Key legal and business issues to consider – 13 key questions.
1. In light of virus-related lockdowns and restrictions on business, can one still sign franchise and distribution deals with Indian parties? Does it even make sense to, at this time?
Yes, some multinational companies who were earlier keen to directly enter the Indian markets are now considering a franchise or distribution model in light of the challenges posed by the pandemic. A franchise or distribution model allows companies to leverage the Indian party’s experience in the Indian market, without having to incur huge costs in setting up a business in India.
2. What are the major issues being faced by international companies in India at this time?
Some of the common problems that are being faced by franchisors/licensors include delays in receiving payments from the franchisees/licensees; delays by Indian parties in achieving minimum development targets, and concerns over deterioration of the overall financial health of the Indian party to be able to fulfill all obligations under the franchise/license agreement in the future.
3. For a new deal, how do we get around the need for wet signatures on contract documents?
Execution of a contract in India using an electronic signature that meets the requirements of the Information Technology Act, 2000 (“IT Act”) is considered at par with the execution of a contract using wet signatures. That said, a contract signed using electronic signatures that are not recognized under the IT Act will not necessarily render the contract void. In the case of any dispute regarding the existence or modification of a contract, the person disputing the existence or modification of the contract will have to prove that the contract was never signed or modified.
4. We need to amend our existing contract to push back development dates and provide royalty waivers. How do we do it most efficiently?
This is possible by signing an addendum to the existing franchise agreement. The addendum can be signed electronically, provided the e-signatures comply with the IT Act. Provisions relating to deferment of payments and interest, if any should be framed in conformity with foreign exchange control regulations. Execution of an addendum attracts stamp duty in India and should be paid in accordance with the relevant stamp duty legislation.
5. The Indian franchisee/ licensee/ distributor is telling us that they can’t receive approval from the Government to make payments to foreign entities. Is there any merit to this?
Remittance of royalty, franchisee or license fee, and other service and administrative fees by the franchisee/licensee to their overseas partner generally does not require any approval from the Government of India, except in certain special cases. Therefore, there is no merit to claims that the payment is being delayed due to a failure to receive timely approval from the Government. Banks in India have been functioning during the lock-down period without any significant limitations.
6. We terminated our agreement with the Indian Master Franchisee/ Licensee/ Distributor, but they continue to use our confidential information and/or brand. Is there anything we can do during this pandemic to stop it?
A majority of Indian courts are currently hearing only urgent matters where relief is required to prevent a miscarriage of justice. The foreign franchisor/licensor can approach the relevant Indian court to seek interim relief (such as an injunction) against the franchisee if the misuse of the franchisor’s confidential information and trade name is a blatant violation of the franchise/license agreement causing irreparable loss to the franchisor. The franchisor/licensor will have to show that the matter is grave and should be urgently heard.
7. We had approved the supply chain for sourcing of products by the Indian party, but that is no longer viable during the pandemic. The Indian party has asked for alternate sources but our normal process requires extensive due diligence on the supplier before approval. What are our options?
This issue should be dealt with on a case-by-case basis. The franchisor/licensor should strike a balance between the need for an extensive due-diligence and the impact of non-availability of supplies on the Indian partner’s business. Supply from alternate sources may be approved without extensive due-diligence for a certain limited duration as a stop-gap arrangement – limited diligence is still possible during this time.
8. Are there any physical limitations around enforcement of contracts during the pandemic? Are Indian authorities and/or forums working at full capacity?
As discussed above, a majority of Indian courts are hearing only urgent matters. Disputes relating to misuse of IP and confidential information may be taken up if it can be shown that failure to provide immediate relief will result in miscarriage of justice. All other matters relating to recovery of dues and other contractual obligations of parties are likely to face significant delays.
9. How do we factor in the effects of on-ground lockdowns in India to better safeguard our rights in a new franchising deal, in terms of jurisdiction and dispute resolution clauses? Can / should we strengthen such clauses in our existing contracts?
The franchisor can revisit their contract and check if Indian courts have jurisdiction to provide interim relief. If such rights are not provided in the contract, parties should amend the dispute resolution provisions to confer such jurisdiction on the Indian courts in relation to granting interim relief.
If the contract provides for arbitration in a foreign jurisdiction, the franchisor should reassess if such a forum or venue is convenient for the franchisor and if required, parties may negotiate and amend the dispute resolution provisions.
10. We were considering entering the Indian market by opening brick and mortar stores in India. However, we are now evaluating the feasibility of selling our products online to customers in India. What are the avenues available for such a model of operation?
Generally, under a franchise or license arrangement, the Indian party should be able to freely able to operate brick and mortar stores as well as on-line model of business.
In the event the Indian franchisee/licensee has equity participation from foreign parties or is under controlled by foreign residents, the Foreign Direct Investment (FDI) Policy should be analyzed to determine if there will be any restriction on the Indian party to undertake on-line sales in India. India’s FDI policy imposes several restrictions on an Indian entity with foreign equity participation or foreign control on undertaking e-commerce business in India.
11. In the QSR sector, there has been an uptick in the cloud-kitchen model of doing business in India, owing to limitations on dining experience due to the pandemic. What are the key considerations to be taken into account when adopting the cloud-kitchen model?
Some of the key considerations that should be taken into account while setting up a QSR with cloud-kitchen business model in India are:
a. whether the franchisee has relevant experience to operate and manage cloud kitchens in the relevant territory;
b. whether the same franchisee is operating a cloud kitchen for other brands as well, and if yes, how is the franchisee protecting the know-how of the franchisor in such cases. Many of the existing cloud-kitchen operators represent multiple brands in order to achieve the scale of the business; and
c. whether the franchisee will be subject to any restriction under the FDI policy to be able to sell products on-line.
12. We operate wellness centers/ gymnasiums in the country. Are there any limitations regarding their operations due to the pandemic?
The Government has permitted gyms and wellness centers to reopen in most states of India, subject to certain restrictions and safety measures in place.
Some of the safety measures that are to be followed are:
1. Gym and wellness centers are required to allocate batches to its users to ensure staggered timings and avoiding overcrowding.
2. People above the age of 65 years, adults with co-morbidities, pregnant women and children below the age of 10 are not allowed at such places.
3. Yoga should be avoided in closed spaces.
4. Provisions for social distancing of six feet should be maintained between different users.
5. In case of a suspected case of the virus within the premises, the wellness center/ gymnasium must immediately inform the nearest medical facility (hospital/clinic) and follow set protocols.
13. Our Indian franchisee is facing financial trouble. Can a foreign franchisor provide any loan or financial assistance to its Indian franchisee?
Provision of loans by a foreign party to an Indian party are governed by ECB Guidelines under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018. The ECB Guidelines prescribe, among other things, the list of eligible borrowers and lenders, end-use of the loan, and repayment conditions.
It may be possible for a foreign franchisor to provide loans to its franchisee in which the franchisor has an equity interest, subject to certain conditions and the sector in which the franchise is operating. In all other cases where the franchisor does not have an equity interest in the Indian franchisee, a number of other issues should be analyzed under the ECB Guidelines to determine if a foreign franchisor can provide loan to its Indian franchisee.
Srijoy Das, IDI Country Expert for agency & distribution in India