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Want to know why McDonald’s may shut down in half of India? Ask its first Indian business partner

Quartz logo Quartz 22-08-2017 Suneera Tandon

McDonald’s headed for a crisis in India.

A long-drawn legal battle with its local joint venture (JV) partner of 22 years, Connaught Plaza Restaurants (CPRL), is straining the company’s business. On Aug. 21, the fast-food chain said it had issued a notice of termination on its franchise agreement with CPRL, which runs its outlets in north and east India, leaving the future of 169 of its outlets uncertain.

The move comes after years of litigation over the control of CPRL, headed by Vikram Bakshi since 1996. The case had led to a slowdown for the burger chain in Asia’s third-largest economy. The closure of 43 Delhi outlets in July, following licence expiry, compelled the chain to terminate its ties with CPRL, McDonald’s said in a statement following the notice issued to CPRL.

READ: McDonald's to shut 169 outlets in India

The move could hit business in parts of India, as the burger chain seeks to appoint a new partner and rebuild its brand across the northern and eastern markets, the statement said.

So what exactly is happening with the golden arches in India?

How it all began

McDonald’s first set foot in the country in 1996 following the opening up of the market to foreign players in the wake of economic reforms.

Its first store was in New Delhi’s Basant Lok market, with its local JV partner, Bakshi’s CPRL. For the south and west of India, the company tied up with Mumbai-based Hardcastle Restaurants, which owns the master franchise rights for these regions even now.

Today, it has over 300 outlets across India, dramatically reshaping India’s fast-food culture, especially among the middle- and affluent classes, over the years.

However, in August 2013, in an abrupt and very public announcement, McDonald’s ousted Bakshi as managing director of CPRL over alleged financial irregularities. It claimed that Bakshi’s other business interests were benefiting through his management of the fast-food chain in India.

A long legal battle ensued as Bakshi moved the Company Law Board (now the National Company Law Tribunal or NCLT) in September 2013. He stated that his removal was oppressive in nature and intended to buy him out at a lower valuation to take full control of the chain’s business in northern and eastern India.

In 2014, hinting at resolution, McDonald’s offered Bakshi Rs120 crore for his 50% stake in CPRL. But then Bakshi valued his stake at Rs1,800 crore. The two failed to arrive at a consensus.

More recently, the NCLT reinstated Bakshi as managing director of CPRL, a move that McDonald’s had vowed to challenge.

The outcome

CPRL’s business decisions are led by a four-member board comprising Bakshi, his wife, and two McDonald’s representatives.

The legal battle, along with a high rate of attrition, has affected day-day operations at the company, hampering the brand’s growth in north and east India. For instance, from 27 in 2012, the number of new-store openings was down to three in 2015. This, even as other fast-food chains, and in fact, McDonald’s own business in south and west India, expanded.

What now?

Wait and watch for Bakshi’s response to the Aug. 21 notice.

According to it, CPRL has 15 days to cease using the burger chain’s brand name, trademarks, designs, branding, operational and marketing practice, and food recipes in India. So, the existing 169 restaurants could face closure if CRPL fails to respond suitably to McDonald’s notice.

Meanwhile, without divulging details, the burger chain said it could “take time to bring the current situation to a final resolution.” It has hinted at uncertainty in its business in the near future. “As we proceed to exercise our legal and contractual rights consequent on termination, a priority will be to mitigate the impact on affected parties such as employees, suppliers and landlords and we are open to working with CPRL to achieve this.”

But Bakshi isn’t giving up easily. Calling the notice a desperate, contemptuous, and oppressive move, he said, “CPRL is considering the appropriate legal remedies that are available under law.”

Where to find McDonald’s in India?

You may walk into a McDonald’s outlet anywhere in India, for they’re are fully functional till the 15-day deadline ends. Or even after that if a solution is found by then.

In any case, it continues to operate smoothly in the west and south through Hardcastle Restaurants, managed by Amit Jatia.

On its part, the company seeking a replacement for Bakshi and CPRL. “We are already looking at the necessary steps to rebuild the brand. As part of this, we are committed to finding the right developmental licensee partner for north and east India, and are taking steps to do so.”

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