Further liberalisation in India helps foreign franchisors
28 May 2010
Until 2007 it was necessary to obtain consent from the
Government of India if the royalty or franchise fee payments made
by an Indian franchisee or developer to the foreign franchisor
exceeded 5%. The maximum permitted initial fee was less of a
problem as this was capped at US $ 2 million, an amount that few
franchisors can command. Franchise Agreement were classed as
so-called Technical Collaboration Agreements.
On November 28th 2006 a new regulation was issued by the Reserve
Bank of India removing the requirement for RBI consent for
obtaining foreign exchange for the purchase of a trademark or
franchise in India. This allowed franchisors to argue that their
agreement was not a technical collaboration agreement but a pure
franchise in which case there would arguably be no limit on the
amount of franchise fees that could be paid by a franchisee to a
franchisor, However, it remained unclear if any royalty element to
a franchise relationship would bring the regular fees within the 5
% limit as the need for consent for royalties beyond 5% from the
Government of India in relation to technical collaboration
agreements still remained. Franchisors were therefore nervous of
the strength of this change.
It has now been made clear that the distinction between a
technical collaboration agreement and a franchise is no longer a
problem that franchisors need to worry about. On May 13th the
Reserve Bank of India permitted the withdrawal of foreign
exchange also for royalty payments pursuant to technology
transfer agreements without any consent from the Ministry of
Commerce and Industry. This means that the Indian
franchisee/developer can now pay royalties and fees without consent
or restrictions to a foreign franchisor regardless of how the
underlying relationship is classified. Franchisors who entered into
agreements under the previous restrictive regime may also seek to
renegotiate contracts especially on renewal of a term.