How to Review a Franchise Agreement in India

A franchise agreement is the contract that lets you run someone else's brand: their trademark, systems, and training, in exchange for a fee and a royalty. India has no dedicated franchise law, no equivalent of the US Franchise Disclosure Document that forces a franchisor to hand over financials and litigation history before you sign. So the contract you are holding is not one input among several. It is the entire deal. Adira, which publishes this guide, sells contract review and CLM software, so it has a commercial interest in you signing more of these through a system. Everything below holds regardless, and you can mark up a draft franchise agreement clause by clause, free, in Weave, our browser tool, without creating an account.

This guide is written from the franchisee's side, the party usually handed a template they did not draft and told it is "standard across the network." It rarely is standard in the ways that matter.

No dedicated franchise law: why the contract has to do all the work

In the US, the FTC Franchise Rule (16 CFR Part 436) forces a franchisor to deliver a Franchise Disclosure Document at least 14 calendar days before you sign or pay anything, covering litigation history and financial statements. Source: FTC Franchise Rule, 16 CFR Part 436 (eCFR).

India has nothing equivalent. A franchise here is regulated the way any other commercial contract is: the Indian Contract Act, 1872 for the deal itself, the Trade Marks Act, 1999 for the brand licence, the Competition Act, 2002 if supply terms get restrictive, and, where a foreign franchisor is involved, FEMA and the Income Tax Act for the money crossing the border. No regulator checks the franchisor's disclosures before you sign, and no cooling-off period is guaranteed. If a promise about average unit sales, territory, or exclusivity is not written into the agreement, it usually does not survive a dispute, however confidently it was made in the sales pitch.

Clause by clause: what to check, and where to go deeper

• Franchise fee and royalty. An upfront fee, plus an ongoing royalty, usually a percentage of gross revenue. Covered in depth below.
• Territory and exclusivity. Whether you get a defined area free of the franchisor's other outlets, and what "exclusive" actually excludes, online sales, aggregator listings, a nearby city. See our exclusivity clause guide on how Section 3(4) of the Competition Act treats exclusive dealing.
• Brand, IP licence, and operating standards. A trademark licence bundled with an operations manual, inspections, and the franchisor's right to update standards mid-term. See our IP licence guide.
• Training and support. What the franchisor is actually obligated to deliver, versus marketing language with no defined scope.
• Term and renewal. The initial term, and whether renewal is a right on stated conditions or entirely the franchisor's discretion.
• Termination and the post-term non-compete. The clause most franchise templates get wrong under Indian law, covered in depth below.
• Supply tie-ins. Mandatory sourcing from the franchisor or its approved vendors, covered below.
• Transfer and assignment. Whether you can sell the outlet, and on what terms the franchisor can assign the agreement to a new brand owner.

Franchise fee and royalty: the numbers, and how they are taxed

Most agreements structure payment in two parts: a one-time franchise fee, and an ongoing royalty, typically 4% to 10% of gross revenue depending on the sector, paid monthly or quarterly. Check three things: whether royalty is calculated on gross or net revenue (gross is far more common and costs you more), whether there is a minimum guaranteed royalty regardless of actual sales, and whether marketing fund contributions sit as a separate line item, not buried inside the royalty.

The tax treatment is where generic templates go wrong. Franchise fee and royalty are a supply of service and attract 18% GST. If the franchisor is Indian, it charges GST on the invoice and you claim input credit normally. If the franchisor is based abroad, the payment counts as an import of service, and liability shifts to you under reverse charge. Section 5(3) of the IGST Act, 2017 lets the government notify "categories of supply of goods or services... on which the tax shall be paid on reverse charge basis by the recipient," and cross-border royalty is notified under this power, so you pay the IGST directly to the government, not the franchisor. Source: Section 5, Integrated Goods and Services Tax Act, 2017 (CBIC).

Income tax withholding runs alongside this. A royalty paid to a resident franchisor attracts TDS under Section 194J of the Income Tax Act, 1961, generally at 10%. Source: Section 194J, Income Tax Act, 1961 (Indian Kanoon). A royalty paid to a non-resident franchisor instead falls under Section 195, which requires the payer to deduct tax "at the rates in force" before making "any payment" chargeable to tax in India, whichever is lower between the Income Tax Act's rate and the rate under the applicable tax treaty. Source: Section 195, Income Tax Act, 1961 (Indian Kanoon). Quick test: if your draft states royalty as a flat number with no mention of GST or TDS, someone gets surprised at payment time about who bears which tax.

Cross-border franchising: what FEMA actually restricts

If your franchisor is foreign, the royalty and any lump sum technology or brand fee are current account transactions under FEMA, remitted through an authorised dealer bank rather than needing prior government approval. This was not always true. Until December 2009, such payments were capped at 5% of domestic sales and 8% of export sales for technical know-how, and 1% and 2% for trademark use. The cap was removed with retrospective effect from 16 December 2009, and royalty now sits on the automatic route with no ceiling. Payment still needs registration with the RBI under Rule 5, read with Item 14 of Schedule III, of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. Source: Foreign Exchange Management (Current Account Transactions) Rules, 2000 (India Code). No cap on the rate is a FEMA problem today, but a franchise agreement silent on who arranges that registration will stall your first payment.

The post-term non-compete: why Section 27 voids what most franchise templates promise

Almost every franchise agreement includes a clause stopping the franchisee from running a competing business, often for one to three years, after the agreement ends. In a US-drafted template, that clause is standard and usually enforceable. In India, it runs straight into Section 27 of the Indian Contract Act, 1872: "Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void." Source: Section 27, Indian Contract Act, 1872 (Indian Kanoon). The section carries one narrow exception, for a person who sells the goodwill of a business agreeing not to compete within reasonable local limits, which does not describe a departing franchisee.

The leading case here is not an employment dispute but a franchise dispute. In Gujarat Bottling Co. Ltd. v. Coca-Cola Co., (1995) 5 SCC 545, the Supreme Court examined a negative covenant in a bottling and franchise agreement that stopped the franchisee from dealing in competing beverage brands. The Court upheld the covenant, but on a specific basis: it operated during the subsistence of the agreement, not after termination, so Section 27 did not touch it. The line is clear: a restraint that binds you while the franchise is live is normal exclusivity; a restraint that tries to bind you after it ends is exactly what Section 27 strikes down. Source: Gujarat Bottling Co. Ltd. v. Coca-Cola Co., Supreme Court of India, 4 August 1995 (Indian Kanoon). Our non-compete guide covers the same Section 27 logic in the employment context.

This does not leave a franchisor unprotected after termination. What survives Section 27 is different in kind: an obligation to stop using the trademark and de-brand the outlet immediately, confidentiality over the operations manual and supplier list, a trade secret claim rather than a restraint of trade, and narrow non-solicitation aimed at the franchisor's other franchisees, which courts read separately from a blanket ban on competing. A well-drafted agreement leans on these instead of a post-term non-compete it cannot enforce.

Supply tie-ins: when "must buy from us" becomes a competition law problem

Many franchise agreements require the franchisee to buy inputs, packaging, or point-of-sale stock only from the franchisor or its approved vendors. This is common and usually lawful, brand consistency depends on it, but it is not automatically safe. Section 3(4) of the Competition Act, 2002 tests this under a rule-of-reason standard, asking whether it causes or is likely to cause an "appreciable adverse effect on competition," with the explanation to the section naming "tie-in arrangement" and "exclusive supply agreement" as categories examined. Source: Section 3, Competition Act, 2002 (Indian Kanoon). Most franchise sourcing tie-ins never come close to that bar, since franchise networks rarely have market power. The risk rises when the tied product is unrelated to brand standards or priced well above open market rates with no route to an alternative vendor.

Red flags

Normal	Red flag	Why it matters
Royalty base and rate stated as a clear percentage of defined gross revenue	Royalty base undefined, or franchisor has unilateral discretion to recalculate	You cannot verify or budget for what you actually owe
Agreement states who bears GST and TDS, and references reverse charge for a foreign franchisor	Fee stated as a flat number, silent on GST or withholding	You discover the real cost only at the first payment cycle
Territory defined with a map or postal codes, and online/aggregator sales addressed	"Exclusive territory," no boundaries or channel carve-outs stated	"Exclusive" turns out to exclude nothing you actually compete against
Post-term restriction limited to trademark use, confidentiality, and non-solicitation	Blanket non-compete barring any similar business after termination	Void under Section 27; the franchisor is relying on a clause that will not hold
Renewal is a right on stated, objective conditions	Renewal entirely at franchisor's discretion, no criteria stated	You build a business with no security of tenure at the end of the term
Supply tie-in limited to brand-critical inputs, alternate approved vendors exist	Franchisor is sole source for every input, at above-market pricing	A weak but real Section 3(4) exposure, and you have no pricing leverage
Termination for cause requires notice and a cure period	Franchisor can terminate immediately for any "material breach," undefined	You lose the outlet and the fee already paid, with no chance to fix the issue
Transfer allowed with franchisor's consent, not unreasonably withheld	Outlet is entirely non-transferable, or transfer requires a fresh, undiscounted fee	You cannot exit or sell the business you built, even to a franchisor-approved buyer
FEMA registration and remittance responsibility assigned to a named party	Silent on who handles RBI registration for a foreign franchisor's royalty	First payment stalls at the bank with no one accountable for the paperwork

Bad clause versus better clause: the post-term non-compete

Bad: "For a period of three (3) years following termination or expiry of this Agreement, the Franchisee shall not, directly or indirectly, own, operate, or have any interest in any business similar to or competitive with the Franchisor's business, anywhere in India."

What is wrong: a textbook post-term restraint of trade, exactly what Section 27 voids. A franchisor relying on it is likely to find it unenforceable, leaving no protection once tested in court.

Better: "Upon termination or expiry, the Franchisee shall (a) immediately cease all use of the Franchisor's trademarks and branding, and complete de-branding of the outlet within [15] days; (b) keep confidential the Operations Manual and supplier pricing for [3] years; and (c) not solicit any then-current franchisee or employee of the Franchisor's network for [1] year. Nothing in this clause restrains the Franchisee from operating any lawful business following the de-branding required under (a)."

What changed: the clause drops the unenforceable blanket restraint and replaces it with three obligations that survive Section 27, de-branding, confidentiality, and narrow non-solicitation, giving the franchisor real, usable protection instead of a clause it cannot enforce.

US and global contrast

The US treats franchising as its own regulated category. The FTC Franchise Rule forces disclosure before signing, and roughly fifteen states layer on their own registration and relationship laws. Non-compete enforceability runs the other way too: many US states enforce a reasonable post-term non-compete, and only a handful, California most notably, void them outright. India inverts this. There is no disclosure law, but Section 27 makes the post-term non-compete void almost everywhere, the opposite default from most of the US. A franchise agreement drafted first for a US network and adapted for India needs both gaps closed: add the disclosure a US franchisee would get by law, and strip the post-term non-compete a US template assumes will hold.

FAQ

Is a franchise agreement covered by a special disclosure law in India, like the US FDD? No. India has no franchise-specific statute. The agreement is governed by general contract, trademark, and tax law, so anything the franchisor has not put in writing is not something you can rely on later.

Can my franchisor stop me from opening a competing business after our agreement ends? Generally no. A post-term non-compete is void under Section 27, as the Supreme Court's reasoning in Gujarat Bottling Co. v. Coca-Cola Co. confirms by contrast: it upheld a restraint only because it operated during the agreement's term, not after. A restriction operating during the franchise term is different and is normally enforceable as ordinary exclusivity.

How is franchise royalty taxed if the franchisor is based abroad? GST applies at 18% under reverse charge, so you pay it directly rather than the franchisor invoicing for it, and withholding applies under Section 195 at the rate in the Income Tax Act or the relevant tax treaty, whichever is lower. The payment also needs RBI registration under the FEMA Current Account Transactions Rules, though the amount itself is uncapped.

What happens if my franchise agreement is silent on territory exclusivity? Silence usually means no exclusivity. Absent an express grant of a defined, protected territory, the franchisor can open or license another outlet nearby, including online, without breaching the agreement.

Can a franchisor force me to buy all my supplies only from them? Usually yes, and it is common and lawful. It becomes a competition law question under Section 3(4) only if the tie-in has an appreciable adverse effect on competition, a high bar for most franchise networks, but check that the tied inputs are actually brand-critical and reasonably priced.

Does the franchisor need my consent before selling or transferring its own business? Depends on what the agreement says. Many franchise agreements let the franchisor assign freely to a successor while restricting the franchisee's own transfer rights. If this asymmetry matters to you, negotiate it before signing, not after.

This guide explains how a franchise agreement should be reviewed from the franchisee's side under Indian law: the tax and FEMA points, the Section 27 rule on post-term restraints, and the competition law angle on supply tie-ins that a generic or foreign-drafted template usually misses. It is not legal advice, and it does not tell you whether your specific agreement is enforceable or safe to sign on your facts. For that, especially before committing a franchise fee, have a lawyer review the actual document.