India has a mixed economy with an active state and private sector. India’s five-year plan from 2007 to 2012 contemplates rapid industrial development, focusing on technological advancement and international competitiveness in sectors such as steel, electronics, machinery, information technology and infrastructure.
India’s political and legal systems are similar to many countries as they are based on the British systems. Its geographical and cultural diversity, however, make it a challenging and complex place to do business.
The banking sector was earlier dominated by state-owned institutions. Banks in India are segregated as public or private sector banks, cooperative banks and regional rural banks.
The entry of new private banks following reforms in the early 1990s means that the state banks account for a smaller share of the system’s assets than in the past. These institutions now offer more sophisticated financial services. It is advisable that foreign businesses establish banking relationships with one of the newer privately owned banks.
Foreign banks are permitted to set up wholly owned subsidiaries in India. The limit for foreign shareholding in private banks (including foreign institutional investors and nRIs) other than in the case of wholly owned subsidiaries of foreign banks, is 49 percent under the automatic route. Additionally, at least 26 percent of the paid-up capital of private banks is required to be held by Indian residents. Foreign institutional investors’ shareholding in a private banking company cannot exceed 24 percent of the paid up capital, except through a resolution of the board of directors followed by a special shareholders’ resolution, to increase the holding up to 49 percent, provided that the investment does not exceed the 74 percent overall foreign investment ceiling.
Foreign and portfolio investment in public sector (nationalized) banks are subject to overall statutory limits of 20 percent as provided by the Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80.
The Competition Act 2002 is designed to prevent businesses engaging in practices that have an adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers, and to ensure freedom of trade carried on by other participants in markets in India. The Competition Act 2002 prohibits anti¬competitive agreements, abuse of dominant position, and regulates mergers and amalgamations of enterprises. It replaces the Monopolies and Restrictive Trade Practices Act 1969.
Following the Bhopal gas tragedy in 1984, the Indian government increased its focus on environmental protection.
Companies are required to obtain statutory pollution and environmental approvals before establishing industrial projects in India. However, if investment in a project is less than Rs1 billion (approximately Us$22.2 million), an environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries.
The establishment of industries in certain locations considered ecologically fragile (for example Aravalli Range, coastal areas, doon Valley, dahanu) are regulated by separate guidelines issued by the Ministry of Environment and Forests.
The Environment Protection Act 1986 lists a number of industries, including oil refineries and cement, petrochemicals, dye and paper products, which require Ministry of Environment approval. The government also prescribes guidelines on the quality standards of air, water and soil for different areas, and the maximum levels of emissions to which industries must adhere.
Whilst there are no franchise-specific laws in India, there are a number of other laws that impact on franchise arrangements in India. These include the law of contract, intellectual property law, competition law and consumer protection law.
The RBI regulates the terms of payment under franchise agreements (such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees) where one party is a non-Indian entity. The RBI prescribes certain requirements that must be complied with, including that a franchisee must provide a tax clearance and a chartered accountant’s certificate at the time of remitting royalty payments to a franchisor outside India.
The Indian government permits foreign franchisors to charge royalties up to 1 percent for domestic sales and up to 2 percent for exports for use of the franchisor’s brand name or trade mark, where there is no transfer of technology. Where there is a transfer of technology (know-how) franchisors may charge royalties up to 5 percent for domestic sales and up to 8 percent for export sales for use of the franchisor’s technology and brand name or trade mark.
Franchise arrangements are governed by the Indian Contract Act 1872. India’s intellectual property laws are also relevant to the licensing of the franchisor’s intellectual property to the franchisee. A franchise arrangement may involve restrictions on the production, supply and distribution of goods and services, thereby attracting provisions of the Competition Act 2002. Additionally, consumer protection laws, which provide for remedies to consumers in case of defective products and services, may also impact on franchise arrangements.
Foreign companies who wish to leverage their brands in India can enter into franchising arrangements such as:
- direct franchising
- franchising through a subsidiary or branch office
- franchising through an area development agreement – under this arrangement, the developer is given the right to open a multiple number of units in accordance with a predetermined schedule and within a given area
- master franchising
- joint ventures
- licensing arrangements.