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Franchising in India - Top 5 considerations for international brands

Following the election of the Bharatiya Janata Party (BJP) on 26th May 2014, there is a very high expectation among the Indian people that the new regime will bring in swift reforms to the ailing Following the election of the Bharatiya Janata Party (BJP) on 26th May 2014, there is a very high expectation among the Indian people that the new regime will bring in swift reforms to the ailing economy, which has suffered from policy paralysis, excessive bureaucratic hurdles, rampant corruption, high inflation and unemployment and devaluation of the rupee.

For foreign brands which are looking again at the Indian market, franchising continues to be an attractive expansion technique. However, despite the obvious attractions of doing business in India, such as its large population, a legal system based on common law, English being a widely spoken language and an established parliamentary democracy, there are a number of factors which need to be considered carefully before entering into arrangements with franchisees.

1. Choosing the right franchisee

It is very important to carry out a thorough due diligence of potential partners. India is a vast territory with numerous regional idiosyncrasies, so a partner's access to finance, the reach of their business infrastructure, political connections and their appreciation of the brand values are crucial to achieving a successful roll out of the business. The Indian court system is slow and in desperate need of reform and will be of little assistance if things go wrong.

2. Territory

India is a sub-continent with 27 States and 7 Union Territories. Each region has it own language, culture, complex local or state laws and customs. It is not always possible for a successful business in one region to access the whole country, not just because of financial reasons, but sometimes simply not having the right connections in other regions necessary to grow the business. There can also be a variation in the demand for types of products or services within India. Granting rights for the whole of India to a franchisee may result in good performance in some regions but underperformance in others. This can sometimes be overcome by granting franchise and development rights to one of the large conglomerates, but then the franchisor may feel powerless in a relationship where the franchisee calls the shots.

3. Realistic targets

It is necessary to assess whether the product or service has appeal in India, and in which regions. Just because there is a large population and buying power does not mean that culturally the product or service is appropriate. A franchisee may be willing to invest in adapting the product or service to Indian tastes but in return they would expect less onerous targets from the franchisor.

4.  Sectoral policies

Franchising is a relatively easy way to enter India as it does not require formal governmental consents prior to doing business. Further, restrictions in relation to repatriating royalty fees or having parallel businesses have been removed. There are, however, specific policies that can affect certain sectors such as retail and it is advisable to find out whether there are any relevant compliance issues in relation to the business of the franchise.

For more information on the regulation of e-commerce in India, please click here: Choosing the right expansion model: e-commerce restrictions on foreign brands operating in India

5. Pre-contractual disclosure

There are no formal requirements for pre-contractual disclosure, nor are there any governmental registration requirements for foreign franchisors, unlike many other countries in the region. However, there is a general lack of understanding of the franchise relationship and claims for misrepresentation are relatively common. It is therefore highly recommended that a franchisor provides full information to the prospective franchisee about itself and its business prior to signing the franchise agreement. This enables the parties to address any misunderstandings at an early stage and a signed disclosure document can be invaluable in defending a claim for misrepresentation.

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