Tag: Franchise Documentation Guide

Quick Answer

Does a franchise agreement itself count as FDI in India? Usually, no. A straightforward franchise or licensing arrangement does not give the foreign franchisor an equity stake in the Indian entity. The FDI position changes if the foreign party invests in that entity or the business falls within an activity with specific foreign-investment conditions.

For single-brand product retailing, India allows up to 100% FDI through the automatic route, subject to the applicable conditions. Once foreign investment goes beyond 51%, the 30% sourcing requirement comes into play. A franchise with no foreign equity does not attract that FDI-linked sourcing condition simply because the franchisor is based overseas.

Does a franchise agreement count as FDI in India?

Not on its own. FDI involves foreign investment in an Indian entity through the structures covered by India’s foreign-investment framework. A franchise agreement works differently: the Indian franchisee uses the foreign brand’s name, systems, know-how or intellectual property and pays the agreed fee or royalty.

So the useful question is how the India business is being set up, not just whether the brand comes from abroad. If the foreign franchisor has no equity in the Indian franchisee, it has no equity ownership in that operating company. If it also takes a stake in the business, the FDI rules need to be examined.

That makes a master franchise, a licence and an equity joint venture three different propositions from a regulatory point of view.

When do India’s FDI retail rules actually apply to a foreign brand?

1. Is there foreign equity in an Indian entity? If there is no foreign equity, the FDI equity rules are generally not triggered merely because the franchisor is foreign. If there is foreign equity, look at the business activity and ownership level.
2. What will the Indian entity actually do? A single-brand product retailer is covered by the single-brand retail framework. Multi-brand retail trading has a separate set of rules.
3. Does foreign investment go beyond 51%? For single-brand product retail trading, the 30% sourcing requirement applies when foreign investment is beyond 51%.
4. Is there a land-border-country connection in the ownership structure? The 2026 changes introduced a limited automatic-route treatment for qualifying non-controlling beneficial ownership of up to 10%. The sectoral cap, route, conditions and reporting requirements still have to be checked.

FDI in single brand retail trading: what is allowed in 2026?

India permits 100% foreign investment in single-brand product retail trading through the automatic route, subject to the policy conditions. The change to 100% automatic route was made in 2018 and is reflected in the FEMA framework.

The products must be sold under a single brand and the brand must be used internationally in the manner required by the policy. The retail activity can be undertaken by the non-resident brand owner or through a legally valid arrangement with the brand owner. The sourcing condition applies where foreign investment goes beyond 51%.

Official reference: DPIIT Press Note 1 (2018) and the RBI foreign-investment framework.

What is the 30% local sourcing rule for single brand retail?

For a single-brand retail entity with foreign investment beyond 51%, 30% of the value of goods purchased must be sourced from India, subject to the detailed policy rules.

This is not a blanket rule for every foreign franchise. If the overseas franchisor has no equity in the Indian operating company, this FDI-linked sourcing requirement is not triggered just because the franchise brand is foreign.

The 2019 changes also made the sourcing test broader. Procurement from India for the single brand can count whether the goods are sold in India or exported. Qualifying purchases from India for global operations can also be counted against the requirement, subject to the policy.

For the initial period, the requirement is worked out as an average over five years beginning on 1 April of the year in which the business starts, based on the earlier of the first store opening or the start of online retail. After that period, the requirement is assessed annually.

Official reference: DPIIT Press Note 4 (2019), paras 5.2.15.3(2)(e) and (f).

Can a foreign brand sell online before opening a physical store?

Yes. The 2019 policy allows a single-brand retail entity with FDI to start online retail before opening physical stores, provided brick-and-mortar stores are opened within two years from the date online retail begins.

For a brand that wants to test Indian demand before taking on a larger physical footprint, this provides another way to sequence the launch. The proposed entity and online model still need to meet the wider FDI and e-commerce requirements.

Official reference: DPIIT Press Note 4 (2019), para 5.2.15.3(2)(g).

What about FDI in multi brand retail in India?

Multi-brand retail trading follows a different policy. Foreign investment is permitted up to 51% under the Government route, subject to additional conditions. The States and Union Territories in which the business operates also matter because the policy contains location-related conditions and the retail activity must comply with applicable local requirements.

These rules should not be carried over to a single-brand franchise or licensing model that has no foreign equity. The two structures raise different regulatory questions.

What changed in 2026 for investors linked to land-border countries?

India changed its FDI framework for investments connected with countries sharing a land border with India in 2026. The amended framework introduced a beneficial-ownership test and a limited automatic route for qualifying non-controlling beneficial ownership of up to 10%, subject to the relevant sectoral caps, entry route, conditions and reporting requirements.

The Union Cabinet announced the change in March 2026, followed by DPIIT Press Note 2 (2026 Series). The policy change was linked to the corresponding FEMA notification, which brought the amended framework into effect in May 2026.

This means the immediate investor’s country is not necessarily the end of the analysis. Where there is participation from a land-border country, the ownership chain and beneficial ownership should also be reviewed.

Official reference: DPIIT Press Note 2 (2026 Series).

Does paying royalty or franchise fees create FDI?

No. Paying a royalty or franchise fee to an overseas franchisor is not, by itself, an equity investment. A genuine franchise or licensing payment therefore does not become FDI simply because the money crosses the border.

There are still other compliance questions around the payment. Depending on the parties and the transaction, FEMA, tax, withholding, GST, transfer pricing and authorised-dealer-bank documentation may need to be considered. The agreement and payment process should be checked before the remittance is made.

Restrictions that once applied to royalty and technical-know-how payments were substantially liberalised in 2009. Today, the practical issue is whether the payment is supported by the underlying agreement and handled in line with the applicable foreign-exchange, tax and banking requirements.

Which India entry structures involve FDI?

Entry structure	Foreign equity?	FDI retail policy review?	30% SBRT sourcing condition
Master franchise	Usually no	Generally no, where there is genuinely no foreign equity	Not triggered by the franchise alone
Area development / licensing	Usually no	Generally no, where there is genuinely no foreign equity	Not triggered by the arrangement alone
Equity joint venture	Yes	Yes, depending on the activity and sector	Applies to SBRT proposals involving foreign investment beyond 51%
Wholly owned Indian subsidiary	Yes	Yes	Applies where the entity undertakes SBRT and the relevant conditions are met

This is a starting point rather than a substitute for reviewing the actual agreements, ownership documents and business activity. A structure marketed as a “franchise” can still include equity or other rights that change the FDI analysis.

A simple example: franchise vs equity structure

Take a foreign fashion brand that appoints an Indian company as its master franchisee. The Indian company pays a franchise fee and ongoing royalty, runs the stores and remains Indian-owned. If the foreign brand takes no equity in that company, the franchise arrangement itself does not create FDI in the Indian entity.

Now change one part of the arrangement: the foreign brand buys 80% of the Indian retail company. There is now foreign investment in the Indian entity. If that company carries on single-brand product retailing, the relevant SBRT conditions, including the sourcing requirement for foreign investment beyond 51%, need to be considered.

What should a foreign brand verify before signing an India franchise structure?

• Whether the Indian operating entity is entirely Indian-owned or has foreign equity.
• Whether the business is single-brand retail trading, multi-brand retail, services, manufacturing or another activity.
• The foreign shareholding and the wider ownership chain, including beneficial ownership where relevant.
• Whether the 30% sourcing requirement is triggered and how the calculation will be documented.
• Whether the agreement includes royalty, franchise fees, technology fees or other cross-border payments, and how those payments will be handled.
• Whether tax withholding, GST, transfer pricing or other tax requirements apply.
• Whether there is a land-border-country connection in the investor or beneficial-ownership chain under the 2026 framework.
• Which reporting and banking formalities apply to foreign investment or cross-border remittances.
• Whether sector-specific licences and state or local requirements also apply.
• Whether the commercial agreement accurately reflects the actual ownership and operating structure.

The key takeaway for foreign brands entering India

The starting point is the structure, not the nationality of the brand. A franchise or licensing arrangement with no foreign equity is different from an equity investment into an Indian retail company.

For single-brand product retailing, India permits up to 100% FDI through the automatic route, subject to the applicable conditions. The 30% sourcing requirement applies where foreign investment goes beyond 51%. Multi-brand retail trading follows a separate Government-route framework.

The 2026 land-border-country changes add an ownership and beneficial-ownership check for relevant foreign investors. Before signing, a brand should map the ownership chain, business activity, payment flows and contractual rights so that the proposed India structure is assessed on the facts rather than on the word “franchise” alone.

FAQs

This page is a summary of published policy positions, not legal advice. India’s foreign investment framework is amended by press note and the detail changes. Confirm the current position with Indian counsel before structuring any transaction. 

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