INTRODUCTION
As per the statistics, India is notably the second-largest franchise market of the world and every year more than 300 companies start franchising. Currently, India has 4600 active franchise operators, operating more than 200,000 franchises. From the data records, regional brands make up 50% of the franchise industry in India, while national brands make up 34% and international brands make up 16%. At present, the Franchise Industry in India is valued at Rs. 800 billion and is expected to grow from 30% to 35% every year. The Franchise Industry has created innumerable jobs and opportunities and has contributed 2% to India’s GDP. Some of the most preferred sectors for Franchise in India are food service, retail, beauty and wellness and the healthcare sector.
Due to various factors, India has been a significant hotspot for multinational companies. Over the years, international food and retail chain companies such as McDonald’s, Starbucks, KFC, Pizza Hut, Dominos, Subway Dukin, Baskin Robbins, and Zara have developed a strong foothold in the Indian market.
Some Italian Food companies have also opted for this business model to establish their brands in India. Food chain companies such as Little Italy have over 50 outlets in 20 cities. Another food brand called the De Pasta Story also has their presence in India serving authentic Italian cuisine.
TYPE OF FRANCHISE
The Franchise models is categorized in various forms and structures such as
- Company Owned Company Operated (COCO) – which is directly owned and operated by the brand. It is also called as a Flagship model wherein the franchisor finances the entire franchise.
- Company Owned Franchise Operated (COFO) – Under this model the initial investment is funded by the Franchisor and the Franchisee thereafter funds the other operational costs and expenses.
- Franchise Owned Company Operated FOCO) – Under this system, the initial investment is funded by the Franchisee and thereafter the franchising company manages and operates the business.
- Franchise Owned Franchise Operated (FOFO) – In this form of business model, the franchisee buys the franchise from the franchisor and bears full responsibility for the business and in return pays a stipulated royalty.
However, before entering any of the above models, it is essential to understand the legal framework that governs this business model.
THE LAW
Franchise as a term has been interpreted under the Finance Act of 1999 as “referring to an agreement granting the authorized entity the right to sell, manufacture goods, provide services, or engage in business activities associated with the Franchisor.
India, unlike Italy, does not have a specific regulation governing the Franchise business in India. Under the Italian Laws, a specific regulation on franchises, called Law No. 129 of May 6, 2004 which is applicable to all franchise agreement, was incorporated to protect the Franchisees. However, in India, laws and regulations governing the contractual relationship between the Franchisee and the Franchisor are segregated into various laws such as the Indian Contract Act of 1872 which provides the basis on which the franchise agreement can be regulated. Other regulations such as the Foreign Exchange Management Act, 1999, Competition Act, 2002, Income Tax Act, 1961, Arbitration and Conciliation Act, 1996, Specific Relief Act, 1963 and Intellectual Property Laws have made specific provisions dealing with Franchise transactions.
Before investing into a Franchise business in India, it is important for the Foreign investor to check the Foreign Direct Investment Policy of India, which governs specifically to each industry the percentage of investment that can be made by the foreign investor either under the automatic route or the approval route.
Pursuant to the investment understanding, the Franchise business model is based on understanding as incorporated in the Franchise Agreement. While drafting the Franchise Agreement it is important that certain key elements are well defined in the agreement. The Franchise Agreement shall make clear provisions for the relationship between the franchisor and franchisee, the duration of the operation, territorial rights, operation standards and procedures, franchise fees and royalties, provisions for training and support, site selection, advertisement and branding, Intellectual property rights, termination, confidentiality, insurance and other essential clauses.
CONCLUSION
In today’s world of globalization, franchising has emerged as a viable and highly successful business model. The franchise industry in India is expected to grow to USD 140–150 billion in the next five years. This growth is attributed to increased consumer spending and more franchise opportunities.