Franchising in India: An opportunity for Korean business

Franchising as a business strategy provides attractive opportunities for foreign companies looking to expand their businesses in India’s thriving markets. The Indian franchise market is expected to reach USD140 to 150 billion during the coming five years. There are now more than 4,600 franchisors operating almost 200,000 stores across the country, with over 53 per cent of franchised locations operated by multi-unit franchisees.

The franchise business model has gained considerable popularity in India because of its low risk and cost-effectiveness. A franchisor allows a franchisee to use its brand, products and operational model in exchange for fees and ongoing royalties. The franchisee enjoys the benefits of entering the market with a recognised brand, an established customer base and a well-defined operational framework. This is a win-win situation for both entities.

Franchise arrangements are essentially licensing agreements for intellectual property rights (IPR) and know-how. They allow the franchisor to grant the franchisee the right to use and exploit its licences, trademarks, patents, copyrights, trade secrets and operational know-how for marketing, branding, manufacturing and technology. It is important for franchisors to ensure that their rights are adequately protected through franchise agreements and IP licensing agreements.

As its legal framework provides strong protection for IPR, India is an attractive destination for foreign businesses to license their IP and expand their presence in a growing market through franchise models. Although India has no specific legislation governing franchise models, it aligns itself with international standards through legislation such as the Indian Contract Act, 1872, the Copyright Act 1957, the Trademark Act, 1999 and the Competition Act, 2002. These provide significant protection and safeguards to businesses interested in setting up franchises.

Because franchising involves the licensing of IPR to franchisees, it is imperative for the parties to enter into IP and know-how licensing agreements. These should cover the nature and scope of the IPR which will be licensed to the franchisee; rights to safeguard proprietary business know-how, and trademark rights; territorial exclusivity, specifying the geographical limit on the use of the licensed IPR; term of the agreement and the events leading to its termination; and trade secret and confidentiality obligations on franchisees should also be in the agreement. Such matters set out the circumstances resulting in unauthorised use and disclosure. The parties should agree on indemnification and limitation of liability, which will cover the consequences of breach of agreement and misuse of IPR, and dispute resolution governing law provisions, specifying how and where disputes between the parties will be resolved.

Franchisors can also include confidentiality and other limited post-termination restrictions on Indian franchisees in order to protect their rights and prevent franchisees from setting up competing businesses. However, validity and enforceability will depend on the nature of the restrictions and whether they are unfairly onerous.

In a franchise, the franchisor may receive revenue streams that may include a one-time franchisee fee paid by the franchisee; ongoing royalties, usually on a monthly or weekly basis, and rebates from vendors based on the percentage of franchisee purchases.

Indian foreign investment regulations and local rules in retail trade are often stringent. Foreign retailers including ones in luxury retail, usually prefer franchising arrangements with Indian retailers. In such cases they rarely have to set up their own local subsidiaries. They can have a presence through franchising or by setting up joint ventures (JV) with Indian companies, such JV companies then getting licences to set up franchisee outlets in India.

The future of franchising in India appears promising because of India’s robust economic growth and a steady rise in middle-class disposable income. India’s ever-expanding economy has been a significant driver, fostering a favourable environment for business expansion and investment. With the popularity of Korean brands in India, franchising may be an opportunity for Korean businesses to explore. However, they should remember that to establish successful franchise businesses in India they must have detailed and clear agreements.

Rajat Prakash is managing partner, Siddharth Mahajan is a partner, Vishwas Chitwar is an associate at Athena Legal.