Franchising is in its early stages in India, and has become increasingly popular as a means of doing business in the past few years, both in terms of international franchises and domestic ones. As a result, the Franchising Association of India was set up in Mumbai, in 2000 which has links with other such associations around the world.  The Franchising Association is still considering whether it should have a Code of Conduct or whether they should press for specific legislation in relation to franchising. The difficulty with a Code of Conduct is that not all franchisors and franchisees are members of the Association and it is difficult to enforce.

Regarding the background, international soft drink and hotel franchises arrived in India as early as in the 1960s, but in 1977 the Government of the day had expelled foreign brands from India. The foreign brands started returning gradually from the mid ‘80s. In the 1990’s as the market opened, foreign franchises started coming in gradually, and faced many hiccups along the way especially KFC, Schweppes etc. Since then there has been progressive entry of international franchises, some have been successful and others not so fortunate. The well-known franchises relating to soft drinks, ice-cream parlours or restaurants include Pepsi, Coke, Baskin Robbins, Movenpick, Subway, McDonalds, TGIF, Geoffry’s, Taco Bell, Pizza Hut, Pizza Piazza, Dominos Pizza,  O’Brian’s Sandwich Bar, Ruby Tuesdays and Barrista. Retail franchises include Marks & Spencer, West Side, Evita Peroni, Pepe Jeans and Adams. Courier companies like Air Action and DHL are there along with computer and software related franchises. The Government has liberalised the rules and regulations in relation to the retail industry and a boom in this sector is on its way.

Franchising has also become a popular method of doing business within India with the franchisor granting numerous unit franchises in a wide range of areas. This has been the case in respect of IT education and franchises such as APTEC, NIIT, and STG. Then there are local food chains like Chawla’s, Nirulas, Nilgiris, Coffee Day, Café Nescafe, and Sagar Ratna. Health clubs like VLCC have come up along with hair and beauty parlours who often sell their products like Shanaz Hussein, Biotique and Habibs. There are numerous cargo and courier companies like Blue Dart, ADL, Dartmail, Blaze Flash, First Flight, Professional Couriers and DTDC. Clothing retail outlets especially for designer clothing include Bentley, L.F Couture, Ritu Beri and Deewan Sons. Other retail chains include Shopper’s Stop, Lifestyle and Ebony. There are Indian travel agencies which now want to franchise abroad like Uniglobe or expand locally like Travel Port. Now the major area for local franchises seems to be healthcare with Apollo Hospitals and various diagnostic centres. Shanaz Hussein beauty saloons and products is already an international franchise, and slowly other Indian franchisors are likely to look to expand internationally with the easing of restrictions by the Government especially since 2000.

It took some time for international franchises to become acceptable because of certain attitudes of Indian businesses towards foreign franchises whereby they could not understand why the Indian party had to make all the investments in India and on top of that had to make hefty payments in foreign exchange to the Master franchisor. Indians feel the foreign franchisor or business should also invest, participate and have some interest in the development and success of the entire business. If the brand name is very well known world wide and the product is marketable in India, then the attitude can significantly change, as it is obvious that the local business would profit just by riding on the back of a well known brand. If the brand is well known in another country but not in India or to Indians travelling abroad, then it is difficult to convince an Indian businessperson to pay lump sum payments or royalties as its worth is not the same in India. That again can be overcome if the product or service provided by the franchise is in short supply in the country and important to its development. Market research and pilot projects can assist in assessing the prospects of any international franchise in India.

The lower the price a product or service can be sold at, the more customers they are likely to have. Some products may be designed to appeal to the masses and other high price items can be marketed just for a select clientele like those in big business, professions, the film industry or celebrities. Expensive cosmetics and beauty therapy from abroad is for the latter. The needs of the affluent has been met already with many expensive products in the market, however there is still scope in the retail sector for cheaper goods in terms of clothing or cosmetics.  In the soft drink and fast food sector, Coke, Pepsi, McDonald and Pizza Hut have already captured the mass market.

In many instances the products sold by the franchise outlets may have to be significantly tailored to local taste, which may go against the franchising concept or principle that outlets should be identical, and a customer should find identical quality of goods. If one goes to a McDonalds or TGIF or Pizza Hut in India, the food tastes different and the menus are geared to local taste and culture. For instance, people like spicy food, and beef and pork have to be absent in the menu to avoid offending religious sentiments. In relation to Restaurants and pubs, even if families would like to go together, the licensing laws in many states prohibit entry of persons less than 21 years to go to an eating place or restaurant where liquor is sold. Regarding retail franchises involving clothing, the children’s wear and men’s wear is similar to any other western country except that the material has to suit the tropical climate and relatively milder winters. The women’s fashion however, is significantly different with the majority wearing salwar kameez or saris. Western clothes like suits, trousers, skirt and tops for women are becoming popular among teenagers and women in cosmopolitan areas of large cities.

A foreign franchisor needs to be aware of local culture and custom, and when deciding on franchise fees or other payments they have to consider realities about the buying power and people’s habits about spending and not make assessment on the basis of population numbers. Research should be done on the viability of any product or service in any given state in India.

Laws

There is no specific legislation or rules applicable to franchising. There is considerable discussion going on the aspect of whether disclosure laws should be introduced. It is advisable that parties disclose and exchange information on each other and due diligence is carried out before entering into a formal agreement. There are remedies however, under the Indian Contracts Act and Specific Relief Act for breach of contract or misrepresentation.

It is also advisable that the franchise is structured in such a manner that it fits around the rules and regulations and also best protects the interests of the parties. There are several Governmental permissions that would be required before an international master franchise can be granted in India. There are also restrictions on the number of shares a foreign company or person can hold in an Indian company if the joint venture option is taken, and there are restrictions on payment of royalties if it is a technical collaboration agreement between the foreign master franchisor and Indian master franchisee. Payments for Master franchisors are best spread out between lump sum fees, royalties, consultant’s fees, and design and engineering fees.

One needs to check the areas where incentives are given by the Government in terms of allowing more foreign shareholding, tax breaks and royalties. It is often in the area in which franchises exist, like in the hotel and tourism industry.

It is important that the trade marks and copyright in relation to the product or service provided by the franchise is registered by the master franchisor in India if it intends to expand into that territory. The new Trade Marks Act 1999, which came into force in 2003, protects both trade marks and service marks. The master franchisee can be registered as permitted/licensed user. This would protect the franchise from infringement by third parties and make it easier to obtain injunctions if necessary. Various remedies are available under common law and criminal law against violation of intellectual property.

In relation to opening outlets in various parts of India, it is necessary to check the state and local laws relevant to the town or city.

The new Competition Act 2002 is aimed at promoting free trade and ending protectionism. The main areas that are dealt with by the Act are the prohibition of anti-competitive agreements; prohibition of abuse of dominant position and regulation of combinations. This prohibits franchisors and franchisees from entering into agreements, such as those involving tied sales, price fixing and other monopolistic trade practices. This Act interprets agreements in a very wide sense including all kinds of arrangements and understanding whether formal or informal, written or oral which has the desired effect, whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.

For Indian master franchisors seeking to expand to other countries, significant positive changes have been made since the Foreign Exchange Regulation Act 1973  was replaced by Foreign Exchange Management Act 2000 and rules made under it. Still permissions have to be sought under the latter before doing business abroad and there are limits or caps regarding the foreign exchange available. It is much easier for Indian companies who are earners of foreign exchange and those that have foreign branches or subsidiaries.