Franchising in India: India offers the most favorable franchising environment with a huge consumer market.

In the past two decades, India has witnessed a sea change in its foreign investment. Globalization, liberalization and growing brand awareness have resulted in India becoming one of the largest and fastest emerging markets. Being geographically vast and culturally diverse, India offers the most favorable franchising environment with a huge consumer market.

The fact that franchising is a popular business model in India with more than 1,200 franchise ventures (with over 300 international franchisors) and a sales turnover of over U.S. $7 billion with growth potential in the range of 30-35 percent per annum confirms its success and huge potential.

The Mall Boom

The concept of malls has witnessed rapid growth in India--three malls in 2000 are expected to reach more than 300 malls by the end of 2012--influencing in a great way the lifestyle of the people. Since malls create an opportunity to have many franchise businesses under one roof, franchising, which is a convenient business model, would benefit most by the mall boom.

Legal Aspects

Although India does not have franchise specific legislation or regulation, there are numerous laws governing various aspects of franchising. While considering franchise in India, one would have to refer to the following:

* Contract Act. The contractual relationship between the franchisor and the franchisee would be governed by the Indian Contract Act, 1872. A franchise agreement would be enforceable under Indian law as it would meet the criteria of a valid contract. However, care would have to be taken that the agreement does not contain any provision which makes it void or voidable.

* Consumer Protection and Product Liability. The Consumer Protection Act, 1986, provides for remedies to consumers in case of defect in products or deficiency in services making the manufacturers and service providers liable for the same: Though, in fact, goods would be manufactured and likewise services provided by the franchisee, it is quite likely that the consumers could file an action against both the franchisor and the franchisee. Suitable provisions in the franchise agreement are advised to crystallize liabilities arising due to consumer claims.

* Competition Law. In view of the globalization and liberalization of its economy, the focus has shifted from curbing monopolies to promoting healthy competition in India. Accordingly, the Competition Act, 2002, was enacted and is now in force in its entirety. The relevant provisions from the franchising perspective are those with respect to anti-competitive agreements and abuse of dominant position.

The Competition Act prohibits any arrangements with respect to production, supply, distribution, storage, acquisition or control of goods or provision of services which cause or are likely to cause an appreciable adverse effect on competition within India.

In terms of the Competition Act, tie-in arrangements, exclusive supply and distribution agreements, refusal to deal and resale price maintenance would be regarded as being anti-competitive, if such agreements cause an appreciable adverse effect on competition in India.

* Intellectual Property Rights

Trademark Protection: India's IPR laws include the Trademark Act 1999, The Designs Act 2000, The Copyright Act 1957, The Patent Act 1970, which provide for protection of the IPR of the franchisor and enforcement mechanism against infringement of the same.

Trans-border Reputation of Trademarks: Indian Courts have in several decisions recognized the reputation of and protected trademarks of foreign companies on the basis of international reputation, even though they were not conducting business in India. However, it would be prudent to register the marks in India.

* Foreign Exchange Regulations. The Foreign Exchange Management Act, 1999, and the rules/regulations framed thereunder, govern payments in foreign exchange. A franchise arrangement would normally involve payments such as franchise fee, royalty for use of trademarks and system, training expenses, advertisement contributions, and so on and can be remitted to the foreign franchisor without any approvals. Issue of guarantees in favor of a foreign franchisor would require approval of the Reserve Bank of India.

Single Brand Retail. 100 percent foreign direct investment without any approval is allowed in "Single Brand Product Retailing," subject to prescribed conditions, such as the products should be sold under the same brand internationally, the foreign investor should be the owner of the brand and depending on the percentage of the foreign investment, a certain amount of products should be sourced from Indian small-scale industries/ cottage industries. In view of this regulatory regime and other reasons, franchising has proved to be a better business option for foreign franchisors such as Mothercare and Next.

* Other Legislation. In addition to the aforesaid, various other central, state industry specific and other legislations such as labor laws, property laws, and so forth would have to be considered.

Franchising in Various Sectors in India

Food and beverages, hospitality, retail, beauty and health care and education sectors dominate the franchise market in India. Studies reveal that more than one-third of new food outlets are through franchise systems, thanks to the rapid development of mall culture. With a rise in business and pleasure travel, the hospitality industry business is growing by leaps and bounds. With India becoming a favored investment, as well as a tourist destination, there is an inflow of foreign travelers, which has triggered a sharp rise in demand for quality accommodations, creating more opportunities for hospitality franchisors. The recent trends have shown a sharp increase in organized retail, be it foreign or Indian brands. Retailing in food, health and beauty products, clothing, footwear, household goods and furniture is getting more popular and has already started to enter into other sectors too.

Increased stress-level awareness for quality health services has boosted the need for health care service providers, including wellness centers and spas.

Growing acceptability among the Indian population and proven success of education franchising in India has led to a boom in the franchising of professional and vocational courses in the fields of aviation, hospitality, retail, financial services and insurance programs. Franchising in the pre-school segment has particularly been a growing phenomenon in the past decade.

It is evident that foreign franchisors have realized the unparalleled potential for franchising in India. Going by the statistics, there is no doubt that franchising as a business concept has a very bright future in India.

Preeti Mehta, a senior partner of Kanga & & Co., a leading law firm, has experience in mergers and acquisitions, foreign investments/ collaborations, private equity, franchising and banking documentation. Mehta serves on the Editorial Advisory Board of the International Journal of Franchising Law, is a patron member and on the Executive Council of the Franchise Association of India and chairs its Legal Committee. She can be reached at preeti.mehta@ kangacompany.com.