Joint Venture in India

Need of Joint Venture:

Business Projects being larger, technology more expensive and failure cost too high to bear alone; the entities these days are heading towards combining their property and expertise.

Joint ventures in simple terms is an association of two or more entities combining property and expertise to carry out a single business enterprise and having a joint interest, right to control and a sharing of profits and losses.

Joint ventures are very common and successful in several industries. Their formation can be a complex procedure. Once a joint venture partner is selected, the goals and structures are defined. The professional involved in such matters, needs to make sure that the potential areas of conflict between the joint venture partners must be reconciled well in advance.

Benefits of Forming a Joint Venture

  • Risk sharing
  • Economies of scale
  • Market access
  • Geographical Constraints
  • Funding Constraints
  • Reduction in Acquisition Barriers

Features of Joint Ventures:

  • Combination of two or more entities
  • Contractual Agreement
  • Separate Identity
  • Active management involvement
  • Sharing in Profits, Losses, Management, Control and Risk
  • Specific Limited Purpose and Duration

Forming a joint venture in India
Joint Ventures can be structured as Corporations, Partnerships (General / Limited), Limited Liability Company (LLC) or Limited Liability Partnership (LLP).

The key to the success of any joint venture lies in the selection of a good local partner. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties. In case of those joint ventures where a new corporate entity for example a company is created, The typical agreement in such a case is the shareholders’ agreement.

Ideally a Shareholders’ Agreement should contain the following clauses:

  • The parties involved
  • A brief recital
  • Definition and Interpretation clause
  • The effective date of the Agreement
  • Capital Structure
  • The object, Purpose and scope of the joint venture
  • Management and the Board of Directors
  • Composition of Board of Directors
  • Shareholders’ Rights and Obligation
  • Representations and Warranties
  • Termination of the Agreement
  • Confidentiality
  • Miscellaneous Clauses

International Joint Ventures:

International Joint Ventures are those in which one or more of the parties are located outside the domestic boundary of home country. Many countries have created a wide range of economic incentives for using a JV structure for foreign investment. The international Joint Ventures must consider the host country’s investment laws and regulations and often obtain the host country’s governmental approval.

A non resident Indian (NRI) or Person of the Indian Origin (PIO) resident outside India can invest in India on non repatriation basis without any approval.

However, NRI/PIO may investment in the capital of the partnership firm on repatriation basis with the prior approval of the Reserve Bank of India. Reserve bank of the India will decide approval with consultation with the Government of the India. Further more a person other than non resident Indian or person of the India origin can only invest in capital of the Association of Person with the prior approval of the Reserve Bank of the India

Joint Venture Companies are the most preferred module of corporate entities for Doing Business in India to achieve specific objectives of a partnership like temporary arrangement between two or more firms. JVs are advantageous as a risk reducing mechanism in new-market penetration and in pooling of resource for large projects. There are no separate laws for joint ventures in India.

For a developing country like India, joint venture(s) provide Indian Company(s) access to acquire sophisticated technology at ease. The joint venture(s) can be formed for one specific project or a continuing business relationship. The decision of entering into Joint Venture is a major business decision and business of any size can enter into such ventures.

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