What is a Joint Venture?
A tactical partnership brought up by more than one party for some business is called Joint Venture. They are the most preferred form of corporate identities for business in India. They may be related to any business available in the country. Joint Ventures in India are rapidly growing and becoming successful.
Types of Joint Ventures in India
Equity joint venture
- It is a partnership where you create an independent legal entity after an agreement with your partner.
- Both parties contribute financially to set up the corporate entity. It is a long term, broad-based venture.
Contractual joint venture
- It is a partnership where a legal entity is not necessary or is not feasible. It is a temporary, limited time venture.
A typical set up of a Joint Venture in our country:
1. Two or more parties come together to bring forward a company in India. One company transfers it’s business to the other, and in return, the other helps in issuing shares that are distributed between the two parties.
2. The two involved parties subscribe to the purchased shares of the joint venture, child company after coming to a common ground in terms of proportion and cash.
3. There is a promoter or a shareholder from a third, the existing company collaborates with the other two parties to jointly carry on the setup business.
A joint venture is not that easy to set up. There are many practical aspects associated with it. Some prerequisites that you need to consider when you decide to set up a joint venture in India are listed below.
The required Government approvals:
No matter what kind of joint venture you decide to set up, you would need governmental approval. You would either need a sanction from the RBI or FIPB (for NRI and foreigners). If the venture is not under the automated rule, you would need special permission from FIPB.
The Indian government has so far outlined 37 high priority areas covering almost the entire industrial sector. 74% of Foreign equity is set, but it can only be carried forward after government approval.
How to enter into a Joint Venture?
- All goes to waste if the partner you choose to do business with is not appropriate. So, the selection of a perfect partner is the key to success.
- Once that is off the table, both you and your partner have to self attest a Memorandum of Understanding or a Letter of Intent. This would highlight the future goals and basis of your joint venture.
- Make sure to sign the above documents only after proper judicial consultation. The lawyers looking after this must be well versed in international laws and multi-jurisdictional procedures.
- Don’t forget to thoroughly discuss, negotiate and understand the terms and conditions mentioned in the documents. If you fail to do so, you might face numerous problems in the future. Be considerate about the legal and cultural background of your partner while compiling the documents.
- You must address the following aspects before you sign the joint venture agreement:
- Applicable Law
- Dispute resolution procedures
- Force Majeure
- Board for directors
- Management Committee
- Dividend policy
- Change of control
- Assignment Break of deadlock
The Venture agreement must have all the required government approvals and should have all the licenses within a specified time.
Choosing an appropriate business structure:
A joint venture in the form of incorporated companies is the most popular in India. However, other types are also available:
Incorporated company based joint ventures include:
- Limited liability partnership/insurance
- Strategic alliances
Management of a Joint Venture in India:
In order to work effectively in the development of the business, it is essential for you and your partner to agree upon and have similar opinions over the proposed management structure.
You need to be ready with the Management Constitution, safeguard policies and control policies when you sign the Memorandum of Understanding (MoU).
Further, to avoid and minimize conflicts, you and your partner should include a provision in the initial agreement which would state that if the AoA is inconsistent with the requirements of the Joint Venture agreement, then both of you will amend the MoA and AoA accordingly and judiciously.
Setting up a joint venture in India is, in many ways, extremely beneficial. However, it is not an easy task. A lot of legal procedures, physical efforts and cooperation go into the success of joint ventures. So, make sure to be adept with the entire project before stepping into it.
A post by https://www.akmglobal.com/