Joint Ventures

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A joint venture acts as a new enterprise formed when 2 or more participants come together to share their assets for a specific business purpose and a limited time period.Although it is owned by the participating firms, they continue to exist as separate firms.

A joint venture is governed by a long term contract and it may be organized as any of business entities available in India.There are no separate laws which govern them. Even if the participating firms have 100% foreign equity, they are treated the same as domestic companies.

Joint ventures are the most preferred corporate entities in India because of their flexible nature.

Setting up a Joint Venture

A joint venture can be set up by one of the following ways:
  1. Two parties, which may be individuals or companies, incorporate a new company. One party transfers its business to the new company and shares are issued by the company which is subscribed by that party. These shares are subscribed for cash by the other party.
  2. Both parties above subscribe to the shares of the new company in agreed proportion and cash.
  3. The promoter shareholder of an existing Indian company and a third party which may be an individual or company, come together to jointly carry on the company's business. The third party takes its shares through cash payment.

Government and Joint Ventures

Joint ventures in India require government approvals either from RBI or FIPB.
    Reserve Bank of India (RBI) - gives approvals if the joint venture is covered under the Automatic Approval Route. The investors are required to notify the RBI's regional office within 30 days of remittances being received. Also, all the required documents must be filed within 30 days of issue of shares.

    Foreign Investment Promotion Board (FIPB) - gives approvals in special cases where the joint venture is not covered under the Automatic Approval Route. The FIPB works under the Ministry of Finance and approves foreign investments as well as provides appropriate institutional arrangements, transparent procedures and guidelines for FDI promotion.

Foreign investment in India is governed by the Foreign Direct Investment (FDI) policy and the Foreign Exchange Management Act (FEMA), 1999.

The Government has also set up an Indian Investment Center under the Ministry of Finance for providing authentic information and assistance for investments, technical collaborations and joint ventures.

Also, the government of India set up the Secretariat for Industrial Approval (SIA) under the Ministry of Commerce & Industry. It provides investor assistance as well as receives and processes all applications for government approval.

Foreign investments require approvals from the RBI or FIPB for which proposals containing an application are submitted.
  • Applications should include information on whether the applicant has any existing collaboration or trade mark agreement in India in the same field for which an approval is sought. If so, details and justification for investing in a new venture has to be given.

  • Applications can also be submitted with the Indian Missions abroad which forwards them to the Department of Economic Affairs for further processing.

  • Applications received in the Department of Economic Affairs are passed on to the RBI or FIPB for approval within 15 days of receipt.

Range of Foreign Investment

Foreign investment can be made in 37 high priority industrial sectors outlined by the government. Investments up to 74% can be made in companies under these sectors and those engaged in export activities. The RBI approves these investments after the proper evaluation of the applications.

For approval of cases where foreign equity is more than 74% and sectors outside the high priority list, an application in the form FC has to be filed with SIA which responds within 6 weeks. The government allows 100% equity in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or units in an Export Processing Zones (EPZ) The government prohibits foreign investment in sectors reserved exclusively for the public sector and sectors like real estate, insurance, agriculture and plantation.

Sector wise detail of the allowed investment in all sectors is given in the FDI policy.

Joint Venture Agreement

The success of any joint venture depends on selecting a good partner. After a partner is selected a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the terms and conditions of the future agreement.

Before the signing of these memorandums and agreements the parties must consult lawyers well versed in international and multi-jurisdictional laws and procedures so that their interest are secured. Also, the terms must be clearly discussed and negotiated. Both parties should agree upon them to avoid future misunderstandings.

For framing a comprehensive and exhaustive joint venture agreement the important factors that need to be discussed well are:
  • Board of Directors
  • General meeting.
  • CEO/MD
  • Access.
  • Change of control
  • Non-Compete
  • Confidentiality
  • Indemnity
  • Management Committee
  • Important decisions with consent of partners
  • Dividend policy
  • Dispute resolution agreements
  • Funding
  • Assignment.
  • Break of deadlock
  • Termination.
  • Applicable law.
  • Force Majeure
  • Holding shares
  • Transfer of shares
The Joint Venture agreement is subjected to obtain all necessary governmental approvals and licenses within specified period.

Advantages of a Joint Venture

  • The risk of forming a new venture is shared by all parties. For a party, the risk is reduced as the activities can be expanded with smaller investments as compared to if financed independently.
  • It helps in knowledge acquisition. It helps a participant to learn more about a relatively new product or market. The knowledge acquisition covers many segments like R&D, production, marketing or product servicing etc.
  • A small firm with a new product idea that involves high risk and requires large capital can form a joint venture with a large firm. The existence of the smaller firm is secured as it doesn't bear the risks alone and can use the other party's capital. The financial risks are carried by the larger firm in return of which it is involved in the growth and profitability of the new business. In addition, the larger firm gains experience in the new business that paves the way for a major thrust in future.
  • The parties can avail many tax benefits.
  • A participating party's expansion into foreign countries is facilitated by the local partner's contribution in the form of specialized knowledge about local conditions which is a key for a successful joint venture.

Obstacles facing a Joint Venture

A joint venture faces many obstacles like:
  • An inflexible contract which cannot cope up with the constant changes in the business environment
  • Inadequate pre-planning
  • Slow technological developments
  • Disagreement on alternative approaches to achieve the objectives of the joint venture.
  • Experts of one company may refuse to share their knowledge with others.
  • Parent companies may not want to share resources due to lack of trust.

    Successful Joint Ventures

    For a joint venture to be successful it needs to meet the following requirements:
    • Sufficient time and energy should be devoted to pre-planning.
    • Each participant must add value to the venture.
    • The contract should be flexible in nature.
    • The legal and cultural background of the country involved must be clear.
    • The agreement should cover provisions for termination, buyouts etc.
    • The implementation and functioning of joint ventures must be in the hands of experienced and key executives.
    • The authority of making decisions relevant to the joint venture must be with a distinct unit in the organization structure.

    International Joint Ventures

    Such joint ventures involve two or more international parties which may be individuals or companies. The details of setting up, government approvals, agreement terms etc are same as that of a normal joint venture with some minor additions.

    International joint ventures have special features which have minor differences from domestic joint ventures. To make them successful some special efforts are required by all the parties involved.