Setting Up a Joint Venture in India
In general terms, a joint venture is understood as an entity formed between two or more parties to undertake an economic activity together. It involves two or more businesses who pool in their resources, both human resources and monetary, in order to achieve or reach a particular or desired goal. A joint venture is normally understood as a partnership, although partnership has a completely different legal meaning to it. Businesses opt for joint venture simply because it gives a boost to them in more than one way, i.e. a joint venture could give you.
Benefits of Establishing a Joint Venture in India
Benefits of Establishing a Joint Venture in India are -
- Increased resources
- Greater capacity
- Increased technical expertise
- Better access to established markets and distribution channels
- Helps in business expansion
- Development of new products
- Chance to explore new and challenging markets, particularly overseas
Why choose a Joint Venture in India?
The idea of joint ventures has gained popularity in last few years, especially amongst creative small business owners, who opt for the idea with the ultimate purpose of saving money, and the very fact that a joint venture not only minimizes the risk factors involved in entering a new and unexplored business market, but also reduces the costs involved in doing so. It also gives access to financial resources of the Indian partners along with access to the established contacts of the Indian partners, which definitely helps in smoothening the process of setting up of operations.
India, being one of the most favourite destinations for foreign investors, joint venture is a common form of doing business and most of the foreign investments are made in a joint venture business. There are no separate laws or principles for governing the formation, conduct and termination of the joint ventures; however it is governed by the Indian Contract Act. Also, considering the fact that there is more than one party involved in forming a joint venture, it involves several aspects of corporate laws as well.
Also Read: Foreign Direct Investment (FDI)
In India, a typical type of joint venture is where a foreign investor signs up with an Indian establishment, in order to access the strengths of later one, in terms of established market, local knowledge i.e. know-how, local management and distribution channels.
Features of Joint Venture in India
Features of a typical joint venture in India are as below:
Approvals Needed for the Joint Ventures in India
A government approval is required if a foreign investor (partner) or an NRI or PIO is involved in setting up the joint venture and depending on the route, the necessary approvals are taken. For example, if the joint venture is covered under automatic route, then it is necessary to take the approval from the Reserve Bank of India, whereas in any other case, not covered under the automatic route, approval or permission from Foreign Investment Promotion Board is required. In the later case, the approval from RBI is not required. As per Indian law, the government has outlined approx 37 high priority areas covering majority of industrial sectors and if the investment proposals involve up to 74% foreign equity in these high priority areas, the permission or approval comes within 2 to 3 weeks. Indian government has also set up a high-powered Foreign Investment Promotion Board (FIPB), which is located in the office of the Prime Minister and is empowered to give clearances to major investment proposals without being restricted by any predetermined parameters.
As far as Indian market is concerned, a joint venture is one of the best medium, especially in sectors where 100 percent FDI is not allowed and one needs to follow the below mentioned steps to set up a joint venture in India:
Step by Step Process to Set Up a Joint Venture in India
Select an Indian Partner
Selection of a good local partner is the key to the success of any joint venture and also one of the main reasons why majority of joint ventures fail to soar high. In order to select a right partner for the joint venture, personal interview with the prospective joint venture partners helps in reaching out to the right one and thus the homework on the same should be given its due diligence. In order to assess a new potential partner, you must carry out certain basic checks such as:
- If the prospective joint venture partners are financially secure?
- If they are trustworthy?
- If they any credit problems?
- If they already have any joint venture partnerships with other businesses?
- Nature and kind of management team of the prospective partners.
- How are they performing in terms of production, marketing and human resources?
- If their brand values complement yours?
- If you both share the same business objectives?
- If you both share same level of commitment towards the collaboration?
Joint Venture Agreement
Once the partner for your joint venture is selected, the very next step is to pen down a memorandum of understanding or a letter of intent, also known as joint venture agreement and to ensure that you are well within the legal boundaries, it is important to draft it after consulting a Chartered Accountant who is well versed with the various acts, namely Foreign Exchange Management Act, Indian-Income Tax Act 1961, the Companies Act 2013, various international laws, applicable Indian rules, regulations and procedures. As it is clear that a joint venture agreement needs to be a detailed and comprehensive one, it calls for a dexterous legal drafting. It should also clearly specify the mutual agreement and understanding between both the parties.
Important Clauses of a Joint Venture Agreement
Go through the below checklist before entering into a joint venture agreement:
- Appointment of CEO/MD and managing committee.
- Dividend policy.
- Shareholding proportion of the parties involved in the joint venture company.
- Nature of shares and their transferability conditions.
- Funding provisions.
- Confidentiality clauses if any.
- Important decisions with mutual consent of partners.
- Dispute resolution agreements.
- Board of directors.
- General meeting and its venue.
- Change of control.
- Non-compete parameters.
- Indemnity clauses.
- Jurisdiction for resolution of dispute.
- Break of deadlock.
- Exit/Termination provisions.
- Force Majeure.
Formalities while entering into a Joint Ventures in India
Apart from selecting the joint venture partner and getting the joint venture agreement right, there are certain formalities which need to be done before you start with the venture. Following are the pertinent issues which needs diligent attention:
Types of Joint Ventures in India
In India, you can choose from various joint ventures options namely:
Equity Joint Venture
In this kind of joint venture, the concerned or the associated parties contributes in term of money and other resources to the assets or capital of the corporate entity and is best suitable for long-term, broad based joint ventures including joint venture limited liability partnerships (LLPs).
Contractual Joint Venture
Contractual joint venture is best suited for the situations that involve either a limited task or a temporary activity.
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