covers several key areas, such as:

• Grant of Franchise Rights: This section explains exactly what rights the franchisor is giving to the franchisee, like permission to use the brand name, logo, and business system.
• Territory and Exclusivity Terms: These defines the specific area or region where the franchisee can operate and whether they have exclusive rights to run the business in that area
• Fees and Royalty Structures: This part details the costs involved, including initial franchise fees, ongoing royalty payments, and any other charges the franchisee must pay to the franchisor.
• Training and Support Provisions: It outlines the kind of training and help the franchisor will provide to the franchisee to ensure smooth business operations and maintain quality standards.
• Quality Control Standards: This ensures that the franchisee follows the brand’s guidelines and maintains consistent quality in products or services, protecting the brand’s reputation.

By clearly defining these points, both parties know what to expect, which helps avoid misunderstandings and build a strong, successful partnership.

2. Registration Requirements:

Before starting a franchise in India, franchisors need to follow some important rules. They often have to register their brand’s trademark, sign up with the right government offices, and get any licenses or permissions needed for their business. These steps can be different depending on the state where they want to operate. If franchisors don’t follow these rules, they could face fines or legal trouble. So, it's important to make sure all the necessary paperwork is done properly before signing a franchise agreement.

3. Disclosure Norms:

India does not have a specific law that forces franchisors to give detailed information to potential franchisees before signing a franchise agreement (known as pre-sale disclosure). However, even though it’s not legally required, it is still highly recommended.

Franchisors are advised to share complete and honest information about their business model, how the franchise works, the investment required, expected returns, fees, support provided, and any past or ongoing legal issues

4. Foreign Direct Investment (FDI):

If an international brand wants to open franchises in India, it needs to follow India’s foreign investment (FDI) rules. These rules are different for each type of business:

• Some sectors allow 100% foreign investment without any special permission (this is called the Automatic Route).
• Other sectors need approval from the Indian government first (this is the Government Route).

Also, if the franchisor wants to send royalty payments (like a share of profits) back to their home country, they must follow FEMA rules (Foreign Exchange laws in India).

So, it’s very important for international franchisors to understand these rules clearly to avoid any legal issues and run their business smoothly in India.

Conclusion:

Understanding the legal requirements side of franchising in India is important for both franchisors and franchisees. It’s not just about signing a deal—it’s about making sure everything in the agreement follows the rules. When both sides take time to get things right legally, it helps avoid problems later and builds a strong, successful partnership.

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.