Overview about Establishing 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:
Top Benefits Of Establishing A Joint Venture In India
- 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
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.
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 a typical joint venture in India are as below:
- When two parties incorporate a company in India and subscribe to the resources and shares of the joint venture in agreed proportion to start a new business. In this case, the business of one party is transferred to the company and shares are issued by the company and subscribed by that party, whereas the other party subscribes for the shares in cash.
- Also in case of a joint venture, a promoter shareholder of an existing company collaborates jointly with a third party, which may be an individual or a company, in order to carry out the business of that particular company and its shares are subscribed by the third party in cash.
- A joint venture can be done by collaborating with an existing company where the joint venture partners acquire shares of an existing and established company either by subscribing to its existing shares or acquiring new shares.
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. One should 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.
- 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:
- As per the Indian Law, it is important to decide if the joint venture will be a private or a public limited company. Because depending on the nature of your joint venture company, you will be able to start the business on receipt of its incorporation i.e. if the joint venture company is a private limited one, you can start the business immediately on the receipt of its incorporation; however in case of a public limited company, you have to file the ROC prospectus or statement.
- The place or location which will be the registered office of the joint venture company.
- Before you finalize the name of the joint venture company, it is advisable to check for its availability from the Registrar of Companies, because it is the ROC where the registered office of your joint venture company will be situated and the company is to be incorporated.
- Select the subscribers to the Memorandum of Association, including the joint venture partners and their nominees.
- Prepare the Articles of Association and Memorandum of Understanding and submit them supplemented with documents such as statutory declaration u/s 33 of the Companies Act 1956 and Form No 18 u/s 146 of the Act. The documents have to be printed and duly stamped before submitting them to the ROC with the applicable fees.
- 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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