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Comparative Guide Series
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Franchising
Indonesia & India
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Prepared by:
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Indonesia
Marshall Situmorang and Andhitta Audria Putri
Nusantara Legal Partnership
A. Definition and Scope of Franchising
1. What is the legal definition of “franchise” pursuant to the relevant laws and
regulations in your jurisdiction? Does your jurisdiction provide specific definition
for “franchise”?
Franchise is defined as “a special right owned by an individual or entity over the unique
characteristics of a certain business system, which has been proven to be successful to
promote goods and/or services, and can be used by another party pursuant to a Franchise
Agreement” (Art. 1 Point 1 of Minister of Trade (“MoT”) Regulation No. 71 of 2019 on
Franchising (“MoT Regulation 71/2019”).
The term “franchise” shall not be used by businesses that meet the following criteria:
(i) have unique business characteristics that cannot be easily imitated by other
parties;
(ii) have been proven to be profitable;
(iii) have written standard operating procedure for the services and/or goods offered;
(iv) are easy to learn and practical;
(v) provide continuous support to the franchisee; and
(vi) are registered as Intellectual Property Rights (e.g., trademark, trade secret, patent,
etc.) at the relevant authority.
(Article 2(2) of MoT Regulation 71/2019).
2. How is franchising typically structured in your jurisdiction?
Indonesia is silent on the terms of how franchise companies are typically structured. MoT
Regulation 71/2019 states that a franchise business can be established by either an
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individual or a business entity. In practice, many franchise businesses in Indonesia are
typically structured as Limited Liability Company or Perseroan Terbatas (“PT”).
3. What is the limitation of activities for businesses that are defined as a “franchising
business”, as both franchisor and franchisee under your jurisdiction?
MoT Regulation 71/2019 does not provide any limitation of activities for franchise business
actors. Both the franchisor and franchisee can carry on with their activities so long that
such business actors are carrying are still within the permitted activities that it is being
licensed for.
However, MoT Regulation 71/2019 requires both franchisor and franchisee to prioritize
domestically produced goods and/or services, and raw materials in the processing stages.
Moreover, a franchisor is also required to work in cooperation with small-and-medium- scaled businesses operating as either franchisees or suppliers to support production of
the goods and/or services.
4. Are there any activities that franchisor and franchisee are prohibited to engage in?
What are the consequences for conducting such prohibited activities?
MoT Regulation 71/2019 does not prohibit specific activities of the franchisor or franchisee.
However, note that the franchise business should comply with Law No. 5 of 1999 on
Prohibition of Monopolistic and Unfair Business Practice as lastly amended by Law 11 of
2020 on Job Creation (“Omnibus Law”), whereas parties are prohibited from practicing a
potential monopoly business.
In addition, a foreign franchisor must ensure that its franchisees and/or master franchisees
comply with the provisions regulating foreign direct investment, including the foreign
ownership limitation, minimum capital requirement, and licensing requirements. Although
a foreign ownership limitation is no longer applicable under the current Omnibus Law
regime, franchising business actors need to comply with the applicable licensing
requirements pursuant to the Risk-Based Business Licensing (“RBA”).
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B. Governing Authority & Business Association
5. Is there any specific government agency that regulates and oversees franchising
activities in your jurisdiction? Please define what power and authorities such
governing agency have towards franchise business activities?
Franchising activities are governed by MoT and the regional government (of the relevant
franchising business). Both agencies are responsible for the facilitation, evaluation, and
supervision of the business activities.
The facilitation provided by MoT through the Director of Business and Distributor
Development includes, among other things, training and/or consultation on the franchise
system, supports for the domestic franchisors participating in national and/or international
franchise exhibitions. Meanwhile, the evaluation and supervision functions are carried out
based on the annual reporting submitted by the franchise organizers.
6. Are there any trade associations for the franchise sector? Is it mandatory for
franchise business actors to join such trade associations and what are the
consequences of not becoming a member?
No. The Indonesian government does not establish a national franchise association.
However, several franchising associations are established by business players. One of
them is the Indonesian Franchise Association (Asosiasi Franchise Indonesia), which
members are Indonesian franchisors, franchisees, and master franchisers. The
association provides the code of ethics for promoting franchising business in Indonesia.
However, there are no statutory obligation to join this association. The membership is not
mandatory for maintaining the regulatory compliance, as well as applying for the Franchise
Registration Certificate.
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C. Regulatory Framework & Licensing Requirement
7. What are the applicable laws, legislations and regulations that governs franchising
activities and licensing in your jurisdiction?
The umbrella regulation that governs franchising activities in Indonesia is MoT Regulation
71/2019. Its enactment replaces and revokes the previous regulations:
(i) MoT Regulation No. 53/M-DAG/PER/8/2012 of 2012 on Franchising;
(ii) MoT Regulation No. 68/M-DAG/PER/10/2012 of 2012 on Franchises for Modern
Store Business;
(iii) MoT Regulation No. 07/M-DAG/PER/2/2013 of 2013 on Development of
Partnerships in Food and Beverage Franchises; and
(iv) MoT Regulation No. 60/M-DAG/PER/2013 of 2013 on Franchise Logos.
8. What are the required licenses and registrations that must be obtained by franchise
business actors to be able to legally operate in your jurisdiction?
Each franchisor and franchisee must obtain a Business Identification Number/ Nomor
Induk Berusaha (“NIB”) and a Franchise Registration Certificate/ Surat Tanda
Pendaftaran Waralaba (“STPW”) under its name.
For this purpose, a prospective franchisor must first register on the OSS system and
submit the relevant STPW documentation (i.e., (i) Franchise Offering Prospectus
(“Prospectus”) submitted by the franchisor or sub-franchisor; and/or (ii) Franchising
Agreement submitted by the franchisee).
9. Is there any requirement for specific types of entities for a franchisor and franchisee
to operate in your jurisdiction?
No. As mentioned in our response to question 2 above, there is no requirement on types
of entity of franchisor or franchisee. According to MoT Regulation 71/2019, a franchisee
or franchisor can be an individual or a business entity (no specifics on the form of entity).
10. What are the mandatory reporting obligations or other statutory compliances to be
undertaken by the franchisor and franchisee?
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MoT Regulation 71/2019 requires both franchisor and franchisee to submit their annual
business activity reports before the deadline on 31 June of the following year. For this
purpose, the franchisor is required to submit their report to the Directorate of Business and
Distribution Development under the Ministry of Trade. On the other hand, a franchisee
shall submit its report to the Department of Industry, Trade, Cooperatives, Small-and- Medium Enterprise of DKI Jakarta (if the business is located in Jakarta) or the relevant
local office in charge of the trading sector.
11. What are the applicable administrative or criminal sanctions that franchisor and
franchisee may be subject to in case of non-compliance to the (i) licensing
obligation and/or (ii) reporting and/or (iii) other compliances? How do the relevant
authorities impose such sanctions?
We note that non-compliance with MoT Regulation 71/2019 may be subject to
administrative, not criminal sanctions. The failure to comply with the franchise licensing
obligation may result in sanctions under the prevailing laws and regulations. However, the
regulation does not elaborate on this matter.
In addition, MoT may issue 3 (three) consecutive warning letters (each of which will be
applicable for a period of 2 (two) weeks) for non-compliance with the reporting obligation
and franchise requirements. If the franchisor or franchisee fails to comply with the terms
and conditions of the warning letter(s), the STPW may be temporarily suspended leading
to revocation of the STPW (subject to certain conditions).
D. Franchise Agreement
12. Does your jurisdiction require certain clauses to be included in a Franchise
Agreement?
MoT Regulation 71/2019 regulates the clauses, which should be included in the Franchise
Agreement:
a. Identity of parties;
b. Types of intellectual property rights owned by the franchisor, including but not limited
to company brand and logo; design; management, and marketing system, or food
recipes.
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c. Types of the franchise’s business activities
d. Party’s rights and obligations
e. Facilitation, including trainee programs and operational guidance given by the
franchisor to the franchisee.
f. Business area;
g. Term of the Franchise Agreement;
h. The agreed reward payment method;
i. The franchise ownership and transfer of ownership clause;
j. Dispute settlement
k. Procedure of agreement extension and termination;
l. Warranty; and
m. Total amount of business areas and/or franchise outlets.
13. Is sub-franchising structure allowed in your jurisdiction? If yes, how is the
contractual relationship structured between the franchisor and the sub-franchisor?
What are the rights and obligations of each party involved?
Yes, sub-franchising structure is allowed under the Indonesian laws.
Sub-franchising is usually done through a Master Franchising Agreement. The franchise
would appoint a local company to act as a master franchisee that has the rights to: (i)
exploit the intellectual property rights, including without limitation, the trademarks, manuals
and ‘know-how’ (franchise system) to develop, establish, and operate its franchise units in
a specific territory; and (ii) grant sub-franchises and sub-license the trademarks and
franchise system to operate franchise units in the territory.
Furthermore, the franchisor provides the necessary technical assistance in connection
with the franchised business to the master franchisee. In turn, the master franchisee must
provide the assistance to its sub-franchisees.
14. What are the material and procedural requirements that apply to the franchise
agreement in your jurisdiction (i.e., registration of Franchise Agreement to certain
government authority)?
As highlighted in point 7 above, the franchisor and/or franchisee acting as a sub-franchisor
must provide a Prospectus, then disclose its comprehensive business data and
information to the prospective franchisee not less than 2 (two) weeks prior to the execution
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of Franchise Agreement (Note: For a completed list of Prospectus material, please refer
to Appendix I of MoT Regulation 7/2019). Upon the execution of the franchise agreement,
the parties shall submit the Prospectus and sign the agreement on OSS for the issuance
of NIB and STPW.
Please note that MoT Regulation 71/2019 requires the Prospectus and franchise
agreement to be made in Bahasa Indonesia. If they are made in a foreign language, they
should be translated into Indonesian language by a sworn translator, legalized by a notary,
and authenticated by the Indonesian embassy in the home country of the franchisor.
15. What are the procedures for the renewal and termination of franchise agreements?
MoT Regulation 71/2019 does not set up a specific provision with regards to the renewal
and termination of franchise agreements. The regulation only provides the procedure of
submission of the amended agreements to maintain the franchise license.
E. Cross Border Franchising
16. Are there any restrictions applicable specifically to foreign franchisors when
entering your jurisdiction?
No. MoT 71/2019 does not stipulate any limitation for foreign franchisors.
17. What is the most typical structure used by foreign franchisors to enter your
jurisdiction? Please provide a brief explanation of structures commonly used in
your jurisdiction.
Most foreign franchise businesses in Indonesia are commonly structured under a PT.
However, please note that a franchisor is prohibited to appoint franchisees who have a
direct or indirect control over the franchisor (e.g., shareholders, subsidiaries, or affiliates).
Consequently, a foreign franchisor must appoint a separate entity that does not have any
direct or indirect control over it to be its independent Indonesian franchisee.
18. What are the key aspects to be considered by foreign businesses before adopting
a franchise model in your jurisdiction?
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Given that Indonesia is an archipelagic country with a high population and consumption
level, the most common franchise model in Indonesia is master franchising, as mentioned
in point 12 above. This way, the master franchisee would be the one that takes care of all
the sub-franchising agreements with the sub-franchisees within the agreed covering area.
This model is considered highly profitable and practicable for foreign franchisors to obtain
their business expansion as well as market targets in Indonesia.
19. What are the typical dispute resolution mechanisms adopted by foreign franchisors
in your jurisdiction?
Most Foreign franchisors would use arbitration or any alternative dispute resolution, such
as consultation, negotiation, mediation, or reconciliation as the typical dispute resolution
mechanism. Furthermore, both foreign and domestic arbitral awards are enforceable in
Indonesia, which also require an execution order to be issued by the relevant court.
Statutorily, MoT Regulation 71/2019 requires that a franchising agreement must contain a
dispute resolution clause under the Indonesian law. To comply with this provision, it is
advisable to use the local arbitration body as the dispute resolution forum.
F. Intellectual Property, Employment, and Tax
20. How are the franchisor’s intellectual Property Rights (e.g., trademarks and know- how, trade secrets) protected in your jurisdiction? What specific impacts does this
have in the context of franchising?
Franchisors can protect their intellectual property rights, i.e., trademarks, know-how, and
trade secrets, under the Indonesian prevailing laws. The know-how, i.e., industrial designs,
copyrights, or trade secrets, may be protected under the patent or relevant Intellectual
Property Law.
It is important to note that MoT Regulation 71/2019 requires a franchisor to register its
trademark with the Indonesian Trademark Office of the Directorate General of Intellectual
Property Rights before entering into the Franchise Agreement. As such, a clearance
trademark search is essential for the franchisor to ensure that no party has filed for the
same trademark.
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21. Are there any relevant considerations for franchisors from an employment law and
taxation perspective?
In terms of taxation, franchisors and franchisees are obliged to pay the income tax. Some
taxes that should be considered are Value Added Tax (“VAT”), the withholding tax, and
the final permanent establishment tax.
VAT is imposed on: (i) supplies of goods and services within or imported into the
Indonesian customs area; and (ii) services performed abroad but consumed in Indonesia.
Therefore, the provision of services by the franchisor to the franchisee is subject to VAT.
For the withholding tax, franchisors shall be liable for Art. 23/26 Withholding Tax.
Furthermore, foreign companies with no permanent establishment in Indonesia are only
subject to a final withholding tax on certain types of income derived from Indonesian
sources.
Generally, Law No. 13 of 2003 as amended by Law No. 11 of 2020 on Job Creation does
not apply to foreign franchisors located overseas, unless they employ Indonesians or
expatriates to work in Indonesia. However, to minimize the risk of a franchisee’s employee
being deemed as an employee of the franchisor, the Franchising Agreement should clearly
express that the franchisor relationship with the franchisee is that of an independent
contractor.
G. Miscellaneous
22. In which sectors is franchising most common and successful in your jurisdiction?
And what is the outlook in this sector in the upcoming years?
Franchising has expanded rapidly, particularly in food and beverage industry, followed by
retail (more to fashion retail, department stores), lifestyle (such as fitness centers or yoga
studios), and education industries.
23. Are there any other specific concerns in connection with franchise business in your
jurisdiction apart from the above?
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Exploitation of the intellectual property, confidential information, manuals, and guidelines
is one of the most significant risks a franchisor may face. Misuse of information and failure
to fulfill the standard customer service by the franchised units may affect the goodwill,
reputation, and image of the franchisor and its business, which may result in economic
losses. Thus, these issues need to be handled carefully in the applicable franchise
agreement.
In addition, the franchisor must foresee the compliance of the franchisee to file and obtain
the required licenses and authorizations for the establishment and operation of the
franchised units. If the franchisee fails to do that, the franchised unit may be subject to
closure by the authorities, which will cause direct or indirect economic losses to the
franchisor.
Marshall S. Situmorang marshall.situmorang@nusantaralegal.com
Andhitta Audria Putri audria.putri@nusantaralegal.com
AIA Central Level 31, Jl. Jendral Sudirman Kav. 48A Jakarta Selatan, 12930 - Indonesia
Tel: +62 21 2709 1321
www.nusantaralegal.com
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AUTHOR & CONTACT INFORMATION
AUTHOR(S): Marshall S. Situmorang, Andhitta Audria Putri
AUTHOR EMAIL(S): marshall.situmorang@nusantaralegal.com;
audria.putri@nusantaralegal.com
FIRM NAME: Nusantara Legal Partnership
FIRM ADDRESS: AIA Central Level 31, Jl. Jendral Sudirman Kav. 48A Jakarta Selatan,
12930 - Indonesia
TELEPHONE NUMBER: +62 21 2709 1321
WEBSITE ADDRESS: www.nusantaralegal.com
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India
Sharanya G Ranga and Sachit Kumar
Advaya Legal
A. Definition and Scope of Franchising
1. What is the legal definition of “franchise” pursuant to the relevant laws and
regulations in your jurisdiction? Does your jurisdiction provide specific definition
for “franchise”?
Currently, India does not have any specific legislation dealing with “franchise” and the
business relationship is essentially governed by the commercial understanding between
the franchisor and the franchisee. However, for the purpose of taxation, the term ‘franchise’
is defined under the (Indian) 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 may be, is involved.”
2. How is franchising typically structured in your jurisdiction?
As there are no specific legislations dealing with franchise in India, the franchisor entities
are typically set up as a private limited company or a limited liability partnership. These
entities have independent corporate existence with limited liability and are governed by a
robust regulatory regime.
A franchisor may also consider other entity structures such as a sole proprietorship
concern or a partnership firm. A sole proprietorship concern is owned and operated by an
individual having unlimited personal liability for all debts and liabilities incurred during the
course of business. A partnership firm on the other hand is an association of two or more
persons jointly engaged in a business enterprise where the profits and losses are shared
proportionally as per mutual agreement. Typically, each partner in a partnership firm is
jointly and severally liable for all acts of the firm. While these entities offer no limited liability
protection, their key advantage is the ease of setting-up, simple operating structure and
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minimal compliance requirements. However, these options are not available for foreign
franchisors as foreign investment is not permitted in these entities.
A franchisor who intends to enter the Indian market for a short duration may consider
setting up a liaison office (“LO”) or a branch office (“BO”). A LO merely acts as a channel
of communication between the foreign franchisor’s head office outside India and parties in
India and is prohibited from undertaking any business activities in India or earning any
income in India. A BO acts as a buying or selling agent of the foreign parent in India
besides rendering professional services and exporting or importing goods. While a BO has
greater flexibility in terms of permitted activities over an LO, prior approval from India’s
central bank, the Reserve Bank of India (RBI), is required for setting up both an LO or a
BO.
3. What is the limitation of activities for businesses that are defined as a “franchising
business”, as both franchisor and franchisee under your jurisdiction?
While there is no specific franchise law in India all foreign businesses looking to enter the
Indian market or invest in Indian entities must comply with the provisions of the prevailing
Foreign Direct Investment Policy (FDI Policy) and the Foreign Exchange Management Act
1999 along with the rules made therein (FEMA).
As per the FDI Policy, foreign investors can invest in India either through i) the automatic
or the ii) approval route. Under the automatic route, no prior approval is required for foreign
investment, whereas in the case of the approval route, government approval is required to
be obtained prior to making any foreign investment.
Currently, foreign investment up to 100% is permitted in a majority of sectors in India under
the automatic route. Some specified sectors have sectoral caps where foreign investment
is permitted only up to a certain limit (i.e., 26 % or 49 % of the total capital infused), under
the automatic or approval route. However, certain sectors have a blanket ban on foreign
investment such as lottery business, gambling and betting, real estate business,
manufacture of tobacco or cigarettes and atomic energy. Additionally, foreign investment
may also be subject to sector-specific norms such as entry conditions, end-use
restrictions, lock-in period, etc.
4. Are there any activities that franchisor and franchisee are prohibited to engage in?
What are the consequences for conducting such prohibited activities?
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In the absence of a specific legislation dealing with franchise, there are no specific
exemptions and exclusions for franchise business. However, as mentioned in our
response to Question No. 3, foreign businesses looking to enter the Indian market or invest
in Indian entities must comply with the prevailing FDI Policy and FEMA regulations. Any
non-compliance of these regulations may lead to statutory authorities initiating
proceedings under applicable criminal and civil laws.
B. Governing Authority & Business Association
5. Is there any specific government agency that regulates and oversees franchising
activities in your jurisdiction? Please define what power and authorities such
governing agency have towards franchise business activities?
As there is no specific legislation dealing with franchise in India, all aspects of a franchise
arrangement are governed by the terms of the franchise agreement.
The following laws are broadly relevant to a franchise business:
• The Indian Contract Act, 1872 is the primary law governing the formation of commercial
contracts in India. It lays down the essentials of a valid contract and identifies contracts
that are per se invalid or voidable at the option of the parties.
• The Competition Act, 2002 prohibits arrangements with respect to production, supply,
distribution, storage, acquisition or control of goods or provision of services that cause an
appreciable adverse effect on competition within India.
• The Consumer Protection Act, 2019 seeks to provide remedies to consumers for
deficiency in services and defective products sold by manufacturers/ service providers/ e- commerce businesses. While the consumer may seek remedy from both the franchisor
and the franchisee, the product liability and claims will lie with the franchisee if it is
expressly specified under the franchise agreement.
• The Trademarks Act, 1999, the Patent Act, 1970, the Design Act, 2000, and the
Copyright Act, 1957 govern the protection of trademark, patent, design, copyright aspects
involved in the franchise agreement.
• The Income Tax Act, 1961 governs the tax aspects of income generated through the
franchising business in India.
• The Specific Relief (Amendment) Act, 2018 grants remedies such as specific
performance of a contract, injunctions, damages or substituted performance for the
protection of rights of the parties in cases of breach of the franchise agreement.
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• The FDI Policy and FEMA regulations govern all transactions involving inflow and
outflow of foreign exchange from India, including foreign investment in Indian entities and
the payments of royalty or franchisee fees to the foreign franchisor.
• Other sector-specific legislations may be applicable to a franchise depending on the
nature of the franchise business.
6. Are there any trade associations for the franchise sector? Is it mandatory for
franchise business actors to join such trade associations and what are the
consequences of not becoming a member?
While there are trade associations for the franchise sector, they are voluntary in nature
and not mandatory.
C. Regulatory Framework & Licensing Requirement
7. What are the applicable laws and regulations that governs franchising activities and
licensing in your jurisdiction?
Currently, there are no specific laws in India that governs franchising activities. However,
other laws listed above in response to Question No. 5 will apply.
8. What are the required licenses and registrations that must be obtained by franchise
business actors to be able to legally operate in your jurisdiction?
A franchisee may be required to obtain certain types of licenses and approvals depending
on the industry and kind of business activity that the franchisee is operational in. For
example, a food chain franchisee may require a license under food laws. Registrations
such as permanent account number (PAN), tax deduction account number (TAN), goods
and services tax (GST) registration are mandatory.
9. Is there any requirement for specific types of entities for a franchisor and franchisee
to operate in your jurisdiction?
No, the requirements will be as per the franchise contract executed between the parties.
10. What are the mandatory reporting obligations or other statutory compliances to be
undertaken by the franchisor and franchisee?
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There are no mandatory reporting obligations specific to a franchise. Statutory
compliances relating to operation of a business entity such as payment of taxes, reporting
of foreign investments, if any, etc. will apply as the case may be.
11. What are the applicable administrative or criminal sanctions that franchisor and
franchisee may be subject to in case of non-compliance to the (i) licensing
obligation and/or (ii) reporting obligation and/or (iii) other compliances? How do the
relevant authorities impose such sanction/s?
As already mentioned, there are no specific licensing or reporting obligations imposed on
a franchisor and a franchisee under Indian law other than the contractual remedies of
franchisee under the franchise agreement and legal relief for violation of contractual
obligations as set out under Indian contract law. Therefore, if a franchisor violates specific
obligations under the franchise agreement or wrongfully cancels or rescinds the franchise
contract, it would amount to a breach of contract. In such cases, the franchisee can invoke
the indemnity for the loss suffered (if provided in the franchise agreement), initiate legal
proceedings seeking damages for such breach of contract and also consider instituting
criminal proceedings against the franchisor for criminal breach of trust.
Franchisees receiving foreign investment must comply with the reporting requirements
under FEMA regulations as non-compliance will expose the Indian company to monetary
penalties.
D. Franchise Agreement
12. Does your jurisdiction require certain clauses to be included in a Franchise
Agreement?
No, there are no specific clauses to be included in a franchise agreement other than those
generally applicable to all commercial contracts under Indian contract law. Common
clauses include those related to matters such as pricing, duration, exclusive territories,
non-compete restrictions, employee non-solicitation, jurisdiction, confidentiality and
dispute resolution. While it is common to impose non-compete obligations on the counter
party during and after the term of the franchise contract, such obligations have been held
to be unenforceable by Indian courts after the termination of the franchise contract if it is
in restraint of trade. However, in case of sale of business where the goodwill of the
company is also being sold, reasonable non-compete restrictions may be enforced against
the seller of the business.
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13. Is sub-franchising structure allowed in your jurisdiction? If yes, how is the
contractual relationship structured between the franchisor and the sub-franchisor?
What are the rights and obligations of each party involved?
Yes, a sub-franchising structure is permissible in India subject to the terms of the contract
between the parties.
14. What are the material and procedural requirements that apply to the franchise
agreement in your jurisdiction (i.e., registration of Franchise Agreement to certain
government authority)?
The franchise agreement has to be properly executed by the franchisor and the franchisee
and witnessed by two individuals besides being adequately stamped as per applicable
stamp laws (depending on the place of execution of the agreement and/or location of the
franchise). There is no registration requirement.
15. What are the procedures for the renewal and termination of franchise agreements?
The process for renewal and termination of franchise agreements is governed by the terms
of such agreements. Either party to the franchise agreement may terminate a franchise
relationship upon the occurrence of the events of termination specified in the franchise
contract.
Additionally, the franchisor may also terminate the franchise relationship in special
circumstances identified under the Indian Contract Act, 1872. These include:
• the franchisor being induced to offer and sell the franchise to the franchisee by
fraudulent acts of the franchisee or under undue influence of the franchisee; and
• performance of franchisee’s obligations under the contract becoming impossible for
reasons other than those caused by the franchisee itself or the franchisor.
While there are no specific legal restrictions on a franchisor’s ability to terminate a
franchise relationship, the Indian insolvency law prohibits a corporate debtor undergoing
liquidation from terminating any contract that would result in disposal of its rights during
the pendency of the insolvency proceeding.
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Further, the franchisor may refuse to renew the franchise agreement if the contract does
not provide for renewal or expressly prohibits renewal of the same or if renewal is subject
to specific performance criteria that have not been complied with by the franchisee.
E. Cross border Franchising
16. Are there any restrictions applicable specifically to foreign franchisors when
entering your jurisdiction?
Please refer to our response under Question No.3.
17. What is the most typical structure used by foreign franchisors to enter your
jurisdiction? Please provide a brief explanation of structure/s commonly used in
your jurisdiction.
Please refer to our response under Question No.2.
18. What are the key aspects to be considered by foreign businesses before adopting
a franchise model in your jurisdiction?
A tough regulatory environment for doing business often acts as a dampener for
multinational corporations looking to enter India. Absence of a ‘single window’ clearance,
multiplicity of laws and a need to obtain approvals across different states compound the
problem for a foreign player looking to set up in India.
The diversity of the local market is often too complex for foreign players as cultural,
linguistic and socio-economic issues make it difficult to move forward with a ‘one –size fits
all’ approach. A local partner therefore adds tremendous value in terms of understanding
the intricacies of the local market, real estate issues, consumer preferences and tastes,
etc. that may help the foreign retailer make a calculated strategic foray into the new market.
International entities find it comfortable to work with local partners that already have an
established manufacturing/distribution/marketing set up and provide the foreign party
direct access to harness the market opportunities. Hence, foreign businesses could
consider franchising as a way of testing the waters for its brand/ its products in a new
market without incurring heavy setting up costs.
19. What are the typical dispute resolution mechanisms adopted by foreign franchisors
in your jurisdiction?
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The Indian legal system is based on the common law system and has a three-tiered
structure with the Supreme Court of India being the apex court of the country situated in
New Delhi, followed by the High Courts at the state level and the district and session
courts. A separate civil and criminal judicial system also exists in each district.
Given the backlog of cases in Indian courts, increasingly, arbitration is a preferred mode
of dispute resolution for commercial contracts, especially international contracts as
litigation in India is usually an expensive and time consuming exercise. Conciliation and
mediation mechanisms are also slowly gaining popularity.
As India is a signatory to the Geneva and New York Conventions, arbitral awards of most
jurisdictions are enforceable in India as if they were made by an Indian court and the same
can be challenged only on limited grounds specified by law. While Indian laws allow the
choice of foreign jurisdiction in an international contract, only judgments made by superior
courts of notified ‘reciprocating territories’ will be enforced.
F. Intellectual Property, Employment and Tax
20. How are the franchisor’s intellectual property rights (e.g., trademarks and know- how, trade secrets) protected in your jurisdiction? What specific impact does this
have in the context of franchising?
Since the grant of rights to use a franchisor’s brand and intellectual property (IP) rights is
the crux of a franchise agreement, apart from statutory protections, it is recommended to
incorporate comprehensive provisions as regards the licence, use and return of
franchisor’s IP in the franchise agreement itself. This assumes importance given the risk
of counterfeiting and piracy in India.
Besides this, a franchisor can consider registration of its trademarks in India as per the
Indian Trademarks Act 1999 or the Madrid Protocol (administered by the International
Bureau of the World Intellectual Property Organization) to ensure statutory protection to
its trademarks being used in India. If the franchisor’s trademark is not registered in India,
the franchisor can initiate only an action for passing-off under common law and seek
injunctive relief against the party infringing its trademark.
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A franchisor’s know-how and confidential information such as trade secrets, designs,
copyrightable and patentable work are generally protected by registration under the
following statutes:
• the Copyright Act, 1957;
• the Patents Act, 1970;
• the Geographical Indication of Goods (Registration & Protections) Act, 1999; and
• the Semiconductor Integrated Circuits Layout Design Act, 2000.
As trade secrets are not specifically dealt with in any of the above legislations, they are
governed by the principles of equity laid down under common law.
21. Are there any relevant considerations for franchisors from an employment law and
taxation perspective?
All business entities in India are required to obtain direct and relevant indirect tax
registrations. Direct taxation in India is governed by the Income Tax Act 1961 (ITA) and
provides for the taxation of residents and non-residents. Resident franchisors would be
subject to tax in India on their worldwide income (being royalty, franchise fee, revenues
shared) while the non-resident franchisors will be taxed only on their Indian income.
Additionally, a non-resident franchisor may also avail itself of the benefits of any double
tax avoidance treaty between India and the country of the foreign franchisor so long as the
non-resident franchisor does not have any permanent establishment in India.
India has implemented a unified Goods and Services Tax (GST) regime throughout India
with effect from July 2017 simplifying the indirect tax framework.
Since there is no specific legislation on franchise, the nature, mode of payment and
quantum of franchise fees, royalties, etc. are entirely governed by the franchise agreement
and applicable FEMA regulations where one of the parties is a non-resident.
From an employment law perspective, all aspects of franchise arrangement including
labour and employment considerations are governed by the terms of the franchise
agreement. It is therefore important to clarify the position as regards the position of the
employees of the franchise in the franchise agreement and the relationship between the
employees of the franchisee and the franchisor.
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G. Miscellaneous
22. In which sectors is franchising most common and successful in your jurisdiction?
And what is the outlook in this sector in the upcoming years?
With India emerging as a global retail hotspot, franchising is a popular option for sectors
such as food and beverages, fashion, lifestyle, health, beauty, wellness, and hospitality.
There are a host of reputed international brands operating in India such as Starbucks, 3M
Car Care, Taco Bell and IKEA. While the Covid-19 pandemic has dampened the economic
prospects of late, India still has plenty of untapped potential thanks to its market size.
23. Are there any other specific concerns in connection with franchise business in your
jurisdiction apart from the above?
In a country like India where most businesses are family-run with promoters often running
multiple businesses with intertwined and related party transactions, selection of a local
partner whose interests are completely aligned with the franchisor is key. Also, enforcing
conflict of interest, non-compete obligations and other contractual breaches can be tricky.
These aspects need to be handled with sensitivity given the cross-cultural differences
between partners.
Sharanya G Ranga sharanya@advayalegal.com
Sachit Kumar sachit@advayalegal.com
C-1111, ONE BKC, Bandra Kurla Complex, Mumbai – 400 051, India
Tel: +91 22 6123 7800
www.advayalegal.com
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AUTHOR & CONTACT INFORMATION
AUTHOR(S): Sharanya G Ranga & Sachit Kumar
AUTHOR EMAIL(S): sharanya@advayalegal.com and sachit@advayalegal.com
FIRM NAME: Advaya Legal
FIRM ADDRESS: C-1111, ONE BKC, Bandra Kurla Complex, Mumbai – 400 051, India
TELEPHONE NUMBER: +91 22 6123 7800
WEBSITE ADDRESS: www.advayalegal.com