India is an attractive destination for a franchising entrepreneur. The continued growth of the economy and the central government’s continuous efforts to liberalise the foreign investment policy and improve the ease of doing business has led to foreign investors considering India as an attractive investment destination. The Indian franchising market has been projected to quadruple between 2012 and 2017 and its estimated worth is expected to reach approximately US$50.4 billion by 2017.2
Today India is home to over 3,700 international brands that have entered the market using the franchising model.3 Many of these are food and beverage (F&B) and luxury brands. Prominent examples include Burger King, Pizza Express, Dunkin’ Donuts, Hard Rock Cafe, Hermès, Fendi, Burberry, Bottega Veneta, Paul Smith, Jimmy Choo and Roberto Cavalli.4 In 2015, Jamie Oliver launched two restaurants in India, both being set up in partnership with Dolomite Restaurants Pvt Ltd; in addition H&M, part of the largest retailer in the world, and GAP entered the market.
Looking ahead, F&B, education, fashion, hospitality and tourism will continue to emerge as high-potential service sectors for franchising.5
II MARKET ENTRY
Various market entry options are available to foreign brands. The available options include operating the Indian business through an Indian subsidiary wholly owned by the foreign brand; entering into a joint venture, franchise arrangement or licensing arrangement with an Indian partner; or a combination of these structures.
Foreign investment is permitted in India in most sectors of the economy, except for sectors such as atomic energy, lottery, gambling, etc. where foreign direct investment (FDI) is not permitted. The few limitations that may affect a prospective franchise arrangement are as follows.
India’s FDI policy is relevant for foreign brands looking to own an equity interest in Indian businesses. The policy prescribes the requirements for foreign investment, including the extent to which foreign investment is permitted and if the investment needs any government approval. India’s current policy makes the following provision.6
Foreign companies can own up to 100 per cent equity interest in an Indian company offering single-brand retail services. For this purpose single-brand retail refers to retail trading of products that are sold under a ‘single brand’ – that being the brand name under which the products are sold internationally. Products should be branded as such during manufacturing. International brands such as Zara, IKEA, Mothercare, Clarks and Marks & Spencer have entered India using this route.
Although 100 per cent FDI is permitted in single-brand retail, prior approval of the Foreign Investment Promotion Board (FIPB) is required for foreign investment in excess of 49 per cent. If foreign investment in the Indian company exceeds 51 per cent, then 30 per cent of the value of goods purchased by the Indian company must be sourced from India, preferably from micro, small or medium-sized enterprises, village and cottage industries, artisans and craftspeople. These sourcing norms do not apply up to three years from the opening of the first store by single-brand retail entities having state-of-the-art and cutting-edge technology, and where local sourcing is not possible.
An application seeking permission to invest more than 49 per cent in a single-brand retail company must specifically indicate the product or product categories to be sold under the single brand and any change in product or product categories to be sold requires prior approval of the government. In cases of foreign investment up to 49 per cent in a single-brand company, the list of product or product categories to be sold, except food products, must be provided to the Reserve Bank of India.
Entities permitted to undertake single-brand retail trading are also permitted to undertake e-commerce activities.
Foreign companies can own up to 51 per cent equity interest in an Indian company offering multi-brand retail services, with prior FIPB approval. An Indian company operating multi-brand stores, and that has foreign investment, can set up stores in states that have permitted multi-brand retailers to operate. In the permitted states, stores may be set up in cities above a specified population. Additionally, sourcing conditions similar to those set out above for single-brand retail apply to multi-brand retail: multi-brand retailers are required to invest a minimum amount of US$100 million and certain requirements for investment in back-end infrastructure must be satisfied. The UK-based Tesco Plc was the first to apply and obtain DIPP approval to carry out the business of multi-brand retail trading in India. The Modi government has not changed the FDI policy in this respect, but equally this sector has not seen any foreign investment since the Modi government took office.
An international franchisor that does not wish to own an equity interest in the Indian business may, subject to Indian law, grant franchise rights to a local franchisee to establish and operate the brand in India through a contractual mechanism. There are no restrictions on a foreign entity granting master franchise or development rights to a local entity and, given the geographical size of India, it is not uncommon for international franchisors to appoint several master franchisees responsible for specific parts of India. Currently foreign investment rules do not permit foreign companies to invest in or establish companies in India that are engaged in an inventory-based model of e-commerce,7 although relaxations have been made for single-brand retail companies to engage in e-commerce, and FDI up to 100 per cent has been permitted in marketplace-based models of e-commerce, subject to certain conditions.8
Owning real estate
Indian exchange control regulations impose restrictions on non-Indian nationals and companies acquiring real estate in India. However, franchisors who have established a branch office or other place of business in India, or companies incorporated in India that are owned by international franchisors, can acquire immoveable property, including through a lease as necessary for or incidental to carrying on their activity.9
Indian exchange control laws10 are relevant to several aspects of franchise arrangements, particularly with regard to payments between Indian franchisees and international franchisors. Indian franchisees can make royalty payments and remit fees for technical services to international franchisors without any limit and without approval of the Reserve Bank of India (RBI). Certain other trade payments may also be made without approvals. If the payment sought to be made to an international franchisor does not fall within the permissible categories, the Indian franchisee will require specific approval from the RBI to make the payment. The approval process can be time-consuming and it is uncertain whether the RBI would grant approval. Therefore, it is advisable to seek legal advice on the type of payments proposed to be made under the franchise arrangement so as to ensure that the payments are correctly structured in such a manner that they are freely permissible under the Foreign Exchange Management Act 1999 (FEMA).
III INTELLECTUAL PROPERTY
Following India becoming a signatory to the WTO TRIPS Agreement,11 Indian intellectual property (IP) laws were amended to make them more consistent with globally accepted IP norms and practices. These amendments coupled with better enforcement of the law have significantly improved the IP protection regime.
To protect their trademarks and brands, franchisors will normally also register their trademarks in India. They enter into contractual arrangements with the franchisee, such as through trademark licence agreements or by including detailed provisions in the franchise agreement.
i Brand search
The process of searching for protected trademarks and other IP relevant to franchises (such as image rights) is quite simple. This can be done using the public search engine for trademarks on the Ministry of Commerce and Industry website.12 For a franchisor considering India as a franchising destination, this search engine can be helpful as it can enable a potential franchisor to identify commonly known marks and prohibited marks, while also showing the business images that are currently trademarked in India.
ii Brand protection
To register a trademark, the proprietor of the mark must make an application in the prescribed form.13 Applications for registration of trademarks are examined by the Registrar of Trade Marks. If the Registrar decides to accept the application, the application is published in the official gazette, the Trade Marks Journal. Following publication in the gazette, any person can, within a specified period, file an opposition. Where oppositions are filed they must be dealt with according to the procedure prescribed and the decisions of the Registrar may be appealed before the Intellectual Property Appellate Board. If no opposition is filed within three months, the trademark proceeds to registration. Registered trademarks are protected in perpetuity subject to renewal of the registration after every 10 years.
If a trademark is infringed, civil remedies can be pursued under the laws of passing off or under the Trade Marks Act 1999 (the Trademarks Act) depending on whether the trademark in question is registered, pending registration or unregistered. Further, in respect of registered trademarks, criminal remedies set out by the Trademarks Act may also be available. Typically, in cases of trademark infringement, provided the court is satisfied, interim injunctions may be obtained to stop the infringing conduct until the infringement suit is decided. Such injunctions are normally granted at an early stage of the trial.
Indian courts have generally been good at recognising the international reputation of trademarks even if the trademark is not registered in India. There have been numerous examples where courts have stepped in to protect unregistered trademark holders, for example, in the Calvin Klein case.14 More recently, courts have also restrained online retailers from using branded names, such as L’Oréal, to sell cosmetics.15
In addition to the Trademarks Act, customs laws prohibit import of infringing goods into India. Holders of registered trademarks may notify Indian customs authorities of goods infringing their IP rights. The customs authorities are empowered to suspend clearance of infringing goods and take certain other actions as are specified in the relevant rules.16
Know-how belonging to a franchisor may also be protected under the Indian Copyright Act 1957 or the Patents Act 1970 if it is capable of protection under those laws. If statutory protection is not available to know-how, contractual remedies will still be available to the franchisor and it is usual to see detailed provisions in the franchise agreement dealing with protection of know-how.
iv Data protection and e-commerce
Customer data is important for companies looking to market or cross-sell their products. India’s data protection provisions are not located in one cohesive piece of legislation. This can therefore be an area that needs careful consideration by lawyers reviewing the types of personal data that may be collected by the franchisee or the franchisor and the impact that legislation such as the Information Technology Act 2000 (the IT Act) and the Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules 2011 (the DP Rules) may have on the manner in which personal data may be collected, handled, stored and processed.
On a strict reading of the DP Rules, difficulties can arise in determining whether the DP Rules apply to personal data that is not sensitive personal data and to companies that are not based in India. The pragmatic view is that consent should be obtained to collect, process, store, handle and export personal data. In addition to the DP Rules, Indian law generally recognises the right to privacy of an individual and a person who discloses personal data in violation of their contractual obligations commits an offence under the IT Act.
So far as sensitive personal data is concerned (which includes bank and credit card information), the DP Rules would generally apply. Under the DP Rules, sensitive personal data must not be exported to a country that does not afford the same level of data protection as that offered by the DP Rules, although export is permitted if the transfer is necessary for performance of a contract or if consent for the transfer has been obtained from the data controller or the data subject.
The IT Act also deals with cybercrime such as hacking, identity theft, tampering with computer records, and prescribes penalties and offences in respect of those matters.
IV FRANCHISE LAW
Unlike many jurisdictions, India does not have a specific statute dealing with franchise matters. The closest point for interpretation can be seen in India’s Finance Act, which had defined ‘franchise’, in the context of service tax, to mean 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 a franchisor, with respect to any trademark, service mark, trade name, logo, etc. A ‘franchisor’ is defined as any person who enters into a franchise with a franchisee and the term ‘franchisee’ is construed accordingly.17
However, the Indian Contract Act 1872 (the Contract Act), the Sale of Goods Act 1930 and the Specific Relief Act 1873, which apply to all commercial arrangements, are relevant to franchise agreements (these are discussed in detail below).
In contrast to the requirements in the United States, there are no laws requiring a franchisor to provide a lengthy franchise disclosure document to potential franchisees within a stipulated period prior to signing the franchise agreement. Aspects of potential litigation, bankruptcy, initial fee, estimated initial investment, etc. are expected to be captured by a party’s own due diligence and commercial understanding. Franchise agreements are not required to be registered in India.
Indian law does not regulate termination of franchise agreements. Parties are therefore free to incorporate provisions in the franchise agreement dealing with termination. Franchise agreements will usually permit termination for breach of contract and insolvency, and stipulate the consequences of termination.
If the franchise agreement is terminated, an international franchisor’s ability to take over the franchisee’s business is predicated on the applicable foreign investment guidelines. If the Indian company operating the business is a joint venture between the international franchisor and the Indian franchisee, in the single-brand retail sector, the franchisor could acquire the franchisee’s interest in the joint venture such that the Indian company becomes a wholly owned subsidiary of the international franchisor. However, if the Indian company operates in the multi-brand retail sector, and assuming the current foreign investment guidelines continue to apply, the international franchisor could not acquire all the franchisee’s interest in the joint venture and would have to find a local Indian partner to own 49 per cent interest in the Indian company. Alternatively, if the international franchisor wishes to exit the joint venture, it could sell its stake in the joint venture, to the franchisee.
The FEMA provides that transfer of shares in an Indian company by a foreign party to an Indian party must not take place at a price more than the fair value calculated using any internationally accepted pricing methodology for valuation of shares on an arm’s-length basis. The foreign party must not be assured an exit price at the time of making its investment and the price must be certified by a chartered accountant or a merchant banker registered with the Securities and Exchange Board of India.18
In a purely contractual relationship where the franchisor does not own an equity interest in the franchisee or the Indian company operating the business, the franchise agreement should specify the consequences of termination, including any step-in rights for the franchisor. Step-in rights must be drafted keeping the FEMA in mind. For example, under the FEMA, foreign companies cannot directly enter into a lease for property in India, except in limited circumstances (as discussed in Section II.iv). Therefore, an international franchisor desirous of stepping into the franchisee’s position will need to establish an entity in India to whom the lease may be assigned.
The Contract Act deals with various matters, including formation, performance and breach of contracts. Contracts are voidable at the instance of an innocent party in certain circumstances, including if consent to the contract was granted by the innocent party because of misrepresentation. Alternatively, the innocent party may insist on performance of the contract consented to as a result of misrepresentation, and be put in a position such that the misrepresentation was not made.19 Misrepresentation is defined in the Contract Act as:
- a a positive assertion of untrue matters (although the person making the assertion believes it to be true);
- b a breach of duty that gains advantage to the person committing the breach by misleading the other person to their prejudice; and
- c causing (even innocently) a party to a contract to make a mistake as to the subject of the contract.20
Importantly, a contract that is formed as a result of consent being given on account of a misrepresentation is not voidable if the innocent party had means of discovering the truth by due diligence.21
Sale of Goods Act
Inter alia, the Sale of Goods Act 1930 stipulates conditions that are implied into contracts for sale of goods (some of which can be contractually waived), rules relating to passing of title and risk in the goods, and the remedies for breach of such contracts.
Specific Relief Act
The Specific Relief Act 1963 set outs the remedies available for enforcement of contracts. Specific performance of a contract is a discretionary remedy that may be awarded if the court is satisfied that damages would not be adequate for breach of a contract.
ii Guarantees and protection
Franchise agreements may require a franchisee to deliver a parent company guarantee or a bank guarantee, guaranteeing performance of the franchisee’s contractual or payment obligations under the franchise agreement. Guarantees are contractual in nature and are regulated by the Contract Act.
Under the FEMA, an Indian company or individual cannot issue a guarantee in favour of a company or individual resident outside India, except in limited circumstances, without prior permission of the RBI and there is no certainty as to whether the permission would be granted by the RBI.
Normally payments under franchise agreements attract direct and indirect taxes in India. Income tax will be payable by a franchisee on the income earned from franchise operations. If the franchisee is providing a service to consumers (for example, a restaurant), service tax will be payable by the entity providing the services. Value added tax would also be payable on sale of goods by the franchisee. As value added tax is levied by each state in India, the rate of tax payable may differ from state to state.
The government proposes to introduce a goods and services tax (GST). The Constitution of India has been amended to pave the way for GST’s introduction, but work is under way with respect to ancillary legislation and administrative machinery required for its implementation. The government hopes to implement GST between 1 April 2017 and 16 September 2017. Once implemented, GST would replace indirect taxes on goods and services such as central taxes (e.g., central excise duty, additional excise duty, service tax, additional custom duty and special additional duty) and state level taxes (e.g., VAT or sales tax, central sales tax, entertainment tax, entry tax, purchase tax, luxury tax and Octroi). Therefore, GST is likely to be a game changer and would have a cascading effect on the economy once implemented.22
i Franchisor tax liabilities
A franchisor may be liable to pay income tax in India if it is resident in India for tax purposes. If the franchisor is based outside India, the franchise agreement should be structured carefully because if the franchisor is considered to have a permanent establishment in India, there may be tax consequences.
ii Franchisee tax liabilities
Subject to the FEMA provisions, a franchisee can make royalty payments to an international franchisor from India.23 However, the franchisee will be obliged to withhold tax on payments towards royalties and technical services made to the franchisor under the franchise agreement. The rate of withholding tax is 25 per cent (plus any additional cess or surcharge). This is subject to double-taxation avoidance agreements (DTAA), or treaties, and for treaty countries the effective withholding tax liability may be reduced. India has in force DTAAs with approximately 120 countries.24
India recognises franchising as a taxable service. This covers agreements, including those that are incidental to a franchise arrangement (for example, licensed production agreements). Any agreement by which the franchisor grants representational rights to a franchisee (to sell, manufacture goods or provide services identified with the franchisor) will be liable to pay service tax of up to 14 per cent (plus any additional cess or surcharge).25 If the franchisor is based outside India, the franchisee will be legally obliged to pay service tax to the Indian tax authorities. Furthermore, depending on the terms of the franchise agreement, additional taxes such as customs duty may be levied on goods imported by the franchisee from the franchisor.
iii Tax-efficient structures
International franchisors often route their investment or contractual arrangements in India through entities based in tax-efficient jurisdictions.
VI IMPACT OF GENERAL LAW
i Good faith
Except in the context of fiduciary relationships, Indian law does not imply an overarching duty of good faith into contractual arrangements. Parties may, however, contractually agree a duty to act in good faith. Having said that, in the event of a dispute, even in the absence of any contractual understanding regarding good faith, courts will consider conduct of the parties in granting relief and the equitable principle that a party cannot take advantage of its wrongdoing may be considered by the court in granting relief.
The Contract Act deals with contracts of agency. An agency arises if a person is employed to undertake acts for another person or to represent that person. Franchise agreements will normally be drafted to clarify that the parties do not intend to create a principal–agent relationship. If an agency relationship is taken to exist, the provisions of the Contract Act that deal with such relationships would apply, including the principal being liable for acts of the agent in certain circumstances, such as tortious acts. There could also be tax consequences for the franchisor if the agent is considered to constitute a permanent establishment of the franchisor in India.
In instances of sub-franchising, the sharing of liability between parties would be governed by the contractual agreements between them.
iii Employment law
It is unlikely that the franchisee would be treated as an employee of the franchisor under Indian employment laws, as often the franchisee would be a corporate entity rather than an individual. It would be advisable to incorporate clear drafting in the franchising agreement demarcating responsibilities with respect to franchisee employees, and their salary and benefits. There are a plethora of employment laws in India, which cover aspects such as wages, payment of benefits, gratuity and leave. Companies formed in India are bound by these laws, and additional regulations depending on individual states may also apply.
iv Consumer protection
The Consumer Protection Act 1986 deals with the rights of consumers. While consumers can seek relief under this legislation for deficiency in goods or services supplied to them, by definition an entity that purchases goods, hires or avails of services for resale or commercial purposes is excluded from the definition of a consumer. Accordingly, a franchisee may not be able to pursue actions against a franchisor under this legislation, unless a more expansive view of the definition of ‘consumer’ is adopted by the courts.
v Competition Act and restrictive covenants
The Competition Act 2002 deals with anticompetitive agreements and arrangements that constitute an abuse of a dominant position. Broadly speaking, anticompetitive agreements, such as exclusive distribution agreements are void if they cause or are likely to cause an appreciable adverse effect on competition within India, although there are exceptions that entitle a person to restrain infringement of or impose reasonable conditions to protect rights conferred on it under the Trademarks Act and other specified statutes protecting IP. If the Competition Commission determines that a party is abusing its dominant position, based on the criteria specified in the Competition Act 2002, civil penalties may be levied.
Non-compete covenants that apply during the term of a contract would normally be enforced. Clauses in franchise agreements restraining a franchisee from carrying out competing business may be treated as reasonable by the Indian courts and historically have been held enforceable.26
The Contract Act generally provides that except in limited circumstances contracts in restraint of trade that operate after termination of the contract are void. Having said that, it is not unusual for franchise agreements to contain post-termination non-compete arrangements, while recognising that there may be limits on their enforceability. Non-solicitation obligations restricting a party from poaching employees of another party that apply during or after the term of a contract are generally enforceable.
Several statutes in India deal with fraud, anti-corruption and money laundering matters. In general, the Prevention of Corruption Act 1988 penalises corruption by public officials and both the public official as well as the giver of a bribe are potential offenders. It is important to note that there are no exceptions for speed money or facilitation payments under the Prevention of Corruption Act 1988. The Prevention of Money Laundering Act 2002 seeks to prevent money laundering, including laundering of property derived from corruption.
In addition to Indian laws, the US Foreign Corrupt Practices Act 1977 and the UK Bribery Act 2010 may also be relevant to the Indian operations, given their wide scope of operation. Recently, anti-corruption allegations seem to have been more robustly investigated and some convictions of high-profile people have occurred. A more transparent environment and rigorous enforcement of corporate governance and anti-corruption legislation is a positive development.
vii Dispute resolution
Since litigants face backlogs and delays in the Indian court system, it is usual for commercial contracts to provide for disputes to be settled by arbitration in India or outside India; for example, through the London Court of International Arbitration or the Singapore Court of International Arbitration.
The Arbitration and Conciliation Act 1996 (the Arbitration Act) is the Indian legislation relating to arbitration. The Arbitration Act is divided into several parts. Part I of the Arbitration Act deals with various stages of arbitration proceedings such as initiation and conduct of arbitration and enforcement, and challenge of arbitral awards. Part II of the Arbitration Act deals with enforcement of foreign arbitral awards (being awards delivered in foreign-seated arbitration proceedings) pursuant to either the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958 (the New York Convention) or the Geneva Convention on the Execution of Foreign Arbitral Awards 1927 (the Geneva Convention).
In relation to arbitration to which Part I of the Arbitration Act applies, Indian courts can grant interim measures, such as injunctions, before, during or after the making of an arbitral award but prior to enforcement of the arbitral award. An equivalent provision is missing from Part II of the Arbitration Act.
In a significant judgment27 handed down by the Supreme Court of India (India’s highest appellate court) in September 2012 (the Balco decision), the Court ruled that:
- a Part I of the Arbitration Act does not apply to arbitration proceedings seated outside India;
- b the Arbitration Act does not confer jurisdiction on Indian courts to annul foreign arbitral awards. This approach according to the Supreme Court is consistent with the New York Convention;
- c if the seat of arbitration is outside India, Indian courts are not empowered to grant interim relief. The court specifically observed that parties that choose to have the seat of their arbitration outside India are ‘impliedly understood to have chosen the necessary incidents and consequences of such choice’; and
- d if the seat of arbitration is outside India, pending conclusion of the arbitration proceeding, parties cannot file a suit in India for interim relief, even if the suit is limited to restraining a party from disposing of assets in India.
This judgment overrules a previous judgment of the Supreme Court in the case of Bhatia International v. Bulk Trading, wherein it was held that Part I of the Arbitration Act applied to all arbitration, whether seated in or outside India, unless the parties expressly or impliedly agreed to exclude application of Part I of the Arbitration Act. The intention was to enable parties to seek interim relief from Indian courts in foreign-seated arbitration, which would not otherwise be available under the Arbitration Act. However, this resulted in parties approaching Indian courts to apply other provisions of Part I of the Arbitration Act to arbitration seated outside India, so that Indian courts were entertaining proceedings relating to the appointment of arbitrators and the setting aside of arbitral awards. This overarching application of Part I of the Arbitration Act not only resulted in increased judicial intervention in arbitral proceedings as a result of an expansive interpretation adopted by Indian courts as to the grounds on which arbitral awards may be challenged on public policy grounds, but also delayed the progress of the arbitration proceedings, resulting in widespread criticism of the Indian approach.
Through the Balco case and another recent decision,28 the Supreme Court sought to establish a pro-arbitration trend as it sought to narrow the ability of Indian courts to interfere in foreign-seated arbitration and the public policy grounds on which foreign arbitral awards may be refused enforcement.29
The Arbitration Act has been amended by the Arbitration and Conciliation (Amendment) Act, 2015 (the Amendment Act).30 Some of the key amendments are outlined below:
- a Indian courts can grant interim relief and assist in collection of evidence in relation to commercial arbitrations seated outside India where at least one of the parties is not resident in, incorporated in or centrally managed and controlled in India. The Balco decision had created a position where Indian courts could not grant interim relief in support of foreign-seated arbitrations. This position has now been reversed by the Amendment Act.
- b The Amendment Act seeks to further define the ‘public policy’ ground for setting aside an arbitral award, a term that has previously been interpreted expansively by Indian courts. The Amendment Act states that this ground will only be applicable where (1) an award has been obtained by fraud or corruption; (2) an award contravenes the fundamental policy of Indian law; or (3) an award is in conflict with the most basic notions of morality or justice. Further ‘patent illegality’ has been recognised as a ground for setting aside arbitral awards only in domestic arbitrations and it has been clarified that an award should not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.
- c Given that arbitration in India was fraught with delays, the Amendment Act imposes a 12-month time limit for arbitration awards to be handed down. This time frame can be extended by six months with the consent of the parties. If the award is not made within this period, the mandate of the arbitrators automatically terminates and any extension can only be granted by courts upon sufficient cause being shown and subject to terms imposed by the court. There are also financial incentives in terms of arbitrator fees for awards being handed down within six months and penalties for delays in handing down awards.
- d Parties can also choose a fast-track procedure for completing arbitration within six months using a sole arbitrator.
Pursuant to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015,31 separate commercial courts at the district level and a commercial division of High Courts at the appellate level are being established to decide on commercial disputes of a specified value (currently 10 million rupees), including applications or appeals arising out of domestic or international commercial arbitrations. Importantly, the definition of commercial disputes includes disputes arising out of franchising agreements, distribution and licensing agreements.
While the enactment of these laws is promising, their actual impact on the dispute resolution process, including timelines for resolving disputes, in India remains to be seen. Until further clarity is available, it is recommended that franchisors choose to settle disputes by arbitration outside India over submission to jurisdiction of Indian courts.
VII CURRENT DEVELOPMENTS
Since taking office in May 2014, the government, led by Prime Minister Narendra Modi, has been key to boosting investment into India by providing responsive fiscal policies, improving the ease of doing business, rationalising the FDI policy and enhancing the economic and political climate. These reforms are visibly producing positive results: during the period January 2016 to September 2016, FDI inflow saw a growth of 28 per cent compared with the same period in 2015, and India has improved its ranking in the World Bank’s ease-of-doing-business rankings from 134th in 2015 to 130th in 2016.32
On 11 November 2016, the government demonetised high-value currency notes with a view to tackling issues of black money in the cash economy. Recent data suggest that the demonetisation decision has resulted in a fall in consumer demand following cash availability constraints. Opinion is divided on the impact this move may have on the economy, although there is an expectation that economic demand will slow down for a few months until the situation normalises.
Notwithstanding the limitations surrounding FDI in multi-brand retail and the demonetisation move, we believe that there are significant opportunities for international companies looking to establish a presence in India through the franchising model.
1 Nipun Gupta is co-head of the India strategy group at Bird & Bird LLP. Divya Sharma is a solicitor (registered in England and Wales) and an advocate (registered in India).
2 ‘Collaborating for Growth, Report on Franchising Industry in India 2013’ by KPMG and the Franchising Association of India, available at www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/Collaborating_for_Growth.pdf (last visited on 4 November 2015).
in-2015-724/#sthash.FjvF7ivC.dpuf (last visited on 4 November 2015).
5 See footnote 2, p. 6.
6 For details refer to the FDI Circular published by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, Government of India on a biannual basis. The circular as at 7 June 2016 is available at http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf (last visited on 19 December 2016).
7 An inventory-based model of e-commerce is defined as a model in which inventory of goods and services is owned by the e-commerce entity and sold to consumers directly.
8 A marketplace model of e-commerce is defined as the provision of an information technology platform by an e-commerce entity on digital and electronic networks to act as a facilitator between buyer and seller.
9 Under the provisions of the FEMA.
10 Indian exchange control laws are comprised of the FEMA and rules, regulations and notifications made under it from time to time. The FEMA is administered by the RBI, India’s central bank.
11 The Agreement on Trade-Related Aspects of Intellectual Property Rights is Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, signed in Marrakesh, Morocco on 15 April 1994.
12 https://ipindiaonline.gov.in/tmrpublicsearch/frmmain.aspx (last visited on 19 November 2015).
14 Calvin Klein Inc. v. International Apparel Syndicate 1996 PTC 293 (Cal).
15 Delhi High Court restrains online retailer from using L’oreal [sic] trademark’ (21 October 2014), at
http://articles.economictimes.indiatimes.com/2014-10-21/news/55279633_1_l-oreal-online-retailer-trademark (last visited on 19 November 2015).
16 Intellectual Property Rights (Imported Goods) Enforcement Rules 2007, available at
www.wipo.int/wipolex/en/text.jsp?file_id=201652 (last visited on 19 November 2015).
17 Finance Act 1994 (as amended), Chapter V, definitions 47 and 48, available at
18 RBI circular, https://rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9903 (last visited on 18 November 2015).
19 Section 19 of the Contract Act.
20 Section 18 of the Contract Act.
21 See the exception to Section 19 of the Contract Act.
23 Press Note No. 8 (2009 series), http://pib.nic.in/newsite/erelease.aspx?relid=56146.
25 Section 65 (105) (zze) of the Finance Act, 1994 (as amended), available at www.cbec.gov.in/resources//htdocs-servicetax/st-act-ason24oct2013.pdf;jsessionid=8F8F39FCC88A9540B9FCC13A022F4B92 (last visited on 18 November 2015).
26 Gujarat Bottling Company Limited v. Coca-Cola Company, AIR (1995) Supreme Court 237.
27 Bharat Aluminium Co v. Kaiser Aluminium Technical Services Inc, Civil Appeal No. 7019 of 2005.
28 Shri Lal Mahal Ltd v. Progetto Grano Spa (2014) 2 SCC 433.
29 The decision in Bhatia International was followed by courts in India on numerous occasions and also led to parties agreeing to exclude application of Part I of the Act in foreign-seated arbitrations by contract. In the Supreme Court’s view in the Balco case, to complete justice, the law declared by the Balco decision applies only to arbitration agreements executed after 6 September 2012 (the date of the Balco decision).
30 See http://taxguru.in/wp-content/uploads/2016/01/Arbitration.pdf (last visited on 6 January 2016).
31 For text of the Act see http://egazette.nic.in/WriteReadData/2016/167379.pdf (last visited on 6 January 2016).
32 See http://dipp.nic.in/English/Publications/FDI_Statistics/2016/FDI_FactSheet_April_Sep_2016.pdf (last visited on 19 December 2016), and www.doingbusiness.org/data/exploreeconomies/india/ (last visited on 19 December 2016).