Today, India is one of the biggest emerging markets for various goods and services, ranging from bare necessities to expensive luxuries. Until 1991 due to the archaic Foreign Exchange Regulation Act, 1973 (FERA), almost all sectors of goods and services relating to the consumer markets in India were secure from the grasp of foreign investors. After the repeal o f FERA and the coming into force of the Foreign Exchange Management Act, 1999 (FEMA), foreign investors found their passage into India with rules for entry becoming far more favourable. Today, a convenient medium of entry by foreign companies into the Indian market is franchising. Franchising also exists as a successful business module for local companies in India within various sectors. The United States of America stands at the forefront of the franchise boom. Today, the legal environment in the United States is highly conducive to the healthy growth and evolution offranchising. With more than 50% of total retail businesses in the United States, 45% in Canada and 26% in Australia choosing a franchise model for expansion the impact of franchising on retail industries across the globe is considerable. To foster the rapid and sustained growth that this channel brings it is critical that laws to regulate the franchising business exist. However, there are no laws enacted solely for the purpose of regulating the growing business of franchising in India, even though many nations across the world have enacted such laws. The result is that when franchisors enter India they are governed by a number of different statutes and codes rather than a single comprehensive enactment. Franchise Laws across the Globe There are many countries which have developed comprehensive legislation to cover franchising in their respective dominions. At the federal level in the United States, the Federal Trade Commission s Rules on Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportuni ty Ventures (1979) regulate the information a franchisor is required to supply the prospective franchisee in order to enable the f ranchisee to make an informed decision on the prospects of venturing into the business. The North Ame rican Security Administration Association (NASSA) has adopted a Uniform F ranchise Offering Circular (UFOC) which delineates the information required to be disclosed to a prospective franchisee. Disclosure requirements under franchising are well-defined in the USA. In 2000, the Ontario Legislature in Canada adopted the Arthur Wishart Act which deals comprehensively with disclosure requirements as well as important aspects of the franchisee- franchisor relationship such as fair dealing by each party to a franchise agreement as regards its performance and enforcemen t, and the right of ac tion for damages for breach of the duty of
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Today, India is one of the biggest emerging markets for various goods and services, ranging
from bare necessities to expensive luxuries. Until 1991 due to the archaic Foreign Exchange
Regulation Act, 1973 (FERA), almost all sectors of goods and services relating to the consumer
markets in India were secure from the grasp of foreign investors. After the repeal of FERA and
the coming into force of the Foreign Exchange Management Act, 1999 (FEMA), foreign investorsfound their passage into India with rules for entry becoming far more favourable. Today, a
convenient medium of entry by foreign companies into the Indian market is franchising.
Franchising also exists as a successful business module for local companies in India within
various sectors.
The United States of America stands at the forefront of the franchise boom. Today, the legal
environment in the United States is highly conducive to the healthy growth and evolution of
franchising. With more than 50% of total retail businesses in the United States, 45% in Canada
and 26% in Australia choosing a franchise model for expansion the impact of franchising on
retail industries across the globe is considerable. To foster the rapid and sustained growth that
this channel brings it is critical that laws to regulate the franchising business exist.
However, there are no laws enacted solely for the purpose of regulating the growing business
of franchising in India, even though many nations across the world have enacted such laws. The
result is that when franchisors enter India they are governed by a number of different statutes
and codes rather than a single comprehensive enactment.
Franchise Laws across the Globe
There are many countries which have developed comprehensive legislation to cover franchising
in their respective dominions. At the federal level in the United States, the Federal Trade
Commission s Rules on Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures (1979) regulate the information a franchisor is required to
supply the prospective franchisee in order to enable the franchisee to make an informed
decision on the prospects of venturing into the business. The North American Security
Administration Association (NASSA) has adopted a Uniform Franchise Offering Circular (UFOC)
which delineates the information required to be disclosed to a prospective franchisee.
Disclosure requirements under franchising are well-defined in the USA.
In 2000, the Ontario Legislature in Canada adopted the Arthur Wishart Act which deals
comprehensively with disclosure requirements as well as important aspects of the franchisee-
franchisor relationship such as fair dealing by each party to a franchise agreement as regards its
performance and enforcement, and the right of action for damages for breach of the duty of
In the United Kingdom, there exists no operative franchise-related legislation. However
different aspects are governed by norms laid down by the British Franchise Association (BFA),
the regulatory body of the franchise industry in the United Kingdom. These include a code of ethical conduct, disciplinary procedure, complaints procedure and appeals procedure.
The Australian government has adopted a mandatory code of conduct and has also modified
the Trade Practice Act 1974 to provide for franchising. The new code imposes comprehensive
disclosure requirements and provides for mandatory mediation of franchising disputes and
minimum standards for franchise agreements including, inter alia, a cooling period, refrain from
seeking from a franchisee a general release liability, disclosing material facts and refrain from
unreasonably withholding consent to transfer of the business.
In April 2002, the Japan Fair Trade Commission (JFTC), the competition authority of Japan,
published new guidelines on franchising. These guidelines contain three parts - a general
description of franchising, provisions for the disclosure of necessary information (such as details
of the assistance to be offered to franchisees, the nature, amount and conditions of repayment,
if any, of the fee to be paid at the time of entering into a franchise agreement, etc.) at the time
of the offer of a franchise and a part on vertical restraints between a franchisor and its
franchisees. Under the guidelines, the failure to provide necessary information shall constitute
deceptive customer inducement, which is considered an unfair trade practice.
On 31 December 2004 the Ministry of Commerce of the Peoples Republic of China
promulgated the Measures for the Regulation of Commercial Franchises which became the sole
legal framework for franchising in China. The measures became operative on 1 February 2005
and provide detailed regulations for franchising, comprising of 42 articles over nine chapters
covering a wide span of areas from the franchise agreement to disclosure requirements, special
rules for foreign invested enterprises and legal liabilities.
Need for a Franchise Law in India
A healthy legal environment is of great importance for franchising and should include provisions
pertaining to all areas that fall within the ambit of franchising. This includes, inter alia,
commercial law relating to contracts and joint ventures and intellectual property law for
protection of trade marks and know-how. Franchise arrangements are subject to an array of
laws and regulations in addition to those regulating commercial contracts and intellectual
property rights. There are no specific laws governing franchising in India. As a result a franchise
Primarily a franchise agreement is a contract between the franchisor and the franchisee. The
first law which comes into the picture is the Contract Act 1872 which governs contracts in India.
A franchise agreement will be governed by the Indian Contract Act, 1872 and the Specific Relief Act, 1963 which provides for both specific enforcement of covenants in a contract and
remedies in the form of damages for breach of contract. If a party to the franchise agreement
commits a breach of contract, the aggrieved party has the option to initiate a suit for specific
performance in Indian courts and apply for relief in the form of a temporary or permanent
injunction, which may be granted at the discretion of the court considering the balance of
convenience and the interests of justice. An order granting or rejecting an injunction may be
appealed by an aggrieved party.
Laws relating to taxation, property laws, insurance law and labour laws also apply to franchise
transactions. Additionally, laws and regulations applying to specific sectors of goods and
services will also apply depending on the franchised.
The following are the reasons why a comprehensive franchise law is required in India:
Application of Multiple Legislation
A well-defined legal structure is indispensable for the effective functioning of any business
operation. The international business environment demands a well-defined suitable legislation
that is complete in all respects. The lack of a comprehensive legislation on franchising in India
leads to the applicability of multiple laws to a franchise
transaction.
This poses the following problems:
Complexities: Parties to a contract normally prefer agreements with a simple approach and
encompassing all the required law procedures and rules required to be complied with. However
the application of different laws to one agreement makes it complex to decide various issues
arising from the agreement.
Ambiguities: Due to the necessary application of multiple legislation, ambiguities are created as
to certain issues. For example, a franchisor would imagine that a certain issue is the
franchisees responsibility under one law, whereas the franchisee would think the opposite
based on a different law.
Time-Consuming: Referring to multiple laws consumes a lot of time at the initial stages of a
transaction as well as other points of time when the agreement is sought to be enforced. This
proves to be detrimental to the smooth functioning of franchising operations in India and also
makes time-bound operations involving new enterprises difficult.
Absence of Disclosure Requirements
Countries with specific franchising legislation make it imperative for parties to a franchise
agreement to disclose certain factual information pertaining to the business of the parties. Thisensures transparency and facilitates an informed decision. A franchisor should be required, by
law, to make certain disclosure to the prospective franchisee wherein he is supposed to reveal
detailed information regarding himself, his litigation and bankruptcy history, his financial
position, the facilities he offers etc. In India, in the absence of effective disclosure norms, a
prospective franchisee is rendered helpless as the franchisor is under no statutory obligations
to make disclosures.
In the absence of a specific statute governing the franchise agreement, the franchisor refrains
from providing any information that is likely to prejudice or make a franchisee reconsider the
business proposition of the franchisor. The lack of proper disclosure requirements provides a
golden opportunity to a franchisor to abuse his position of importance as he is virtually under
no statutory obligation to make the requisite disclosure.
Applicability of Laws of other Countries
Normally, the absence of franchise laws enables foreign franchisors to make the laws of their
own country applicable to the agreements entered into with the franchisees in India. The same
is the case with franchisors who enter into franchising agreements with franchisees from other
countries. This proves to be an additional burden on the parties, particularly the franchisee.
Lack of Proper Format for Franchising Agreements
Due to lack of a specific format, franchisors from other countries draft agreements which are in
the same format as is approved or followed in their countries. Such agreements are made to
suit the specific environment of their respective countries and hence are not suitable for Indian
environment.
Liability of Parties Uncertain
Due to the lack of specific legislation, the liability of either party is either determined by the
agreements entered into between them or on the basis of general prevailing law. The liability
clause is different in different countries, and this leads to a great discrepancy among the courts
which try such disputes on liabilities.
The Central Government is currently considering a franchise law aimed at fast resolution of
disputes; the proposal is expected to be placed before a sub-committee of the National
y Permits or requires the franchisee to carry on a particular business using the franchisors
know-how under the franchisors brand as an independent business;
y Allows the franchisor to exercise continuing control over the manner in which the
franchisee carries on the franchised business;
y Obliges the franchisor to provide the franchisee with ongoing support in carrying on the
franchised business.
As a commercial matter, the agreement inevitably requires the franchisee periodically during
the period of the franchise to pay to the franchisor sums of money in consideration for the
franchise and / or goods and / or services provided by the franchisor to the franchisee.
The International Franchise Association (IFA) defines franchising as a continuing relationship in
which the franchisor provides licensed privilege to do business, plus assistance in organizing,
training, merchandising and management in return for a consideration from the franchisee.
Who is a Franchisor?
He is the owner of the franchised system. It owns the know-how of the concept and the brand
name. It grants franchises to third parties.
Who is the Franchisee?
He is the one who has been granted the right by the franchisor to carry on the business using
the franchisors know-how and the brand name. Now, depending on the rights granted,
franchisees can be classified into:
1. Unit Franchisee this is the simplest and most common form of franchising. This
franchisee is granted the right to operate one unit or outlet of the franchised business.
2. Master Franchisee He is generally granted the right to a substantial territory. It will then
grant unit franchises to unit franchisees throughout the territory. The Master Franchisee needs
to have sufficient drive and resource to fully exploit the territory and control the unit
franchisees territory.
3. Regional Franchisee Ina geographically large area a franchisor, or a Master Franchiseemay decide that it is commercially appropriate to further divide the territory up with separate
regions and grant a Master Franchise for each separate region. These franchises are known as
take them to break even? Did the franchisor fulfill its promises? If the franchisees could do it all
over again, would they still buy the franchise? It may also be wise to visit the home or regional
office of as many franchisors as possible to get a feel for the quality of their operation
firsthand.
Finalization of agreements
Once a particular franchise opportunity is selected, a consultant can explain to you your rights
and obligations under the franchise agreement. You should understand that your consultant
has limited ability to negotiate the deal on your behalf, unlike other types of business
transactions. Most franchise offerings, particularly in established franchise systems, are offered
virtually on a take it or leave it basis. This is due to a natural reluctance to negotiate, a desire
for uniformity, the franchisors obligation to disclose the franchise terms (stating whether such
terms are negotiable or non-negotiable) to all prospective franchisees.
Incorporation
While a sole proprietorship is the simplest form of ownership, a sole proprietor has his or her
personal assets at risk for any liability in connection with the operation of the franchised
business. In a partnership the partners are jointly and individually liable for the liabilities of the
partnership and for the actions of the other partners acting within the scope of the
partnership.
With a corporation, a shareholder generally will not be liable for the liabilities of thecorporation except to the extent of the shareholders capital contribution. A shareholders
personal assets are protected.
Estate planning
If you have a substantial estate, you may want to consider certain estate-planning opportunities
to shift any appreciation in the value of the franchise to your children or grandchildren to
reduce your estate tax liability. This can be accomplished without relinquishing control over the
operation of the franchise by having different classes of stock.
Real estate
If you are acquiring real property and/or constructing the premises, a consultant
knowledgeable in real estate matters may be desirable. Lease negotiations can also benefit by
having a consultant knowledgeable in leasing matters.
WHILE Franchising, as a way of doing business, has been known in the country for decades the
concept, until recently, was practiced in a very limited way and in many cases was somethingfor which one used the spare real estate, or what ones wife did. With opening of the economy,
the environment for franchising, has in the last few years, undergone a sea change.
With our vast and inherent entrepreneur talent, franchising is now poised to help spur the
economy as it is an excellent way of encouraging private enterprise, it fulfills the growing need
for connecting the customer through self-driven localized business partners called franchisees,
and helps in establishment of global standards for products and services. The practice of
franchising is, thus, fast catching up as is evident from the increasing number of examples wesee around us in diverse fields such in Aptech and NIIT in computer education, McDonalds and
Dominos Pizza in Food, ABF and others in entertainment, DHL and Blue Dart in couriers and
many other examples in healthcare, fitness centres and the like.
Like all business partnerships franchising involves two parties to the deal i.e. franchisor and the
franchisee, while the former provides the brand, the know-how, the training and the systems
for the product or service the later forms the front end for expanding the business acumen
abundantly available in our country at the grass root level. In order to reinforce the basis of a
mutually beneficial and enduring relationship, it is vital to ensure that both the parties
understand their rights and responsibilities to work in unison for success of the business.
It is in this context that the Indo American Chamber of Commerce, supported actively by the
United States Foreign Commercial Service in India and backed by a group of high repute
professionals with extensive experience in the fields of franchising, took the initiative about a
year ago to form the Franchising Association of India (FAI) to provide a forum for Franchisors,
franchisees and other related interests, to promote the concept of franchising. FAI has since
been incorporated as an Association under the Companies Act and after meeting the rigorous
criteria has also been admitted as a member of the prestigious World Franchising Council
(WFC).
FAI is, thus, the only and exclusive body, which will henceforth represent the interests of all
concerned with franchising in India at the national and the international level. Membership of
WFC also helps to provide FAI with strong contacts to the Franchising Association of other
countries including the International Franchising Association in the United States. All these
linkages will clearly help to connect the Indian entrepreneurs with the enormous increase in
Direct Franchising Under this system, the franchisor grants franchises to individual franchisees
in the foreign country through the execution of an international contract. The main problems
associated with this type of franchising is the difficulty of franchisors to control the
performance of the franchisees as these are located in another country, the assistance to be
provided to the franchisee during the operation of the contract. The question of intellectualand industrial property rights in the foreign country also needs to be considered. Taxation is
another issue which receives due consideration. Furthermore, how the franchise arrangement
is structured and the existence of treaties between the countries involved may have
considerable influence on taxation. A very important question is clearly that of the choice of
law and jurisdiction. There is a tendency for franchisors to want their own domestic law to
apply to the agreement, even if the franchise is exploited in another country. Another vital
point to be kept in mind is the law relating to transfer of technology that may be applicable.
Keeping the above problems in mind, it is observed that direct franchising is not used
extensively internationally.
Subsidiary or Branch Office Franchising through a subsidiary or a branch office are two
methods which are often treated together, although there are differences which derive from
the fact that a subsidiary, albeit controlled by the franchisor, is a separate legal entity whereas
a branch office is not. Whatever be the difference, an advantage of this approach is that the
franchisor is present in the foreign country as a corporate body. The contract will in this case be
a domestic contract and thus subject to local legislation.
The problems associated with this type are similar to direct franchising. In addition, the
franchisor will be required to send his personnel to the foreign country for the start up
operations thus involving work permit and residence formalities.
Area Development Agreements Such agreements traditionally involved an arrangement
whereby the developer is given the right to open a multiple number of outlets to a
predetermined schedule and within a given area. These arrangements in the past have been
used mostly in domestic franchising, but are now being used increasingly in international
franchising.
Items that are to be considered here include the number and density of the outlets to be
opened, detailed development schedule and the consequence of non-complying of the
schedule. In such arrangements, the developer will need to have substantial financial resources
so as to be able to open the required number of outlets.
Master Franchise Agreements In the international scenario, this is widely used. In respect to
such agreements, the franchisor grants a person in another country, the sub-franchisor, the
exclusive right within a certain territory to open franchise outlets itself and/or to grant
franchises to sub-franchisees.
In this case, there are two agreements involved: an international agreement between the
franchisor and the sub-franchisor (the master franchise agreement) and a national franchise
agreement between the sub-franchisor and each of the sub-franchisees (the sub-franchise
agreement). The franchisor transmits all its rights and duties to the sub-franchisor, who will be
in charge of the enforcement of the sub-franchise agreement and of the general development
and working of the network in that country. All the franchisor will be able to do is to sue the
sub-franchisor in case of breach of obligation to enforce the sub-franchise agreement as laid
down in the master franchise agreement.
The advantages of this system are that the sub-franchisor is familiar with the local habits,
tastes, culture and laws of its country and that it will know ways about the local bureaucracy for
necessary permits as and when necessary. The disadvantages include that the financial returnsof the franchisor will be reduced by the amount due to the sub-franchisor and also that the
franchisor will have to rely on the sub-franchisor for the performance of the franchise system.
Joint Ventures In the case of joint ventures, the franchisor and a local partner create a joint
venture. This venture then enters into a master franchise agreement with the franchisor, and
proceeds to open franchise outlets and to grant sub-franchises just as a normal sub-franchisor
would do.
An arrangement such as this will have to consider legislation on joint ventures in addition to all
the other legalities that are involved. Problems may also arise with the fact that the double link
may create conflicts of interest for the franchisor. The advantages accruing from this
arrangement may include that it could be a way to solve the problem of financing franchise
operations in countries where financial means are scarce.
Miscellaneous forms There is no limit to the refinement that can be made to the above forms
of franchising to accommodate the differing demands of potential franchisor and / or
franchisee. New forms of franchising, or combinations of different forms of franchising, appear
at regular intervals. Examples of these are stated as follows:
Franchising has been specifically regulated in only a very few countries. In part, this is due to
the complexity of the relationship and due to the great number of areas of law that a
franchising relationship involves. Some of these laws are dealt with hereunder: -
Competition Law or Anti-trust Themes
The resources in the market place would best be allocated by free competition; it is believed
that goods and services are provided at the lowest possible price by the rule of open market
forces. Any conduct, which unreasonably restricts those market forces, must therefore be
eliminated. Terms such as prevention, restriction or distortion of competition, hinder normal
functioning of the market, distortion of normal play of competition are found in most
competition regimes. When considering the expansion of their businesses through franchising,
entrepreneurs should review their business practices and be mindful of their conduct in five
main areas. These are:
1. Horizontal restrictive agreements
2. Excusive dealings
3. Tied sales
4. Territory or customer restrictions
5. Resale price maintenance
Indian Competition Law In India laws to prevent monopolistic, restrictive and unfair tradepractices that distort free competition in the market are found in Part A of The Monopolies and
Restrictive Trade Practices Act (MRTP Act), 1969. Also, the remedies available to the individual
consumers for loss and injury suffered as a result of defective and sub-standard goods and
deception are found in the Consumer Protection Act, 1986 and Part B of MRTP Act, 1969. The
first part of MRTP Act, 1969 is mainly directed against the franchisors, whereas Consumer
Protection Act and Part B of MRTP Act are directed mainly at those Master Franchisees and
franchisees who produce the goods which the Indian Consumer Purchases.
Consumer Protection
It is anticipated that consumer protection laws could have a substantial impact on thedevelopment of franchising in India. As discussed earlier, one of the great strengths of
franchising is that although the franchise network is comprised of independent entrepreneurs
each having entered into a franchise agreement, they all present a common face to the public
who should not be able to distinguish between corporate or franchised outlets. The franchisee
uses the franchisors brand name or goodwill, in relation to the goods he sells or services he
offers to the public, thereby representing that the goods or services are of the same quality or
standard as that of the franchisor. If the consumer finds that it has paid a high price and chosen
the particular brand of goods or a particular agency due to its international reputation, but
does not receive the same quality of goods and services, then it must have a remedy. Also whenthe product of the franchise causes injury to the persons who are the consumer of the products
or causes damage to the property of the consumer, then who should be held responsible?
Consumer Protection Law in India
Consumer Protection Act 1986 is the most relevant to the common man who is the consumer
of the franchised product. This Act covers a wide range of persons who may be liable including
manufacturers, assemblers, distributors, wholesalers, retailers and packers. It may extend to
installers, erectors and repairers of goods. Therefore, the franchisor or franchisee of goods can
fall into this category quite easily. An action in tort may be also maintained if the relationshipbetween the consumer and the franchisor / franchisee can be direct and proximate to create a
duty of care towards the consumer. At present there is no provision for disputes arising
specifically out of franchising in relation to consumer protection, however the general law and
statutes present can provide some relief to the consumer, until such time as specific legislation
in relation to franchising are enacted. A draft model law framed by UNIDROIT has come into
The protection of Intellectual Property Rights is of paramount importance to any international
or domestic franchisor that is franchising into a new territory; since its goods can be copied and
marketed by others or its brand name can be misused resulting in its goodwill being diluted.
Further the know-how being transferred by the franchisor to the franchisee in relation to the
product or services needs protection. In India, the Intellectual Property Laws have been in
existence for long, but its implementation has been developing only in the recent years with
considerable interaction with foreign businesses in relation to collaborations, technology
transfers and trade.
Indian Law on Intellectual Property rights
There are various remedies available in India both under Statute and Common Law in relation
to trademark, design and copyright, which are particularly effective against infringement and
trafficking in trademarks. The Trademarks Act, 1999, which came into force subsequent to the
amendment of Trademarks and Merchandise Act, 1958, was enacted to provide for the
registration and better protection of trademarks and for the prevention of the use of fraudulent
marks on merchandise. One of the ways for a franchisor to protect a trademark in India is by
registration. The Designs Act 1911 is aimed at protecting the proprietors of novel or original
designs and for enforcing those rights against infringers. It helps the franchisor to protect his
exact design and maintenance of his goodwill, which is the whole basis of the existence of the
franchise system. The issue of copyright arises in franchise when a franchisor wishes to protect
his franchising manual, which contains the entire technique of running the franchise business
from being used improperly by another. Furthermore, the franchisor may have videos on how
to use the product and for advertisements that need to be protected from being pirated.
Keeping such questions in mind, Copyrights Act, 1957 has been enacted and gives protection to
the franchisor against the above apprehensions.
Labour Laws relating to Franchising
Labour laws are very important in International and domestic franchises especially in relation to
the various outlet, shops and offices in which persons are employed. No franchising contractcan derogate from the applicability of the labour laws. The labour laws govern the day-to-day
conditions of employment and are particularly relevant in the franchising context when an
outlet is shut down or the business is sold, in relation to the amount of compensation payable
by the master franchisee, franchisor or franchisee.
Procedure for Approval of Foreign Franchises in India?
The approval procedure is complex and bureaucratic. The application has to be made to
Secretariat for Industrial Assistance, Department of Industrial Development in form FC (SIA)
along with 10 extra copies. No fees need to be paid with the application for technical
collaborations.
On submission, the Entrepreneurial Assistance Unit (EAU) allots a registration number. The
application is then sent to the Foreign Collaboration section 1 in SIA, which sends the document
to various departments such as the technical advisory section, department of economic affairsand the concerned administrative ministry for scrutinizing. Their comments along with the
papers are then put before the Project Approval Board (PAB). The Board takes into account the
need for foreign know-how, technology transfer and the terms of the franchising agreement.
Those proposals involving only financial collaboration or a combination of financial and
technological collaboration are sent to the Foreign Investment Promotion Board (FIPB). If the
investment in the project is up to 600 crore rupees, the application is sent for final decision to
the Empowered Committee headed by the Finance Minister. In respect to projects requiring
more than 600 crore rupees, the application is sent to the cabinet committee for final approval.
The Section 2 of SIA issues the final approval within a period of approximately 45 days from the
submission of the application form.
The approval by the government may vary the terms of franchise including the mode of
payment of royalty / lump sum payment to the franchisor. If the terms are not favorable to the
franchising business, representation against the same can be made to the administrative
A franchisor must give every prospective franchisee a disclosure document, to which the
proposed franchise agreement must be attached at least 14 days prior to either the signing of the agreement by the prospective franchisee or the payment by the prospective franchisee of
any fees relating to the franchise.
Article 6
The franchisor shall provide the following information in the disclosure document:
The legal name and address of the franchisor
The address of the principal place of business of the franchisor
The description of the business experience of the franchisor
Complete professional experience of each of the officers, directors and other managerial
personnel of the franchisor
Relevant details of any criminal or civil liability for the previous 5 years
The total number of franchisees in the network
Information regarding the franchisors intellectual property rights.
The following information shall also be included in the disclosure document. However, where it
is contained in the agreement, the franchisor may make a reference of it.
A description of the franchise to be operated by the franchisee
Terms and conditions of renewal of the franchise
A description of the training facility
Conditions for termination.
Where the franchise is a master franchise, the sub franchisor must in addition to above items,
disclose to the prospective sub-franchisee the information that it has received under the above
points as well as the situation of the sub-franchise agreements in case of the termination of the
The franchisor may require the prospective franchisee to sign a statement acknowledging the
confidentiality of the information relating to the franchise.
Article 8
As a condition for its signing the franchise agreement, the franchisor may require theprospective franchisee to acknowledge in writing the receipt of the disclosure document.
Article 9
The disclosure document must be written in a clear and comprehensible manner in the official
language of the principal place of business of the prospective franchisee or in the mother-
tongue of the franchisee.
Article 10
If the disclosure document is not delivered at all or is not delivered within the period of time
established in article 5, the franchisee is entitled to terminate the franchise agreement
If the disclosure document contains a misrepresentation or if there is an omission of a material
fact required to be disclosed under article 6, the franchisee is entitled to terminate the
franchise agreement.
The above is a model law yet to be passed. Countries, like India, which do not have any specific
legislation, could take the above as its basis of franchising law governing their territory.
Financial And Taxation Aspect of Franchising
Valuation what is the franchise worth?
A franchise is like any other asset. Ultimately, its value is what people are willing to pay for it.
However, when considering the commercial viability of licensing as compared to some other
form of exploitation, it is important to try and scientifically arrive at a reasonable valuation. It is
only when the franchisor and the franchisee have taken a view as to the value of the franchise
that negotiation can take place and ultimately a franchise granted. When entering into a master
franchise / development agreement, the franchisor undertakes a number of commitments,
which cost money and thus forms the basis of valuation. These include:
expected cash flows generated by the asset being valued. Cash flows are adjusted for the time
value of money and the risk of their eventual realization.
Cost Method This approach focuses upon the cost of creating an economically equivalent
substitute, i.e. replacement value. It is interesting to note that in determining the value of a
franchise, the cost of the original development is rarely discussed. The reason for this seems to
be that they do not fit into the equation suggested. They are seen as necessary but irrelevant as
regards calculating the value. Millions of rupees might be spent upon R & D, but if the final
franchise does not work, it will have no value.
Comparable Value Method Market value can be transaction based or security price based. In
order to make progress with this approach, it is important to identify a business, which is truly
comparable in an economic sense, and secondly once such a comparable business has been
identified, obtaining the relevant information much of which will be confidential and
therefore inaccessible- will be the task at hand.
Taxation Aspect?
Taxation is another issue which receives due consideration. It is important to know the local
sales tax, property tax, and withholding tax applicable in a certain area. Furthermore, how the
franchise arrangement is structured and the existence of treaties between the countries
involved may have considerable influence on taxation.
The situations and types of taxes that apply to franchising in India are described below: -
Where the franchisor receives royalties service or franchise fees, tax has to be paid under theIncome Tax act, 1961 as income arising and accruing in India, whether the franchisor is an
Indian or foreign party.
If the franchise is wholly based in India, then the franchisor and franchisee as separate
companies or partnerships will be subject to the taxes applicable to all Indian Companies
incorporated under the Companies Act, 1956.
In a case where the franchisor is a foreign party and the franchisee is Indian, and the franchisor
sends technicians and supervisors to India, the salaries payable to these persons would be
subject to personal income tax, whether an arrangement is made to deduct the tax at source or
they are taxed as self employed persons if they come as consultants.
If the franchise agreement provides that the franchisee shall export or sell to the franchisor
some of the goods produced by it, then taxes will be levied on the deemed profits.
If the master franchisor is a foreign company, it will be taxed only on income that arises from
operations carried out in India or in certain cases, on income that is deemed to have arisen in
India. The latter includes royalties, fees for technical support, interest, gains from sale of capital
assets situated in India and dividends from Indian companies.
Advance tax has to be paid by both, Indian and foreign corporate assesses, whose taxable
income exceeds Rs. 5000/- p.a.
In calculating the amount of tax payable by the franchisor / franchisee company as assessee,
the deductions available in Section 30 to 43D of the Income Tax Act, 1961 can be important for
tax planning purposes. Some of these relate to:
Rent, rates, taxes, repairs and insurance in respect to premises used for business.
Depreciation
Expenditure on scientific research
Expenditure of a capital nature on acquisition of patent rights or copyrights
The availability of tax advantages would depend on the type of franchise, the product of the
franchise and where the unit is to be physically located.
Collection of Tax the income received by the foreign franchisor are taxable, and these have to
be paid in India through an agent which could be the sub-franchisee himself.
Capital Gains Tax is relevant to a franchise business as any profits and gains arising from thetransfer of a capital asset effected in the previous year is chargeable to income tax under the
head capital gains.
Advance ruling on Taxation if a foreign Master Franchisor has any apprehensions or
uncertainties regarding the tax implications of any venture or transaction in India, a reference
or application can be made to the Advance Ruling Authority under Section 245N of the Income
Tax Act, 1961.
It must be noted that the above is subject to Double Taxation Avoidance Agreements entered
into by India with any foreign country. The tax liability would accordingly be reduced. Section90 of the income tax act gives recognition to this and this agreement takes precedence over the
Termination of an international franchise system is without doubt one of the most difficult
issues for a franchisor to face. Not only must the franchisor face often complex legal provisions,
sometimes providing for substantial compensation, it must face the daunting task of deciding
exactly what should happen to the franchise in the territory following the termination.
Commercial Issues
The prospect of terminating a franchise agreement with a Master Franchisee, developer or
franchisee raises a question of what is to happen to the franchise in the territory following the
termination. The answer will inevitably depend on the value and potential value of the market.
If the territory has a number of profitable outlets up and running, it will usually allow them to
continue. One way of achieving this is to terminate the Master Franchisees right to open new
outlets.
If full termination is the only possibility, the choices for the franchisor are:
Pulling out of the territory
Stepping into the master franchisees shoes
Appointing a new master franchisee for the whole territory.
Legal Issues
The whole question of jurisdiction and conflict of laws is absolutely vital for the draftsman toconsider when contemplating what may occur in the case of termination. Termination is
generally resulted from breach of the franchising agreement. In such cases, the grounds are
quite reasonable and, provided the obligation of notice being served is duly complied with,
termination is set in action.
Some of the legal issues that are to be kept in mind are:
Intellectual Property rights It is important that following termination, the franchisor takes
steps to protect its trademarks and other intellectual property rights from the abuse by the
master franchisee / developer / franchisee.
Arrears non-payment of declared sums is a somewhat easier matter to deal with as the
franchisor can weigh up the pros and cons of entering into litigation.
Over the next decade the global soft drinks industry is l ikely to undergo probably the most
fundamental change in its entire history, according to a new report from Canadean, the
international beverage research specialists. With its traditional focus mainly on carbonates, and
notably colas, often involving complicated franchise systems, the soft drinks business is already
in the throes of a major revolution which encompasses the very concept of a soft drink as well
as questioning the relevance of the franchise system that has served the industry so well for so
long.
At the same time the competitive landscape is shifting dramatically, says the Canadean report.
Once mainly the preserve of Coca-Cola and Pepsi-Cola, the carbonates market alone is seeingsuccessful local players emerge to challenge the pre-eminence of the US multinationals, from
Europe to South America. In the context of the wider definition of soft drinks, the competitive
line-up now includes international majors such as Nestle, Danone, Unilever and Procter &
Gamble.
Who will set strategy now?
Against this background the Canadean report spells out the sort of conflicts that could arise
within the existing franchise system for soft drinks, consisting as it does of brand owners and
brand bottlers, especially the more recently consolidated anchor bottlers - now very largebusinesses in their own right. The whole ethos of the anchor bottler is based on achieving ever
more efficient production built around fewer and fewer high speed filling lines. That implies
constant product and brand rationalisation. On the other hand, a strategy which embraces the
new wider definition of soft drinks implies product proliferation. So who will set the strategy
agenda in the future? How are these two seemingly opposing strategies to be reconciled?
Pressures for lower concentrate prices
Moreover, the growing importance of anchor bottlers within the franchise system raises even
more fundamental questions for the brand owners. In recent years both Coke and Pepsi have
learned to their cost the need to stay close to local consumers, and are now reversing earlier
strategies aimed at centralising their global operations, especially marketing. As they
decentralise that role, and the added value function of global marketing becomes increasingly
superfluous, there will be growing pressure from anchor bottlers for the brand owners to pass
on corporate savings in lower concentrate prices. That pressure is likely to become even more
know-how provided by flavor houses, filling equipment makers, packaging suppliers; the role of
leading food chains in demanding higher quality and lower prices in return for extended supply
contracts - an imperative which does much to explain the continuing focus on pruning
overheads within such companies. Moreover, there is growing evidence that soft drinks
manufacturers, which operate within a single integrated system, may be attaining a level of profitability, which is greater than half the total profit pot, which has traditionally been
available to the whole of the two-tier franchise system.