Guidelines for Foreign Companies Franchising in India: Tips for Success of Franchise Business in India

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In the past few years, India has become a favourable place for businessmen to launch and expand their businesses. Because of the large population and diverse preferences of consumers, the one who understands them succeeds in its business. But launching or expanding business in India requires compliance with several regulations and policies. To provide some financial easement, India has time-to-time updated its investment policies, and keeping in mind the foreign businessmen’s who want to establish their presence in India by opening franchises of their businesses here, India is making its Foreign Direct Investment (FDI) policies in favour of those businesses. Foreign company franchisors prefer entering the Indian market through single-brand as well as multi-brand retail trading.

Following are some FDI regulations for these franchisors in brief:
• Under single-brand retail trading (SBRT) businesses, FDI is allowed 100% through the automatic route. This means that the franchisors can make such investments without the need for government approval. This system rules that the franchisors shall sell their products domestically and internationally under a single brand name only. However, investment of more than 51% comes with the condition that 30% of the value of goods is to be sourced from India itself. But following 2018, the Indian divisions of foreign retailers engaged in creating products based on cutting-edge technology, and if local souring is unfeasible, are exempted from this requirement of local sourcing. Famous examples of this retail trading include companies like Apple and Nike.
• Under multi-brand retail trading (MBRT) businesses, FDI is permitted only up to 51%, and that is also with the condition that the businesses obtain prior approval from the government. In this way, the products are sold both domestically and internationally by different brands under a single umbrella. This ensures that such multi-brand stores offer a broad selection of items. Famous examples of this retail trading include companies like Amazon and Walmart.
Entering a new country requires careful analysis of the modes it offers. The best suitable mode which matches and fulfils the desires of the franchisor shall be chosen. The mode varies from nation to nation and from franchise to franchise; thus, there is no straight way to find which one is suitable.

For understanding different modes of entering, below is discussed a discussion of them in simplified manner:
• Foreign franchisors in India have multiple choices when establishing a franchise business in India. They can provide a single franchise to an individual (direct franchising), give master franchise rights to one entity, or engage in franchise agreements for designated regions.
• In direct franchising, the franchisor holds onto the control and licensing of the franchise. This mode is preferred where the franchise outlet is to be opened in regions near the franchisor or where the rules and regulations are similar for ease of business. However, in this mode, substantial resources are required to be provided by the franchisor to the franchisee for operating its outlet.
• In master franchising, the franchisor authorizes a master franchisee to grant sub-franchises within a specified territory. The master franchisee is allowed to retain a significant portion of the fees collected from the franchisees operating in that territory. This reduces the profits of the franchisor to some extent but relieves him of much burden as the day-to-day responsibilities for operating the franchise are supervised by the master franchisee, and the master franchisee’s better understanding of the local market reduces the initial risk for the overall franchise brand.
• In a joint-venture franchise, the franchisor or a related company, along with an individual known as the owner operator, become shareholders in a company that is exclusively established to operate the franchise business. The parties sign a joint venture agreement which mentions the rights and obligations of their franchise. Similar to master franchising, the franchisor in this mode also avails of the benefits of local market understanding and easier navigation through local regulations. This mode enables the sharing of risks, fees, profits, and losses.
The franchisor shall decide in the initial phases only; while entering or expanding its business, which method shall be suitable to him so that he can make him prepare accordingly.

This involves complying with several requirements and considering various factors beforehand, some of which are discussed below:
• Foreign franchisors, while opening their franchise in India, shall make their entities register either as a wholly-owned subsidiary, joint venture, or liaison office (representative office). Although there’s no compulsion to register it as per any law, it is still preferred to get it registered with the Ministry of Corporate Affairs.
• The taxation laws and policies shall also be complied with to avoid any related disputes. This includes complying with Goods and Services Tax (GST), corporate tax, income tax, and transfer price regulations, no matter whether the franchisor is an Indian or a foreigner.
• The intellectual property of the franchise, including the trade mark, patent, and copyright, shall be protected by registering them under the relevant laws in India to prevent their infringement.
• The general laws of the land shall also be kept in mind wherever the franchise is open. This means that not only the laws applicable at the central level but also the individual state laws shall be kept in mind while establishing a franchise in a particular region.
• Before entering the market, proper, detailed research and analysis shall be done to get a rough idea of its position. This includes research regarding consumer preferences, the competitive landscape, and the size of the market.
• Financial planning shall also be made beforehand to get an estimate of how much investment could yield profitable results in a particular year so that accordingly the operational costs and other investments are arranged.
• Local customs, traditions, tastes, festivals, and other auspicious events shall be respected, and marketing shall be done keeping in mind the cultural sensitivity of the nation.
• The location and the key competitors of the relevant area and the country overall shall be identified to facilitate better planning and positioning of the brand effectively. Sites with heavy foot traffic like shopping malls, commercial zones, and urban centres, are preferred.

Concluding this with the examples of some popular franchises like Subway and McDonald’s, which, being foreign companies, analyze, understand and adapt to the local market and meet the needs of the consumer. They understood the local tastes of Indian consumers and thus modified their menu to reflect local preferences. Thus, by thoughtfully examining the above-discussed strategies and elements, foreign companies can successfully establish and expand their franchise operations in India, leveraging the country’s vast market potential while managing its unique obstacles.
Authored by: Adv. Anant Sharma & Sahil Arora

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