Franchising with the help of a local partner may be a foreign hospitality brands key to unlocking India's market. Hotel and leisure brands face no restriction on the ability to hold shares in an Indian company. Nevertheless, experience shows that direct investment in the Indian market is not for the faint-hearted or those with capital or resource restraints. Despite its great commercial promise, India can be a hostile environment for Foreign hotel brands that are not assisted by a local partner. Local operators jealously guard their domestic market and there is no denying that some aspects of India's real estate market can create problems for US companies under the foreign Corrupt Practices Act and British companies under the Bribery Act 2010. Add to that a judicial system that is slow, expensive and at times unpredictable and it may be easier to understand why few foreign hospitality companies go it alone in India.
The Joint Venture Option
Joint ventures are sometimes used by hospitality brands that enter India. These can make it easier for foreign brands to exploit the Indian market if the local partner has the appropriate expertise, capital and connections. However, the bigger, wealthier and better connected the local partner, the more difficult it will be if the joint venture breaks down. The reality is that hospitality joint ventures do not have a track record of being particularly long lived. Ending a joint venture can be a drawn-out, expensive and testing process. Mismanagement, bribery and use of black money by the joint venture may result in a range of problems not only in India but also in the US and the UK thereby adding to the potential difficulties. Deadlock mechanisms present a particular challenge in joint ventures. Take Russian Roulette as an example. If the Indian partner "wins" they get to buy the business and they get to keep the hotels. They will then take the hotel portfolio to a competitor of the western brands or create their own local brand. This destroys the footprint of the hotel chain in one of the world's major growth markets but cannot always be compensated for by the purchase price received. So what other options are there?
Since management agreements involve international hotel management companies acting as hotel operators for Indian owners, they have to form a company in India. Fortunately, in the hospitality sector, it is possible for foreign parties to have 100 per cent shareholding in an Indian company and often international hotel management companies enter India by forming a subsidiary. There are also other sectors such as retail where direct foreign investment is much more heavily restricted, so hoteliers are fortunate in this regard.
No need for specific government consent to set up a hotel management company but the investment necessary has to be made through inward remittance from foreign bank accounts. There are also several reporting obligations to the Reserve Bank of India which controls inflow and outflow of foreign exchange. The management company has to pay domestic corporation taxes in India (currently 33.99 per cent). The income has to be repatriated abroad and it is also necessary to ensure that the investment is made on a repatriable basis. Specialist tax advice is essential in that regard. International hotel management companies intending to use their own brand should register their trademark at the relevant trademark registry in India as soon as possible before doing business in the country. It can take several years to fully register the marks. In the meantime, common law protection is available to brand owners, and it is best not to be in a position where one has to rely on passing off action or other litigation locally. There is protection against infringement and local franchisees will more confidently cooperate with the brand. Given that a management company is expected to deal with the day-to-day conduct of the local hotel business, it is important that competent local staff are employed who can navigate local laws and practices. Termination of management agreements can be problematic in India unless default events are clearly defined. The termination is only possible for material breach; notice to cure should first be given where appropriate. Termination for breach can be contested by the Indian party who frequently take recourse to the local courts.
This can leave the operator in an extremely uncomfortable position as local owners will often react aggressively to a notice of termination and proceed to make a counterclaim for substantial damages. In extreme cases one can seek to have the operator banned from further management activity in India.
Going the franchise way
Perhaps because of these undeniable difficulties many hospitality companies are entering the Indian market by way of franchise agreement. Especially so, since in 2010 the restrictions on royalties and other forms of payment that Indian franchisees are able to make in foreign exchange were removed. The structuring of franchising arrangements in the hospitality sector in India requires careful consideration and must take into account not only the diverse cultural, religious, linguistic, political and economic differences in the country but also the myriad of legal restraints and requirements that affect hotel and leisure companies. Nevertheless, with the right advice, brand can develop and implement an effective franchise strategy for the Indian market using a licensing-based approach.
Expertise and negotiation
The first challenge is finding a hotel developer with the expertise and the resources to develop the brand on a national rather than regional basis. Franchisors are often unaware of the cultural, religious and economic differences within the different parts of India and are thus easily misled by potential partners that oversell themselves and the ability to deliver national coverage. This often results in the franchisor having to renegotiate for several years on a process that can be expensive and time-consuming. Once a suitable owner has been identified, commercial terms need to be agreed. Indian real estate developers often try to overnegotiate every last term of the franchise agreement resulting in the process being excessively protracted and expensive. More importantly, it can result in key quality control provisions being eroded.
IP and competition
Protecting the franchisor's brand can sometimes cause problems if the franchisor does not have trademark rights in India when the deal is being negotiated. Registration can take up to three years. Common law rights can be relied upon but that may present problems. India's competition law is likely to lead to some disputes as a franchisor's desire to impose exclusivity on the developer could be seen to be anticompetitive. This has not been a problem so far, but these are still early days for Indian competition law. Choice of jurisdiction
The choice of law and jurisdiction is often an issue of some debate. Local owners prefer Indian law and the jurisdiction of the Indian courts but franchisors usually insist on their local law and jurisdiction, citing the slow progress that court cases make in India.
Compromises tend to result in the choice of arbitration and the law of a place with a reputation for more speed, such as England or Singapore, although the Indian party often pushes for Indian arbitration. Technical issues about the enforcement of foreign judgments and the application of Indian public policy can also complicate matters. There have been several recent instances where foreign arbitrations were not enforced on public policy grounds.
Perhaps one of the greatest concerns for foreign franchisors entering the Indian market is their ability to enforce provisions against a former franchisee. The Indian courts are often perceived to be slow, meaning that it can be difficult to get an injunction before damage to the brand has been done. This is therefore a major topic of discussion during the negotiations.
In summary, franchising offers a good way of entering the Indian market, but it is not without challenges. Franchisors wishing to use this route into the subcontinent need to obtain expert legal advice from lawyers with a strong track record of taking franchises into India.
Competition from domestic players
Since the arrival of Sheraton in 1973 and Hyatt in 1980, the Indian hospitality market has not stood still. Hoteliers were fast to learn about "Asset Light" strategies. Today the likes of Starwood and IHG face stiff competition from their former franchisees. Oberoi now own and manage 29 luxury hotels under the Oberoi and Trident brand whilst Taj Hotels operate 76 hotels across India and 16 abroad. None of the foreign
brands have been able to exceed 20 hotels, yet the
domestic players such as Sarovar (a local
management company) manage over 60 properties.
Former franchisees such as ITC and Lalit have also
started to create their own domestic brands offering
"local solutions" that US-listed companies may not be
able to accommodate.
Companies from all around the world have entered
India. There are a few examples below