Franchising
In commercial and business sense the word "Franchise" means a permission granted by a manufacturer to a distributor or retailer to sell its products within a specified territory. A franchise can be equated with a licence. A franchise may include a contract whereby the owner of a business grants to another person permission to carryon a particular business using the grantor's know-how and trade mark as the grantee's own business. The grantor may exercise continuing control over the management of the grantee's business and give all possible support in carrying on the said business. This is done for a consideration agreed upon by the parties.
The grantor of such licence is in modern terminology called "Franchisor" and the grantee as "Franchisee". In some cases the Franchisee can carry on his existing business and take on the franchised business and both can be run at the same premises by the Franchisee. If required a Franchisee has to set up a factory and install plant and machinery to carry on the franchised business. By such franchise the Franchisor does not control his business but finds an additional outlet for sale of his products. The Franchise Agreement may require the Franchisee to deal exclusively with the franchised articles subject to any statute relating to Monopoly and Restrictive Trade Practices.
Franchising can be done within the same country by division of geographical area or Franchisor appointing the Franchisee in another country to expand its market share of the product.
Franchising can be in respect of an existing business or a new business.
Franchising agreement may be in respect of construction business, automobile parts and services, petroleum products, business aids and services, education services, soft drinks, fast foods, restaurants, health, medical, beauty care, commercial and other miscellaneous matters.
A Franchisor appoints a Franchisee to sell his products in a new geographical area in a new market to increase his sales and income. To capture markets in other countries franchising is one of the methods, the other method may be establishing a subsidiary company or a joint venture or a new company in collaboration with the Franchisee company. It is a pure commercial matter and profit motive is the main criteria for the Franchisor and the Franchisee.
The advantages of a Franchise Agreement is that the Franchisor expands markets of his products and earns more profit and the advantage of the Franchisee is that it deals with a product already having a goodwill and reputation on its own right and thereby expecting a good turnover and consequently substantial profit. The Franchisee gets almost an assured share of the market for the product and as such he runs less risk of operating loss or loss of capital that he may invest for the franchised goods.
The Franchisor to protect his own interest must see that the Franchisee does not act for another franchisor and proper accounts are maintained and royalties and other payments are made regularly to the Franchisor by the Franchisee for use of the franchised items including goodwill. The Franchisor to protect its interest may try to control and regulate to some extent the business of the Franchisee. The Franchisee to earn this extra income by using the goodwill of the Franchisor has to surrender a portion of his liberty and is to carry on his business in consultation with the Franchisor and make utmost efforts to pay royalties and fees in time. Franchisor has an advantage over ordinary distributorship inasmuch as in normal circumstances the owner of the goods do not have sufficient control over the distributor and the distributor may not have any shop or outlet except his own godown. For the purpose of business profits and development a Franchising Agreement is more beneficial for both the manufacturer and the seller.
Before entering into the Franchising Agreement the Franchisee must satisfy himself that the Franchisor has in fact a goodwill and that his goods will be sold at a profit without much efforts. The Franchisor would see that the Franchisee has enough capital to invest and has a good set up to carry on the business of the franchised goods efficiently and profitably, the capital adequacy of the Franchisee and the know-how about the business or matter to be franchised. The Franchisee may be given some training so that he may make himself fully acquainted with the product of the Franchisor and become competent to deal with the customers and give satisfactory services to them. The Franchisor after giving the franchise will pass on the up-to-date technology to the Franchisee so that the products and services of the Franchisor may stand the competition of the market.
The Franchisor is to make sure that he will get payment by way of royalties and/or fees for the goods, services and/or technology transferred to enable the Franchisee to carryon the business in the franchised goods or services. The Franchisor may demand a lump sum payment in the beginning and thereafter royalties on the sale proceeds or on any other basis depending upon the nature of the transaction. If the Franchisee has no funds the Franchisor may help the Franchisee in raising loans from the Financial Institutions or by issue of shares. The Franchisor may take shares in lieu of lump sum, royalty and services thereby to some extent solving the cash flow difficulty of the Franchisee.
So long the parties are reasonably honest the Franchising Agreement will remain effective and both parties would gain but if one of the parties try to deprive the other of his legitimate dues the Agreement would fail and both will suffer. Therefore good faith and honesty of purpose will be essential in such an arrangement.
The requirement of capital in the business of Franchisee and the 'extent of control by the Franchisor over the business will depend upon the nature of the subject matter of the franchise. The Franchisor has to supervise to some extent the working of the Franchisee's business and to see that the Franchising Agreement works to the advantage of both the Franchisor and the Franchisee. Unless it is profitable for both the parties the agreement cannot work. There must be also provisions making it difficult for either party to deprive the other of his legitimate dues and/or expectations.
Before entering into the agreement both the Franchisor and the Franchisee should obtain all required information in respect of each other and consider whether in the particular type of business the arrangements would work profitably for both the parties.
The Franchise Agreement may contain all possible safeguards to avoid any misunderstanding at a later date. Both parties must see that the franchising business develops and remains prosperous. Unless the business is running well the Franchisee will not be able to pay the royalties or service charges and the Franchisor will not be able to recover its dues by way of royalties and service charges. Any litigation will damage the image of both the parties. A businessman will be reluctant to enter into any agreement with a Franchisor or a Franchisee who was involved in litigation in respect of its business transaction.
The quantum of lump sum initial payment, the rate of royalty and other payments to be made by the Franchisee are to be calculated taking into consideration the probable turnover in the business of the Franchisee, his capital structure, his access to market, his management efficiency as also capacity. In other words the financial solvency, technical ability, a fund of goodwill and good faith are required from both the parties to make the Franchise Agreement a success.
For foreign investment in India Reserve Bank of India permission will be required. Foreign companies and Nationals will require prior permission of RBI to carry on in India any activity of a trading, commercial or industrial nature or to set up a project or an office or a place of business for carrying activity. For the purpose of execution of any specific project or contract if the foreigner wants to obtain a temporary office then prior permission of RBI will be required. Foreign Franchisor intending to set up once in India or to post a representative for liaison activity will require prior permission of RBI.
A foreign national or company with the permission of RBI may accept an appointment as an agent in India of a foreign Principal in his trading or commercial transaction. If the foreigner takes up employment in India or acts as an Advisor in India on non-repatriable basis then RBI permission will not be necessary.
Franchise Agreement that provides professional, technical, accountancy or consultancy services being a self-financing unit within India will require RBI approval if any remittance to foreign country is involved.
If a technician of a foreign Franchisor is on a short visit to train or supervise the staff or operation of the Franchisee, the Franchisee can pay for the air fare and expenses in India of the foreign technician in Indian rupees. General permission of RBI is required to import or export Indian Currency.
Permission of RBI is necessary for giving a Guarantee in respect of debts, obligations or liabilities in favour of a person resident outside India. A Franchisee for opening a Performance Guarantee or for issuing a Letter of Credit in favour of the foreign Franchisor will have to obtain prior permission of RBI.
A Franchisee who seeks to obtain technical know-how must obtain the approval of RBI, for technical know-how or the collaboration agreement with the foreign Franchisor, the Franchisee has to obtain RBI permission for lump sum payment, remittance for royalty or technical fees. In approving such agreement RBI designates the branch of the authorized dealer preferably a Bank through whom remittances of the fees and royalty are to be made. In granting such permission RBI may modify the agreement in relation to payment. The authorized bank is under obligation to strictly follow RBI terms and conditions of remittances and of the Franchise agreement. The bank is required to maintain separate records for remittances under the Franchise Agreement till 5 years after termination of the agreement.
The Franchisee has to submit a return by 15th of January every year showing payments made under the agreement during the proceeding year. The Franchisee gives a guarantee to the Income Tax Authorities on behalf of the foreign Franchisor for payment of tax or to deduct tax at source at the applicable rates and deposit the same to the account of Income Tax Authorities. A No Objection Certificate or tax clearance certificate is required from the Income Tax Authorities before any remittance can be made to the foreign Franchisor.
A Franchisee may engage the services of a foreign national on a short term assignment not exceeding 3 months at a time without the approval of RBI. All payments made in connection with the foreign personnel including payments made locally in rupee towards their travel, living expenses, etc. are liable to a cess at 5% under the Research and Development Cess Act 1996. For employment of a foreign national for technical assistance for more than 3 months Home Ministry's permission has to be obtained. Foreign nationals who are in regular employment with a Franchisee on monthly salary are permitted to make recurring remittances for family maintenance up to 75% of net salary after deduction of Provident Fund contribution and Indian Income Tax. A Franchisor having a branch in India has to obtain permission from RBI for remittance of profits.
Dividend, interest and other income on shares and securities and sale proceeds thereof originally acquired out of the remittance in foreign exchange may be repatriated after obtaining permission of RBI subject to deduction of Indian Income Tax. A Franchisee intending to remit dividends to its non resident shareholders has to obtain permission of RBI.
In respect of foreign investments in about 22 Consumer Goods Industries, RBI has stipulated remittance of dividend on a balancing system rendering thereby that the amount of foreign exchange outflow by way of dividend should be balanced with similar amount of inflow of foreign exchange by way of export earnings.
A foreign Franchisor or a foreigner requiring permission of RBI to acquire, hold, transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise any immovable property in India excepting a lease not exceeding 5 years has to apply to Central Office of RBI, Foreign Investment Department in Mumbai.
By a notification dated 26th April 1993 RBI has granted general permission to foreign companies to acquire or hold any immovable property which is necessary for or incidental to any activity permitted by the RBI. On obtaining such permission the company has to submit a declaration to RBI within 90 days of such acquisition.
Foreign citizens, foreign companies, foreign trusts, societies and associations will be permitted to acquire immovable property by RBI provided the immovable property is acquired for consideration and is paid out of the foreign exchange remitted from abroad in convertible currency through normal banking channel and any income or proceeds of the property are to be credited only to the non-resident Rupee account and will not be allowed to be repatriated.
By a notification of 26th May 1993 RBI has granted permission to the foreign citizens of Indian origin who are resident in India or not to acquire or dispose of immovable property other than agricultural land, farm house and plantation property subject to fulfillment of certain conditions.
Foreign Franchisor cannot acquire any business in India as of right. The right of a foreign Franchisor under any Franchise Agreement will be subject to permission of RBI. RBI permission is necessary for acquiring the whole or part of any industry in India in trade and industry.
Provisions should be made to resolve the disputes between the Franchisor and the Franchisee in relation to their transactions. Both parties must consider whether arbitration in a foreign country would be feasible both from economic point of view and conducting proceeding in a foreign country involving huge foreign exchange. Provisions may be made to buyout the business of one party by the other in respect of which Franchise Agreement was entered into in the event of any such dispute.
