The Joint Venture (JV) represents a newly created business enterprise; its participants continue to exist as separate firms. A joint venture can be organized as a partnership firm, a corporation or any other form of business organization which the participating firms choose to select. Joint Ventures and Foreign Collaborations are two important business models which become more popular with the opening up of the economies in the contest of liberalization, competition and globalization in India.
LAW APPLICABLE ON JOINT VENTURE
There is no separate law for incorporation or registration of Joint Venture in India. It is incorporated or established like a private company or public company under the Indian Companies Act, 1956. There are some other Indian laws which are applicable on JV:
- Foreign Exchange Management Act, 1999
- Partnership Act
- Competition Act, 2002
- Foreign Trade (Development and Regulation) Act, 1992
- Industrial Policy and Procedure
- Contract Act
- Policy for Foreign Investment
- MRTP
- Companies Act, 1956 and
- SEBI Guidelines, Regulations, Notifications & Circulars
Joint Ventures and Wholly Owned Subsidiary have been defined in the Foreign Exchange Management (Transfer and Issue of Foreign Security) Regulations, 2000 as under:
Joint Ventures means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct Investment.
In recent years, the term “Joint Venture” has also been used interchangeably with a newer business vehicle called “strategic alliance.”
A strategic alliance is a specific form of collaboration between two or more companies. Strategic alliance with stronger overseas partners can provide a means of overcoming the problems of small size and lack of resources faced by some companies.
According to the survey, while India has been one of the leading destinations for shared services, the country is rapidly emerging as a manufacturing location for many foreign corporations. By 2020, 25% of our survey respondents see India among the world’s leading three destinations for manufacturing.
REASONS FOR ENTERING INTO A JOINT VENTURE
Parties looking for an appropriate business vehicle often seek out a joint venture arrangement because of benefit it affords with respect to the limitation of liability of the parties to the venture. The reasons for creating a joint venture could be stated as the ability to combine technology, expertise, strengths and knowhow of separate businesses with the sharing of investment costs and risks.
The following list is a summary of other motivations for entering into a joint venture:
- A company may want to enter into a foreign market with which it is not familiar.
- The joint venture allows the parties to the venture to undertake a potentially speculative and high risk endeavor without exposing assets to unlimited liability.
- The joint venturing parties can define at the outset of the project, the extent to which each shall be liable for costs and how the risks associated with the venture shall be allocated.
- The joint venture can offer flexibility in distributing operational responsibilities authority and facilitate use of the strengths of each party to the venture.
- A joint venture may be entered into for competitive considerations for example a joint venture with a potential competitor may reduce or eliminate competition.
FEATURES OF JOINT VENTURE
A joint venture is a partnership through which two or more firm or entity create a separate entity to carry out a particular economic activity in which each partner takes an active role in decision making. Besides the requirement that the joint venture must have a contractual basis, there are certain additional requisites for the successful existences of a joint ventures. Although its existence depends on the facts and circumstances of each particular case. However, the following key issue should be addressed before establishment of Joint Venture:
- Constitution of the Joint Venture (Equity based or Contractual Base)
- Contribution by the parties in the form of money, property, effort, knowledge, skill and other assets to a common understanding;
- To choose sect oral cap for FDI in proposed joint venture
- A joint property interest in the subject matter of the venture;
- A right of mutual control or management of the enterprise;
- Location of registered office;
- Proposed name of the Joint Venture
- Clear understanding of formation, performance and exit mechanism between joint venture parties;
- Selection of nominees/alternate directors on behalf of nominee shareholder/director
- A right to participate in the profit.
STEP TO FORM A JOINT VENTURE
Before entering into a joint venture agreement, the parties should go to the following process:
1. Recognise your options: identify different methods that can be used for entering into the joint venture;
2. Selection and understanding of market;
3. Determine the necessary resources you can commit like; time money and people;
4. Selection of partner
5. Determination of Joint Venture Strategy
6. Negotiation
7. Letter of Exchange
8. Determine the objective of the joint venture
9. Feasibility Study
10. Agreement in Principle
11. Joint Venture Agreement
12. Staged implementation
13. Full Operation
14. Review
15. Expansion
IMPORTANT CLAUSE OF JOINT VENTURE AGREEMENT
Selection of good local partner is the key to the success of any joint venture. A joint venture agreement requires dexterous legal drafting and should incorporate clearly the relevant clause that specifies the mutual understanding arrived at between both parties as to the formation, registration and operation of the joint venture company. A brief checklist of important clause is as follow:
- Name of the parties of Joint venture
- Place of execution of agreement
- The proportion of shareholding pattern in the Joint Venture
- Specify nature of shares
- Composition of Board of Directors, appointment and changes in chairman, Quorum of meeting, casting vote provision in Board Meeting
- Appointment of CEO/CFO
- General Meeting provision
- Appointment of Management Committee
- Dividend Policy
- Funding Provision
- Access Condition
- Change of Control/Exit Clause
- Anti Compete Clause
- Maintaining Confidentiality
- Indemnity Clause
- Applicable Law
- Force Majeure
- Termination of Agreement
Joint ventures perform a useful role in assisting companies in the process of restructuring. It can enable a firm to achieve market penetration into new areas overtime, enter and develop new product markets, expand into new geographic areas and participate in new technology driven value activities. They can also be used by smaller firms protectively as an element of long-range strategic planning. Thus, a small firm in a highly concentrated industry can negotiate joint ventures with several of the industry's dominant firms to form a self-protective network of counterbalancing forces.
Regards
CS Ajay Mishra
Email: csajaygkp@gmail.com & ajaygkp@gmail.com
CAclubindia
