Legal Issues For Investment In The Hotel And Hospitality Sector In India

-CB Edit Desk

The major legal issues for investment in the hotel and hospitality sector in India can be divided into six categories, as reported in Lexology:

1) Foreign Investment in the Hotel and Hospitality Sector

Around 11 million foreign tourists visited India in 2019. Recovery in the tourism sector in India is likely to occur at end of 2021, said Bird & Bird LLP. The Government of India has implemented various campaigns such as “Incredible India” and “Atithi Devo Bhava” (“Guest is God”) in order to promote tourism in India. The Government of India has also introduced `visa on arrival’ for tourists arriving from a number of countries. India has seen an upsurge in event-based tourism including religious tourism, wedding tourism, medical tourism, and education tourism. Under the Foreign Investment Regulations, foreign investment of up to 100% is permitted by Indian companies engaged in the hotel or hospitality sectors. This includes the development and construction of hotels and restaurants under an automatic route without any approval from the Government of India, the Reserve Bank of India, or the Indian Exchange Control Regulator. In addition to the investment model, the franchising model is also popular for the hotel and hospitality sector without any ownership of the hotel and hospitality entities in India.

2) Due Diligence and Brand Protection

The basis of success for any business relationship is finding the right partner. Therefore, it is imperative to undertake background checks on a prospective partner, verifying the partner’s track record and any claims against them. The due diligence of the partner is an ever-evolving process which has to be undertaken in addition to due diligence of the target entity. The emphasis of due diligence in the context of the hotel and hospitality sector should be on (i) land issues: searches at land registries and verification of user requirements under development and town planning laws (ii) brand protection and ownership of intellectual property rights (iii) related party transactions (iv) onerous contracts (v) non-compliance with laws (vi) open ended obligations (vii) change of control issues and (viii) approvals for the transaction, permits and business licences.

3) Operating Licences Issues

There are approximately 65 licences required for the establishment of a hotel in India. The numerous licence requirements result in (i) delay in project implementation (ii) cost escalation (iii) discouragement of investment (iv) stopping of a project midway and (v) default and restructuring of the relevant entity engaged in the project. These licences are required under Food & Hygiene, Pollution Control, Establishment, Weights & Measurement, Petroleum & Boiler, Liquor, Fire Safety, Construction & Municipal, and Public Performance laws. The (i) numerous licences (ii) high licence fees and (iii) state specific requirements of licences, are key hurdles for greater investment in the hotel and hospitality sector in India. There is still need for simplification of the regulations and licencing requirements for the hotel and hospitality sector. This is the purpose of the Government of India’s “Ease of Doing Business in India” initiative.

4) Hospitality Development and Promotion Board (HDP Board) and Other Agencies

The Ministry of Tourism Development (MoTD) of the Government of India has set up the HDP Board. The HDP Board facilitates project clearance and approvals for the construction and development of hotels. It also monitors and reviews federal and state licencing requirements. The Hotel and Restaurant Approval and Classification Committee (“HRACC”) has been set up by the MoTD for granting star ratings to hotels based on 17 criteria for 5 years, with prior 6 months application for renewal. The Federation of Hotels and Restaurants Association of India and Hotel Association of India are important associations for restaurants and hotels operating in India.

5) COVID-19 Standard Operating Procedures (“SOPs”) for Hotels/Restaurants/Entertainment Parks

The Government of India has issued COVID-19 SOPs for Hotels/Restaurants/Entertainment Parks which are required to be complied with by the persons engaged in the hotel and hospitality sector. The SOPs provide for:

  • Installation and use of the Aarogya Setu app shall be advised for all.
  • Preferably separate entry and exits for guests, staff and goods/supplies.
  • Details of the guest (travel history, medical conditions, etc.) along with ID and selfdeclaration form to be provided by the guest at the reception.
  • The adoption of contactless practices such as QR codes, online forms, digital payments like e-wallets etc. for both check-in and check-out.
  • Luggage to be disinfected before sending to rooms.
  • Disposable/QR code-based menus advised to be used.
  • Instead of cloth napkins, use of good quality disposable paper napkins to be encouraged.
  • Buffet service to follow physical distancing norms among guests.
  • For air-conditioning/ventilation, the temperature setting of all air conditioning devices should be in the range of 24-30o C, relative humidity should be in the range of 40-70%, intake of fresh air should be as much as possible and cross ventilation should be adequate.
  • Rooms and other service areas to be sanitized each time a guest leaves.
  • Rules for: physical distancing, crowd management, ensuring ventilation, making available COVID supplies, creating awareness, maintaining healthy operations, and establishing clear entry and exit points from the premises when using common areas.

6) Other Issues

There are several other important issues relating to the hotel and hospitality sector in India. The exclusivity for a project should be specified in relation to type of hotel, area of operation of the hotel and brand under which the hotel operates. The non-competition covenants between the partners should be restricted to areas of operation of the hotel, type of hotel and brand under which the hotel operates. Generally, Hotel Management Contracts or Operation and Management Contracts or Franchise Agreements specifying the contributions of the parties and control over operation and management are executed between the hotel brand owner and the Indian hotel company. However, established hotel companies have been executing separate contracts for providing Offshore Technical Services through wholly owned subsidiaries of hotel companies in India.

The future of the hotel and hospitality sector in India looks very promising in the long run.

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