Franchisie Law In India

Before we start the discussion on various laws affecting franchising in India it is important to understand what exactly does the term ‘FRANCHISE BUSINESS’ stand for. The word Franchise comes from an old French word meaning privilege/ freedom. Franchise refers to the form of business in which owners, or franchisers, sell the rights to their business logo and business model to third parties, called franchisees. Some of the internationally well known franchise business models are McDonald’s, Papa John’s, Pizza Hut, Barista etc. Though at the start the Franchise business in India was limited to eating joints however with time it has extended to other areas and as of today there are at least 80 different types of franchise businesses in the market which include clean and maintenance, automotive services, health care services, financial and banking services etc. As on date some of the world’s leading brands providing beauty and health care services have extended their area of operation into India. Likewise we see many of Indian service providers extending their area of operation globally. Presently there are approx. 1150 established franchisors, above 1,00,000 franchisees with an annual turnover of around 15,000 Crore. In India the highest franchising happens in Education Sector followed by Food and Beverage sector.

There is no specific legislation/ law in India dealing with franchising. However, chapter 5 of the Finance Act 1999 defines a ‘franchise’ as: ‘an agreement by which the franchisee is granted representational right to sell or manufacture goods or to provide service or undertake any process identified which the franchisor, whether or not a trademark, service mark, trade name or logo or any such symbol as the case may be, is involved.’

Apart from global businesses expanding into India, there is a growing trend of Indian businesses franchising for local expansion. There has been an upward movement in the trend of Indian businesses franchising their products and services in Countries such as USA, Canada, UK, EU, Australia & New Zealand, Singapore etc. What has really made franchising as an effective business model is its ability to provide rapid market penetration and product distribution without the typical capital costs associated with internal expansion.

ADVANTAGES OF FRANCHISE AGREEMENT

There are various advantages of entering into Franchising Agreement which are also its characteristic features:

• The business is based on a proven idea. One can check how successful other Franchises are before arriving at a decision to enter into a franchise agreement
• You can use a recognised brand name and trademarks. You benefit from ay advertising or promotion by the owner of the brand
• The Franchisor gives you support- usually including training, helps setting up the business, a manual telling you how to run the business
• You usually have exclusive right in your territory. The Franchisor will not sell any other franchises in the same region.
• Financing the business may be easier. Banks are more likely to lend money in cases of borrowing required for setting up of a Franchisee of a reputed Company
• Risk is reduced and shared by the Franchisor
• If one has an existing customer base he will not have to invest time looking to set up one
• Relationships with suppliers have already been established.

TYPES OF FRANCHISE BUSINESS IN INDIA

There are four major types of Franchise Business that exists in India

• Business Format Franchise : Can be defined as an “arrangement where a franchisee receives (in addition to the right to sell goods or services i.e. licensed use of franchosr’s products and trademark) the franchiser’s designs, quality control and accounting systems, operating procedures, group advertising and promotions, training and case of hotels and travel agencies worldwide reservation system. This is the most preferred form of franchise in India. Here the franchisee gets a successful business model that is backed by a popular brand and product. The brand owner provides the required training and help for establishing the business. The franchisor also provides the supplies and receives a royalty fee from the franchisee. The franchisor also provides the raw material and products to ensure quality. The major example of this type of franchise is fast food chains.
• Product Franchises: Product franchises are ones where the manufacturer uses the franchise contract to decide the ways in which the franchisee will be distributing the products. An example of this would be one where a retail establishment procure the franchise to distribute cakes. In these case the franchise will be able to use the trademark and bran name of the manufacturer in order to sell or distribute the cakes. The store owners will be paying the manufacturing company a certain amount or previously agreed fee or come to an agreement regarding the purchase of minimum amount of inventory for selling to the customer.
• Manufacturing franchises: In these cases the franchises are allowed to make the products with licenses and also market them by using the name and trademark of the company/ franchisor. They can also use national advertising medium to market the products. The company that owns the product is provided with franchisee fee and also certain payment for the units sold.
• Business franchise ventures: the business franchise ventures are instances where the franchisee buys and sells the products from the franchisor. In these cases the franchisor normally provide franchisee with a client base, which they need to maintain.

Types of Franchise Agreements The following are the key methods of franchise arrangements made globally.

• Direct Franchising Format In this franchising the franchiser grants the franchise to a franchisee by the execution of a contract and has direct control over the franchisee. The franchiser specifies operating guidelines and the policies of the franchiser, the consideration being a periodic royalty. He also provides process manuals, shares expertise, monitors and controls the operations. The advantage is that of getting a readymade and established business format that can be replicated. But the franchisees will have to work strictly within specified compartments with little room for flexibility in operations.
• Subsidiary Franchising Wherever laws and regulations allow foreign organizations to set up their subsidiaries in India, franchising is done through
  • subsidiary. The franchiser controls the subsidiary directly. The major advantage is that the franchiser is present in the country as a corporate body. The franchise rights for retailing and dealerships are given by the subsidiary office in India, which controls all the processes in retail and distribution.
• Regional Franchising or Multiple Franchising Here the franchiser offers franchise rights to a franchisee only for a region or an area. There are separate franchisees for each area or region in the country. This is also known as multiple franchising when more than one franchisee is given the franchise rights for the same brand. Such agreements offer the franchisee the right to open a multiple number of outlets.
• Unit Franchising The franchiser offers rights to a franchisee to open and run just one store through an exclusive agreement which involves many franchisees. It is very difficult to monitor compliance to specified standards and processes. The strength of this format is that each franchisee pays full attention to his store and its performance.
• Master Franchising Here, the franchiser grants the franchise rights to an entire country or territory and the franchisee is permitted to open franchise outlets and grant sub-franchises to others. Two agreements are generally involved — one that is entered into between the franchiser and master franchisee and the other between the master franchisee and sub-franchisees.

LAWS GOVERNING FRANCHISING IN INDIA

In the absence of specific legislation regulating franchising businesss, Franchise in India is basically built on the principles of Indian Contract Act, 1872 and is regulated by the provisions of Foreign Exchange Management Act, 1999 which in words regulate all franchising activities involving foreign investments and foreign remittances. The various laws governing Franchising in India are

• The Trademarks Act
• The Indian Contract Act
• The Sale of Goods Act
• The Patents Act
• The Copyright Act
• The Competition Act, 2002
• The Consumer Protection Act
• The Geographical Indication of Goods (Registration and Protection) Act, 1999
• The Semi Conductor Integrated Circuits Layout Design Act 2000
• The Specific Relief Act
• The Income Tax Act 1961
• Activity specific legislation
  • The Pharmacy Act, 1948
  • The Prevention of Food Adulteration Act 1954
  • The Drug and Cosmetic Act 1940
• The Employment and welfare legislations which include
  • The Trade Unions Act 1926
  • The Minimum wages Act 1948
  • The Maternity Benefit Act 1961
  • The Payment of Wages Act
  • The Industrial Disputes Act 1947
  • The Apprentices Act
  • The Child labour Act 1986
  • The Contract Labour (Regulation and Abolition) Act 1970
  • The Employers Liability Act 1938
  • The Employees Provident Funds and Miscellaneous Provisions Act 1952
  • The Employees State Insurance Act 1948
  • The Factories Act 1948
  • The Trade Unions Act 1926
  • The Payment of Gratuity Act 1972
  • The Workman’s compensation Act 1923
  • The Equal remuneration Act 1976
• The Real Estate Laws which include
  • The Transfer of Property Act 1882
  • The Indian Easement Act
  • The Registration Act 1908
  • The Indian Stamp Act 1899
  • And State Legislations