Franchise Agreements in India: Building Scalable Brand Networks
A Franchise Agreement grants the right to operate a business using an established brand’s trademarks, systems, and know-how in exchange for fees and royalties. India is one of the world’s fastest-growing franchise markets, with brands like Lenskart, Chai Point, Amul, and international giants like McDonald’s and Domino’s operating through franchise models.
While India has no specific franchise legislation (unlike the US FTC Franchise Rule), franchise agreements are governed by the Indian Contract Act, Trademark Act, and Competition Act. The lack of a Franchise Disclosure Document (FDD) requirement makes thorough due diligence even more critical for prospective franchisees.
Key Franchise Models in India
FOFO Model
Franchise Owned, Franchise Operated. Most common in India. Franchisee invests capital and manages operations. Used by Subway, Archies, and most retail franchises.
FOCO Model
Franchise Owned, Company Operated. Franchisee provides capital, franchisor manages. Used by some hotel chains and QSR brands for quality control.
Master Franchise
Right to sub-franchise within a territory. Common for international brands entering India. Master franchisee becomes mini-franchisor for a region or the entire country.
Essential Clauses for Indian Franchise Agreements
- • Territory and exclusivity: Define geographic boundaries clearly. An exclusive territory in Koramangala, Bangalore, is vastly different from “South Bangalore.”
- • Fee structure: Initial franchise fee (₹5–50 lakhs typical), ongoing royalty (4–10% of gross sales), and marketing fund contribution (1–3%).
- • Operations manual compliance: Franchisee must follow brand standards. Include audit and mystery shopping rights for the franchisor.
- • Term and renewal: Typical terms of 5–10 years. Renewal conditions should be specified upfront, including renewal fee and updated agreement requirements.
- • Non-compete: During and 1–2 years post-termination within the territory. Courts may scrutinise post-termination restrictions under Section 27.
Key Takeaways
- ✓ India has no franchise-specific legislation—rely on Contract Act and Trademark Act
- ✓ Negotiate exclusive territory with clear geographic boundaries
- ✓ Ensure trademark licence is registered with the Trademark Registry for enforceability
- ✓ Include exit and transfer provisions—what happens if the franchisee wants to sell
- ✓ GST at 18% applies on franchise fees and royalties (SAC 9983)
Frequently Asked Questions
Are franchise royalties subject to TDS?
Yes, TDS at 10% under Section 194J (professional/technical fees) or Section 194H (commission) depending on the nature. If the franchisor is foreign, TDS under Section 195 at treaty rates applies.
Can a franchisee terminate the agreement early?
Only as per the agreement terms. Most franchise agreements have lock-in periods. Early termination typically attracts liquidated damages equal to remaining term royalties or a fixed penalty.