Franchising Laws - India - Franchise - International Franchise ...

Franchise 

in 33 jurisdictions worldwide 

Contributing editor: Philip F Zeidman 

® 

2009 

Published by 

getting the deal through 

in association with: 

Advokatfirmaet Storløkken AS 

Akademia Rozwoju Systemów Sieciowych Sp z oo 

Allen & Overy LLP 

Al Sarraf & Al Ruwayeh 

Anderson Mo-ri & Tomotsune 

Angara Abello Concepcion Regala & Cruz Law Offices 

(ACCRALAW) 

Attorneys-at-Law Juridia Ltd 

Bahas, Gramatidis & Partners 

Bersay & Associés 

Bowman Gilfillan Inc 

DLA Piper UK LLP 

DLA Piper US LLP 

Duro & Lorang 

Gateway Law Corporation 

Gonzalez Calvillo SC 

Kanga & Co 

Koan Legal Strategies 

Lapointe Rosenstein LLP 

Lee & Ko 

Longan Law Firm 

Makarim & Taira S 

Mason Sier Turnbull 

Mboya & Wangong’u Advocates 

McConnell Valdés LLC 

Nörr Stiefenhofer Lutz 

Nörr Stiefenhofer Lutz OOO 

Palacios & Asociados 

Raffalli de Lemos Halvorssen Ortega y Ortiz 

Rödl & Partner 

Stewart Germann Law Office 

Thylin Advokatbyrå AB 

Tov Noerr Stiefenhofer Lutz 

Wong Jin Nee & Teo

Kanga & Co india 

india 

Preeti Mehta 

Kanga & Co 

Overview 

1 What forms of business entities exist that would be relevant to the typical 

franchisor? 

A franchisor may set up any of the following entities: 

• sole proprietorship – though it is the simplest form of ownership, 

a sole proprietor risk his or her personal assets for any liability in 

connection with the operation of the franchised business; 

• partnership – 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; 

or 

• company – the shareholder generally will not be liable for the 

liabilities of the corporation except to the extent of the shareholder’s 

capital contribution. 

However, a foreign franchisor may grant a franchise directly without 

establishing an entity in India. 

2 What laws and agencies govern the formation of business entities? 

Any individual can set up a sole proprietorship. There are no specific 

laws governing the formation of such an entity. 

Partnerships are governed by the Partnership Act 1932 and registered 

with the Registrar of Firms. 

Companies are incorporated under the Companies Act 1956 as 

private limited companies or public limited companies and registered 

with the Registrar of Companies (ROC). 

3 Provide an overview of the requirements for forming and maintaining a 

business entity. 

There are no specific requirements for carrying on or establishing a 

business as a sole proprietorship. 

Regarding partnerships, a minimum and maximum of two persons 

can form a partnership by executing a partnership deed, which 

will determine each partners’ share in the profits and losses and other 

aspects including dissolution. The partners of the firm are jointly 

and severally liable to unlimited extent. There is no compulsion on 

registering the partnership with the Registrar of Firms, though most 

firms are registered partnerships. 

Regarding companies, seven or more persons are required for the 

formation of a public company, and a minimum of two and maximum 

of 50 persons can form a private company. For a private company, the 

minimum share capital requirement is 100,000 rupees whereas for a 

public company, the minimum share capital requirement is 500,000 

rupees. Every private company is required to have a minimum of two 

directors and every public company a minimum of three directors. 

The memorandum and articles of association are the charter doc- 

uments required to be filed with ROC along with other prescribed 

documents. The memorandum of association is a document that sets 

out the constitution of the company and should mention: 

• the name of the company; 

• the state of the registered office of the company; 

• the objects, that is, every possible activity related and ancillary to 

the business proposed to be carried out by the company; 

• that the liability of its members is limited if the company is limited 

by shares or by guarantee; and 

• the authorised share capital of the company and the paid-up capital 

of the company. 

The articles of association contain the rules and regulations of the 

company for the management of its internal affairs. 

On compliance with all requirements, the ROC would issue 

the certificate of incorporation that is conclusive evidence that all 

the requirements of the Companies Act have been complied with 

in respect of registration. A public company would additionally 

require obtaining a certificate of commencement of business from 

the ROC. 

A company must hold an annual general meeting of the shareholders 

every year within six months of the end of the financial year 

and at least one board meeting every three months, subject to at least 

four meetings in a year. Further, the company is required to file every 

year its annual returns, tax returns and its financial statements with 

the government. 

4 What restrictions apply to foreign business entities and foreign 

investment? 

Presently, foreign direct investment (FDI) is freely allowed in almost 

all sectors including the services sector, subject to sectoral ceilings in 

certain cases. 

FDI up to 100 per cent is allowed under the automatic route in 

all activities or sectors except the following: 

• activities or items that require an industrial licence; 

• proposals in which a foreign collaborator has an existing financial 

or technical collaboration in India in the same field; 

• proposals for acquisitions of shares in an existing Indian company 

in the financial service sector and where the Securities and 

Exchange Board of India (substantial acquisition of shares and 

takeovers) Regulations 1997 are attracted; and 

• all proposals falling outside notified sectoral policy or caps, or 

under sectors in which FDI is not permitted, which require prior 

approval of Foreign Investment Promotion Board (FIPB) or the 

government. 

In few sectors FDI is prohibited eg, retail trading (except single brand 

product retailing), gambling and betting, lottery business, atomic 

www.gettingthedealthrough.com 61

india Kanga & Co 

energy. 

Please see answer to question 28 regarding payments to foreign 

franchisors. 

5 Briefly describe the aspects of the tax system relevant to franchisors. 

How are foreign businesses and individuals taxed? 

The franchisor’s income in the form of royalties or franchise fees 

would be treated and taxed as business income under the Income 

Tax Act 1961, and will be subject to a tax deduction at the applicable 

rates. However, this would be subject to any tax treaty between India 

and the relevant country. 

6 Are there any relevant labour and employment considerations for 

typical franchisors? What is the risk that a franchisee or employees of a 

franchisee could be deemed employees of the franchisor? What can be 

done to reduce this risk? 

India has numerous labour laws, some of which are as follows: 

• the Apprentices Act 1961; 

• the Child Labour Act 1986; 

• the Contract Labour (Regulation & Abolition) Act 1970; 

• the Employees Provident Funds and Miscellaneous Provisions 

Act 1952; 

• the Employers Liability Act 1938; 

• the Employees State Insurance Act 1948; 

• the Equal Remuneration Act 1976; 

• the Factories Act 1948; 

• the Industrial Disputes Act 1947; 

• the Minimum Wages Act 1948; 

• the Maternity Benefit Act 1961; 

• the Payment of Bonus Act 1965; 

• the Workmen’s Compensation Act 1923; 

• the Payment of Gratuity Act 1972; 

• the Payment of Wages Act 1936; 

• the Sales Promotion Employees Act 1996; and 

• the Trade Unions Act 1926. 

Generally, the franchisor and the franchisee carry on the business on 

a principal-to-principal basis and there are no indicia of employer 

and employee or principal and agent relationships in the conduct of 

business. However, it is advisable to include express provisions in the 

franchise agreement to ensure that the employees of the franchisee 

are not deemed employees of the franchisor. 

7 How are trademarks and know-how protected? 

The Trade Marks Act 1999 provides for the protection of marks of 

goods and services, collective marks, certification trademarks and 

well-known marks in India. 

The Trade Marks Act gives the proprietor of the registered trademark 

an exclusive right to its use and statutory remedy for infringement 

of this right. 

The following courses of action are available against violation 

of trademarks rights: an action for infringement in case of registered 

trademark or a passing-off action in case of unregistered trademark, 

and criminal action. In an action involving infringement or passing 

off, a court may grant injunctive relief. At the request of the plaintiff, 

damages or an account of profits, together with any order for the 

delivery of the infringing labels and marks for destruction or erasure, 

can be obtained. Similarly, a civil action can be supplemented 

by a penal action for violations. 

A franchisor’s know-how and confidential information can be 

adequately protected by express provisions in a contract. For the 

grant of an injunction it would be necessary to prove that the information 

was important enough to justify an injunction, in the absence 

of which irreparable damage would be caused to the franchisor. 

Where there is no express provision, an implied obligation may be 

construed depending on the circumstances of the case. 

8 What are the relevant aspects of the real estate market and real estate 

law? 

As per the normal trend, the franchisee acquires or owns the real 

estate. Commercial premises can be acquired either outright or on 

lease basis by an Indian franchisee. A foreigner would need to obtain 

approval from the Reserve Bank of India (RBI) to acquire property, 

except for a lease not exceeding five years. There are no restrictions 

on a domestic franchisor acquiring property. Suitable provisions need 

to be incorporated in the franchise agreement and leases for transfer 

of the property rights (to the franchisor or its nominee) at the franchisor’s 

option. 

The real estate laws that need to be taken into consideration are: 

• the Transfer of Property Act 1882, which regulates sale, mortgage, 

lease, gift of immoveable property; 

• the Indian Easement Act 1882, which regulates licensing of 

immoveable property; 

• the Registration Act 1908, which regulates the registration of 

agreements and documents; 

• the Indian Stamp Act 1899 and state legislation governing the 

levy of stamp duty; 

• rent control legislation, which regulates tenancy and letting of 

immovable property; and 

• development control rules. 

Laws and agencies that regulate the offer and sale of franchises 

9 What is the legal definition of a franchise? 

India does not have franchise-specific legislation. However, the term 

‘franchise’ is defined under chapter 5 of the Finance Act 1999 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 with franchisor, whether or not a trade mark, 

service mark, trade name or logo or any such symbol, as the case 

maybe, is involved’. This definition is wide enough to cover all possible 

franchise relationships for the purposes of tax implications 

10 Which laws and government agencies regulate the offer and sale of 

franchises? 

There is no franchise-specific legislation. 

The various statutes which would be relevant are: 

• the Indian Contract Act 1872, governing the contractual relationship 

between the franchisor and the franchisee; 

• the Specific Relief Act 1963 for enforcement of the rights; 

• the Trademarks Act 1999; 

• the Designs Act 2000; 

• the Copyright Act 1957; 

• the Patents Act 1970; 

• the Monopolies and Restrictive Trade Practices Act 1969 (MRTP 

Act); 

• the Competition Act 2002; 

• the Consumer Protection Act 1986; 

• the Income Tax Act 1961; 

• the Provincial Insolvency Act 1920; 

• the Foreign Exchange Management Act 1999 (FEMA); 

• the Rules issued by RBI; and 

62 Getting the deal Through – Franchise 2009


• various state statutes and regulations. 

In the context of cross-border franchising the Secretariat of Industrial 

Assistance (SIA), the Ministry of Commerce and the RBI are 

the main government agencies regulating the foreign investment and 

remittances abroad. 

11 Describe the relevant requirements of these laws and agencies. 

The franchise agreement will be governed by the Indian Contract Act 

1872. This statute covers all aspects of the contract: offer, acceptance, 

validity, breach and termination. The principles set out in this 

statute govern the rights and obligations of the parties. In case of 

breach, the rights can be enforced by appropriate legal proceedings 

and invoking the Specific Relief Act, 1963 for remedies such as 

injunction and damages. 

The intellectual property protection and issues will be governed 

by the Trade Marks Act 1999, the Patents Act 1970, the Designs Act 

2000 the Copyright Act 1957. 

The MRTP Act and the Competition Act 2002 regulate competition 

in business. 

An action can be taken by a consumer under the Consumer Protection 

Act 1986 for deficiency in goods or services. The franchise 

agreement would normally provide for this liability to be borne by 

the franchisee. 

The Income Tax Act 1961 governs all tax aspects of any franchise 

business in India. 

FEMA prescribes the guidelines on foreign investments and foreign 

remittances. Currently, remittance towards franchise fees is freely 

allowed. However, there are limits on free payments (without approval) 

towards royalty and technical fees for technology transfers. 

12 What are the exemptions and exclusions from any franchise laws and 

regulations? 

Since there are no specific laws regulating franchise, there are no 

exemptions and exclusions from any franchise laws and regulations. 

13 In the case of a sub-franchising structure, who must make pre-sale 

disclosures to sub-franchisees? If the sub-franchisor must provide 

disclosure, what must be disclosed concerning the franchisor and the 

contractual or other relationship between the franchisor and the 

sub-franchisor? 

There are no disclosure requirements. 

14 What is the compliance procedure for making pre-contractual disclosure 

in your country? How often must the disclosures be updated? 


15 What information must the disclosure document contain? 


16 How do the relevant government agencies enforce the disclosure 

requirements? 


17 What actions can franchisees take to obtain relief for violations 

of disclosure requirements? What are the legal remedies for such 

violations? How are damages calculated? If the franchisee can cancel 

or rescind the franchise contract, is the franchisee also entitled to 

reimbursement or damages? 

As stated earlier, there are no disclosure requirements in India. 

Nonetheless, a franchisee can file civil proceedings for damages for 

any misrepresentation or breach of warranties under the franchise 

agreement, and criminal proceedings for criminal breach of trust. 

The damages normally allowed would be actual damages only and 

not consequential. 

18 In the case of sub-franchising, how is liability for disclosure violations 

shared between franchisor and sub-franchisor? Are individual officers, 

directors and employees of the franchisor or the sub-franchisor exposed 

to liability? If so, what liability? 

As mentioned above, there are no disclosure requirements in India. 

However, the liability for any misrepresentation will depend on the 

franchise agreement between the franchisor and sub-franchisee. 

Normally, the franchisor or the sub-franchisor is vicariously liable 

for all acts of its individual officers, directors and employees, either 

in the course of business or in good faith, or both. The individual 

officers, directors and employees of the franchisor or the subfranchisor 

are not exposed to any liability unless the liability is 

specifically undertaken. 

19 In addition to any laws or government agencies that specifically regulate 

offering and selling franchises, what are the general principles of law 

that affect the offer and sale of franchises? What other regulations or 

government agencies or industry codes of conduct may affect the offer 

and sale of franchises? 

There are no franchise-specific laws, including for offer and sale of 

franchises. 

20 What other actions may franchisees take if a franchisor engages in 

fraudulent or deceptive practices in connection with the offer and sale of 

franchises? How does this protection differ from the protection provided 

under the franchise sales disclosure laws? 

See question 17. 

Legal restrictions on the terms of franchise contracts and the 

relationship between parties involved in a franchise relationship 

21 Are there specific laws regulating the ongoing relationship between 

franchisor and franchisee after the franchise contract comes into effect? 

The franchise agreement would be governed by the Indian Contract 

Act 1872 and various other laws already mentioned above. 

22 Do other laws affect the franchise relationship? 

See question 10. 

23 Do other government or trade association policies affect the franchise 

relationship? 

The franchise relationship is not affected by any government or trade 

association policies. 


india Kanga & Co 

Update and trends 

The government is currently considering enactment of specific 

legislation pertaining to franchising in India. The government is also 

considering liberalisation of foreign direct investment in the retail 

sector. Also, once the Limited Liability Partnership (LLP) Bill is passed 

as an Act, the LLP will be an alternative form of corporate business 

entity that would give the benefits of limited liability to its members. 

24 In what circumstances may a franchisor terminate a franchise 

relationship? What are the specific legal restrictions on a franchisor’s 

ability to terminate a franchise relationship? 

The terms under which the franchisor can terminate the franchise 

agreement will be as stipulated in the franchise agreement. 

25 In what circumstances may a franchisee terminate a franchise 

relationship? 

The terms under which the franchisee can terminate the franchise 

agreement will also be as stipulated in the franchise agreement. 

26 May a franchisor refuse to renew the franchise agreement with a 

franchisee? If yes, in what circumstances may a franchisor refuse to 

renew? 

A franchisor may refuse to renew the franchise agreement subject 

to the terms of the franchise agreement. If there is no provision for 

renewal or the conditions for renewal are not complied with, the 

franchise agreement can be terminated. 

27 May a franchisor restrict a franchisee’s ability to transfer its franchise or 

restrict transfers of ownership interests in a franchisee entity? 

The franchisor can restrict a franchisee from transferring its franchise 

ownership by expressly providing for the same in the franchise 

agreement. 

28 Are there laws or regulations affecting the nature, amount or payment of 

fees? 

There are no laws regulating the quantum of franchise payments. 

Kanga & Co 

29 Are there restrictions on the amount of interest that can be charged on 

overdue payments? 

There are no statutory restrictions on the amount of interest that can 

be charged on overdue payments. The interest to be charged on overdue 

payments would be at the rate mutually agreed in the franchise 

agreement taking the market trends into consideration. 

30 Are there laws or regulations restricting a franchisee’s ability to make 

payments to a foreign franchisor in the franchisor’s domestic currency? 

The franchisee can make payments to the foreign franchisor in the 

franchisor’s domestic currency. The franchisee has to comply with 

relevant formalities of the RBI for remittance. 

31 Are confidentiality covenants in franchise agreements enforceable? 

Confidentiality covenants in the franchise agreements are enforceable. 

32 Is there a general legal obligation on parties to deal with each other in 

good faith? If so, how does it affect franchise relationships? 

Under common law parties are under a legal obligation to deal with 

each other in good faith. The remedies available to an aggrieved party 

in case of breach of contract by the other party would be to initiate 

civil proceeding for compensation and damages and criminal proceedings 

under the Indian Penal Code for cheating, fraud, misrepresentation 

of facts and criminal breach of trust. 

33 Must disclosure documents and franchise agreements be in the language 

of your country? 

There is no mandatory requirement for franchise agreements to be in 

any local language. Generally franchise agreements are in the English 

language. 

34 What restrictions are there on provisions in franchise contracts? 

Preeti Mehta preeti.mehta@kangacompany.com 

Readymoney Mansion Tel: +91 22 66230000 

43 Veer Nariman Road Fax: +91 22 66339656 

Fort 

Mumbai 400 001 

India 

Parties are free to provide suitable restrictions eg, confidentiality, noncompete, 

non-solicitation assignment, jurisdiction (except if a court 

would otherwise not have jurisdiction) and dispute resolution. 

64 Getting the deal Through – Franchise 2009


35 Describe the aspects of competition law in your country that are relevant 

to the typical franchisor. How are they enforced? 

The MRTP Act regulates monopolies and restricts unfair and restrictive 

trade practices. The most commonly complained-of practices 

before the MRTP Commission applying to franchise agreements are 

‘resale price maintenance’ provisions and ‘tie-in’ practices. The former 

occurs when the franchisor insists that its goods must be sold at prices 

dictated by it. The practice of ‘tying-in’ involves the purchaser of a 

commodity, as a condition of such purchase, having to take another 

commodity as well, which is stocked by the seller. Judicial decisions, 

however, show that reasonable restrictions have been allowed. The 

Competition Act 2002 will soon replace the MTRP and will regulate 

competition in business. The Competition Act 2002 provides for the 

establishment of the Competition Commission of India. 

36 Very briefly describe the court system. What types of dispute resolution 

procedures are available relevant to franchising? 

The Supreme Court is the apex court in India followed by the high 

courts. Subordinate to the high courts are the district courts and the 

sessions courts. 

In the event of any dispute between a franchisor and franchisee, 

the option available to the parties is to initiate litigation or any other 

method of dispute resolution such as arbitration or conciliation. In 

case of a cross-border franchise it is advisable to have an international 

forum as the arbitrator. Domestic arbitration would be covered by 

the Arbitration and Conciliation Act 1996.

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