The model of franchising business is now emerging as a lucrative business for prospective entrepreneurs. It is a process according to that an entity called as franchisor gives opportunity to existing or would-be entrepreneurs to use its business model in different location for some time period. Unique and well-reputed entities use this way to maximize their profit.
Meaning of franchising:-
Indian law does not define the concept of franchising. According to Black’s Law Dictionary, “a franchise is a license from the owner of trademark or trade name permitting another to sell a product or service under that name or mark.” In simple terms, it is an innovative method of distributing products or services. The two parties are involved in this process i.e. franchisor and franchisee.
Who is Franchisor?
Franchisor may be a person or a company who grants its licence to third party for conducting business under its brand name or trade name. Franchisor owns trademark rights and other rights and allows that third party to use those rights during the conduct of business.
Who is called Franchisee?
Franchisee is someone who purchases the rights to use an already existing company’s brand name, trademarks and business model. Franchise pays royalty and initial fee for doing such business under the franchisor’s name and business model.
Who can franchise in India?
Any kind of business entity or an individual can franchise in India. Even a foreign business entity can into franchise business in India. It is most preferred route adopted by foreign entities to expand their business in India.
What are laws governing franchising in India?
In India there is no specific law regulating the franchising process. Howbeit, there are some laws and regulations that can be made applicable to franchising such as contract law, competition law, consumer protection law, intellectual property rights, taxation law and so on.
Let’s put some light on the provisions of these laws which regulates the franchising process in India:-
Indian Contract Act: – All the contracts and agreements in India are governed by Indian Contract Act. The Act provides the essentials of valid contracts and agreements. It regulates the fundamentals of contractual obligations such as offer, acceptance and consideration etc. between the franchisor and franchisee.
Competition Law: – This piece of legislation strict the big franchise from creating monopoly in the market. The provisions of this law prohibit arrangements related to production, supply, distribution and storage of goods which are likely to cause adverse effect on competition within the territory of India.
Consumer Protection Act: – This Act provides safeguards to the consumer against multifarious unfair trade practices. In case of any defect in the product or deficiency in services, a consumer can file complaint against both the franchisee as well as franchisor.
Intellectual Property Laws: – The Trademark Act, Patent Act, Copyright Act and Design Act govern the intellectual property aspects involved in a franchising process. The identification of any brand is protected under the Trademark Act and in same context food recipe of any brand can be protected under the Patent Act.
The Foreign Exchange Management Act: – This law came into picture when there is involvement of foreign currency or assets. International brands such as McDonalds’, KFC, Subway, Adidas Originals and so on are covered under the ambit of this legislation. As per new rules Govt. of India abolishes number of prior restrictions on foreign franchisors’ ability to charge certain fees without government approval.
Income Tax Act: – The tax matters relating to franchise business such as tax on royalties or franchise fee and so are regulated by the Income Tax Act. The Act also covers the aspects of international franchising.
What is to be included in franchise agreement?
For enforceability and to avoid any future hassle, there are some provisions which are required to be specified in the franchise agreement. These basic components of the franchise agreement are given below:-
- Scope and subject matter of the agreement
- Licensing and protection of intellectual property rights
- Obligations of the franchisor
- Obligations of the franchisee
- Consideration i.e. franchise fee and royalty
- Tax provisions
- Termination of the agreement and its repercussions
- Arbitration clause
- Governing law
The rapid growth of Indian economy attracts many foreign entrepreneurs to invest in franchising business in India. Before entering into franchising it is vital to know the about the things involved into it. A franchisor and franchisee both must have adequate knowledge about the legal complexities before entering into tie up.
Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali