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Establishing a Joint Venture in India

 Establishing a Joint Venture in India
A
joint venture is a tactical
partnership where two or
more people or companies
agree to put in goods,
services and/or capital to
a uniform commercial project.
In sectors where 100% FDI is not
allowed in India, joint venture is best
medium to enter into Indian market.
Joint venture offers a low risk option
for the companies wanting to enter
in vibrant market like India. For any
successful JV into India, compatibility
is important tool for both the parties. To
maintain a successful joint venture in
India both the associated parties should
have a long term goal and conditions
should be written in the clauses in JV.
Why JV?
Joint Venture companies are mainly
the chosen form of corporate houses
for Doing Business in India. There
are no separate laws for joint ventures
in India. The companies registered in
India, even with up to 100% overseas
equity, are considered the same as local
companies. A Joint Venture may be any
of the business entities existing in India.
How to enter in to JV in India?
hoosing of a good home partner is
the important tool to the success of
any joint venture. Once an associate
is selected normally a Memorandum
of Understanding or a Letter of Intent
is signed by the parties stressing the
foundation of the future joint venture
agreement.
A Memorandum of Understanding
(MoU) and a Joint Venture Agreement
must be marked after consulting
Chartered Accountants Firm well versed
in Foreign Exchange Management
Act, Indian Income Tax Act, Indian
Companies Act, international laws and
applicable Indian Rules & Regulations
and procedures.
2 Establishing a Joint Venture in India
Terms and conditions should be properly
assessed before signing the contract.
Negotiations need an understanding
of the cultural and legal background
of the parties. The Joint Venture union
should be a subject matter to obtaining
all required governmental approvals and
licenses within specified period.
Before signing a Joint Venture contract
the below points must be properly
assessed:
Applicable law
Shareholding Pattern
Composition of Board of Directors
Management Committee
Frequency of Board Meeting & its
venue
General Meeting & its venue
Composition of quorum for important
decision at Board Meeting
Transfer of shares
Dividend policy
Employment of Funds in cash or kind
Change of control
Restriction /Prohibition on
Assignment
Non-Compete parameters
Confidentiality
Indemnity
Break of deadlock
Jurisdiction for resolution of dispute
Termination criteria & notice
Methods of Joint Venture in
India
1. Equity Joint venture
2. Contractual Joint venture
The Equity Joint Venture is an
understanding whereby an independent
legal entity is created in accordance with
the agreement of two or more parties.
The Contractual Joint Venture might
be used where the organization of a
detach legal entity is not needed or the
creation of such a separate legal entity
is not feasible.
Where one or more legal methods are
used in the founding of the joint venture
company to execute its operations is
based on the partnership between the
parties, the results of which reproduce
in the joint venture agreement entered
into between the parties.
The licensing agreement, know how
agreement, technical services or technical
assistance agreement, royalty payment,
franchise agreement and agreement
including all other profit-making matters
including use of intellectual property
rights normally form annexes or
attachments to the main J V Agreement.
They can be signed simultaneously
or after the joint venture Company is
recognized.
Recent Joint Ventures in India
The Nissan Motor signed a Joint Venture
deal to make commercial vehicles,
engine and components in India. Ashok
Leyland Nissan vehicles, the 50:50
JV between ALL and Nissan Motor,
has unveiled its first light commercial
product, “Ashok Leyland Dost”. The
1.25 tonne payload capacity vehicle is
to hit the market in the second quarter
of 2011-12.
After Nissan, it’s Volvo’s turn to tap
the same market. The Swedish truck
maker is investing $375 million for
a joint venture with Eicher Motors,
the third-largest commercial vehicle
manufacturer in India.
The world’s largest retailer, Wal-Mart,
entered into a 50:50 joint venture with
Bharti Enterprises for wholesale cash-
and-carry business in India that will
roll out 10-15 such outlets over seven
years. This also covers a supply chain
and back-end logistics.
DragonWave Inc., a global supplier
of packet microwave radio systems
for mobile and access networks, and
Himachal Futuristic Communications
Ltd. (HFCL, are undertaking a joint
venture to provide leading packet
microwave solutions to the Indian
market.
Advantages of JV
Following are the advantages of the
Joint Venture for a foreign investor:
Established distribution/ marketing set
up of the Indian partner
Available financial resource of the
Indian partners
Established contacts of the Indian
partners which help smoothen the
process of setting up of operations
A JV also offers parties an opportunity
to jointly manage the risks associated
with new ventures. Through a JV they
can limit their individual exposure by
sharing the liabilities.
JVs offer many flexible business
diversification opportunities to the
partners. A JV may be set up, as a
prelude to a full merger or only for
part of the business.
Certain market sectors remain
restricted for foreign investment
and a local partner with a certain
shareholding in the company is a
regulatory necessity for commencing
business and making investments.
Types of JV
Though a JV in the form of incorporated
Company is the most famous among
foreign Investors, the other types of JV
available are as follows:
Incorporated
• Company
• Limited Liability Partnership (LLP)
Unincorporated
• Partnership
• Cooperation Agreement /
Strategic Alliances
Management
It is important to have the same opinion
over the proposed management structure
and to categorize which party has to
organize early in the joint venture
procedure. Superlatively, management
constitution, control and safeguards
should be agreed when preparing the
memorandum of understanding.
Structure of the Board of Directors
of the Company can be resolute by
the Joint Venture Agreement and
corresponding necessities can be made
in the Articles of Association of the
Company. Members to the Joint Venture
can choose on the matters such as
total number of Directors, number of
Directors to signify parties to the JVA,
appointment of Managing Director,
Chairman.
Therefore necessities can be made in the
Articles of Association of the Company.
It is universal to provide in the JVA, that
every resolution of the Board linking
to particular matters shall involve
confirmatory vote of a mainstream
comprising at least one director each
representing the partners in the JV.
Royalty
For the automatic route, RBI permits
lump sum payments not exceeding US$
2 million.
Royalty payable is restricted to 5 % for
local sales and 8 % for exports, without
any constraint on the period of the
royalty payments. The royalty limits are
net of taxes and are calculated according
to standard conditions. Imbursements
are made through RBI.
The royalty is measured on the source
of the total ex-factory sale price of
the product, except of excise duties,
minus the cost of the average bought-
out constituents and the landed cost of
imported components, irrespective of
the source of procurement, including
ocean freight, insurance, custom duties,
etc.
Issue of equity shares against lump sum
fees and royalty fees is allowed. For
over and above this norm, the firm has
to go to FPBI.
Profits repatriation
India allows free of charge repatriation
of profits once the entire domestic
and central (tax) liabilities are met.
Historically, there has never been
an occurrence that India has failed
to provide foreign exchange for
repatriation. Investment exit processes
are also fairly simple, and profits can
be repatriated once all the tax debt and
other compulsions are fulfilled. Troubles
only arise when people escape or dodge
the already simple rules, or do so out of
ignorance.
Exit Strategy
Joint ventures in India are normally
planned for a particular period, and
overseas companies should take the
length of such a lifespan acutely. Indian
Joint Ventures often fall short because
the domestic associates are not capable
to fund enough resources to expand
the business as rapidly as the foreign
company had hoped for or because the
local partners have a data advantage in
terms of the local conditions of doing
business and have different interests
from the foreign firms. Though it
might be contradictory instinctive, it
is absolutely mandatory to determine
the planned timing of the exit from
the joint venture at the beginning.
The general exit options are: buy-sell
agreements, unilateral sale rights, and,
put/call rights. On the other hand, the
Indian joint venture agreement may also
provide for the termination of operations
and the liquidation and closure of the
venture. Any of those options can be
used independently or in combination
with each other.
Removal of the condition
of prior approval in case of
existing joint ventures/ technical
collaborations in the ‘same field
The government of India in an updated
foreign direct investment (FDI) policy
stated simplification of joint venture
norms and opens up new areas for
overseas funds.
In a milestone decision, the government
of India has eased regulations for
investment by foreign companies
that are present in India through joint
venture (JV) or technical collaboration.
Establishing a Joint Venture in India 3
 Now, overseas companies will not
have to seek a no-objection certificate
from the Indian associate for investing
in the sector where the joint ventures
operate. These changes are part of the
consolidated FDI policy (3rd revision).
The restructured policy permits overseas
firms in existing joint ventures to
function independently in the same
business segment. Previously, they
needed prior approval from their Indian
partners.
According to the updated policy the
commerce and industry ministry
released, companies have now been
grouped into only two categories —
companies owned or controlled by
foreign investors and companies owned
and controlled by Indian residents.
Elimination of this condition would give
more confidence to investors who were
strangulated by their partners.
Removal of the condition of prior
approval in case of existing joint
ventures/ technical collaborations in
the ‘same field
The government of India in an updated
foreign direct investment (FDI) policy
stated simplification of joint venture
norms and opens up new areas for
overseas funds.
In a milestone decision, the government
of India has eased regulations for
investment by foreign companies
that are present in India through joint
venture (JV) or technical collaboration.
Now, overseas companies will not
have to seek a no-objection certificate
from the Indian associate for investing
in the sector where the joint ventures
operate. These changes are part of the
consolidated FDI policy (3rd revision).
The restructured policy permits overseas
firms in existing joint ventures to
function independently in the same
business segment. Previously, they
needed prior approval from their Indian
partners.
According to the updated policy the
commerce and industry ministry
4 Establishing a Joint Venture in India
released, companies have now been Registered User Agreement) with Indian
grouped into only two categories — organizations.
companies owned or controlled by
foreign investors and companies owned Human resource
and controlled by Indian residents. Agreement of employment for
Elimination of this condition would give employees is generally governed by
more confidence to investors who were the Indian Contracts Act, which is
strangulated by their partners. fundamentally a codification of English
contract law. The hiring and firing of
Pre incorporation Due Diligence staff is therefore normally subject to
Overseas firms should conduct a formal the terms of the contract rather than any
due diligence process to evaluate the inflexible employment act.
expectations and limitations of the
Indian associate, to check the validity Many overseas investors have their
of the partners’ business operations, to customary service contracts amended to
review the validity of the documents the degree that it is needed to obey the
produced by the prospective partners, rules with Indian law or cultural norms,
and to evaluate any risk factors such as the provision of “casual leave”
associated with the potential partners. or more reimbursement in kind rather
than cash. A parallel way can be adopted
Tax consideration when drafting employee handbooks for
Foreign firms should reach out to tax Indian company.
advice at the beginning of an Indian
investment. India has a very low entry In order to generate a win - win condition
for creating a taxable presence. The for both, Indians and Foreign Investors,
sale of shares in an Indian company is JV is a good tool to venture into a
usually taxed in India as capital gains, business opportunity. It is also important
even if the seller is not a resident of to say that lot depends on the communal
India. India taxes such capital gains at trust and confidence. Complying with
high, variable rates of taxation ranging the suitable measures and avoiding
from zero to around 30%. Therefore, communication gap are quite vital to
overseas are generally advised to invest the accomplishment of any JV.
through offshore jurisdiction. India has
tax treaties with Mauritius, Cypress, the
UAE, Singapore, and the Netherlands.
Intellectual property rights
India functions a system of listing for
IPR and is a participant to various
international IPR treaties. The
perception remains, that India is a
high-risk area for IPR shoplifting. A
foreign investor should carry out an
inspection to recognize what, if any, of
its IPR will be uncovered to the Indian
market, and then consider whether it is
worth shielding.
Processes that can be taken by an
overseas investor to protect its IPR
include registration and the making of
detailed provision in the joint venture
agreement. Independent documentation
to the joint venture contract may also
be executed, such as a name and logo
license agreement (also known as a
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