A joint venture law may be described as an association between a group of persons (natural or legal entities) who enter into an agreement to do business together. In India, there are no separate laws or set of principles governing the formation, conduct, and termination of joint ventures. But these can be governed under The Companies Act and Indian Partnership Act. This article delves into the governance of joint ventures in India.
Tue Jul 19 2022 | Business Law | Comments (0)
A joint venture law may be described as an association between a group of persons (natural or legal entities) who enter into an agreement to do business together or to undertake a particular project, without losing their independent corporate structures.
A joint venture not only minimizes the risk factors involved in entering into a new business area, but also reduces the costs involved. By allowing entry into a foreign jurisdiction, a joint venture unlocks potential business opportunities and provides new learning experiences for the concerned business entities, which is especially helpful in emerging countries such as India.
In India, there are no separate laws or set of principles governing the formation, conduct, and termination of joint ventures. However, the agreements that will regulate an Indian joint venture should be construed in accordance with Indian general principles and rules in force, and should comply with some requirements imposed by Indian law concerning the transfer of technology. The receipt of Government approvals may also be necessary.
Joint ventures in India require Governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained either from RBI or FIPB (Foreign Investment Promotion Board). In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India might be required. In other special cases, not covered under the automatic route, a special approval of FIPB is required and then no further RBI permission is to be sought.
The Government has outlined more than 30 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74%(this limit is subject to sectoral cap on FDI in the particular sector) foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required.
Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but Government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's").
For major investment proposals or for those that do not fit within the existing policy parameters, there is the FIPB. The FIPB can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters.
Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 50% in mining for commercial purposes and up to 49% in telecommunication sector. The Government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated.
A joint venture may take place between corporations, limited liability companies, partnerships, or any other type of legal entities. It may be for a short period, or for several years. The purpose of a joint venture determines its type or mode. Some of the fundamental types of joint ventures in India are described below.
A joint venture may be classified into the following types, on the basis of how it is constituted.
An unincorporated joint venture is a contractual joint venture that is affected by a legally binding agreement, and does not involve the incorporation process. It does not create a separate corporate entity or create equity capital. Thus, it is very like a partnership. This kind of joint venture is generally entered into for a limited period or for a particular purpose, and does not join the parties for perpetuity. An unincorporated joint venture may be either by way of contract or partnership.
In a joint venture by way of contract, the contract is entered into between the parties and it sets forth their relationship, and their respective rights and liabilities.
A joint venture formed by way of partnership is governed by the Indian Partnership Act, 1932. A partnership does not enjoy an independent existence from its members and may be either in the form of an expressed or implied agreement. It is not mandatory that it be registered , however registration helps in providing certain benefits and exemptions under various statutes and enactments, and makes the partners eligible for instituting legal proceedings to enforce their rights, as arising from the partnership agreement. Registration also gives them the right to sue any third party, to enforce the contractual rights of the partnership.
An incorporated joint venture is one that uses a company established for the purpose of the joint venture, with the venturers acquiring shares in the company. It is either a public or a private company with limited liability in which the shareholders are the joint venture participants. Here, the shareholders have no rights in relation to the company’s assets. They can participate in the profits (which are distributed as dividends), but not in the losses. Basically, in this kind of joint venture, the equity of the project is divided into shareholdings.
All incorporated joint ventures in India are domestic companies, and are governed by the provisions of the Companies Act, 1956. Such joint ventures have a separate legal entity under law, and enjoy an independent existence from the parties constituting it.
In India, joint ventures also may be classified on the basis of the strategy they will follow:-
Production Joint Venture
This kind of joint venture involves joint production of a product, for sale to other parties, or to be used by the participants themselves as an input for their own production processes. Such collaboration helps the parties bring efficiency to their production, and enables them to offer cheaper and more valuable goods or services to their consumers.
This type of arrangement is made between companies that wish to utilize the more economical and experienced labor force in India through a local Indian partner. Such joint ventures are targeted at making India the production hub, and thereafter selling in the domestic market, as well as exporting the product.
Marketing Joint Venture
A marketing joint venture is one in which two or more businesses combine their resources synergistically for jointly selling, distributing , or promoting goods or services that are either jointly or individually manufactured. This kind of joint venture is a very popular way for small businesses to maximize their profits.
It creates a greater marketing impact and bigger profits than either of the parties could achieve on its own. On the other hand, this joint promotion minimizes comparative advertising which, in turn, harms competition by restricting information to consumers on price and other competitively significant variables.
A marketing joint venture is useful when the products are imported into the Indian market, or in case of licensing and franchise arrangements.
Buying Collaboration
In a buying collaboration, two or more entities join hands to purchase the necessary inputs. Such an arrangement not only provides economies of scale in the purchasing and warehousing of supplies, but also gives access to a stock of goods that might be otherwise unavailable to the parties in their individual capacities. The parties also can exercise enormous bargaining powers in this kind of arrangement.
Buying collaborations are useful in areas where the raw material is either available in India or sourced from countries where India is traditionally a large buyer. This arrangement is very common in the engineering and mining sectors.
The kind of joint venture that is intended to be set up in India will, as in any other country, materially and quantitatively determine the agreements that should be drawn up and executed between the venturers. The fact that an unincorporated (contractual) joint venture represents a more flexible and practical tool for venturers willing to share some specific projects and aiming at a not-so-long-term collaborative relationship reflects on the negotiations and drafting activities with respect to the main agreement. On the other hand, considering the complexity and the number of steps required to set up an equity joint venture, extensive negotiation rounds preceding fairly exhaustive and detailed agreements should be expected.
In both cases, the function of the joint venture (with productive, marketing or buying collaboration strategy) will play an important role for the purposes of determining of the contents of the joint venture agreements.
The joint venture agreement also should cover the possibility of modifying the type of joint venture. The agreement should be structured so that changes in law or in technology do not make the joint venture redundant. An adequate amount of flexibility should be visualized, in case the joint venture partner or the terms of trade need to be modified.
In India, current laws put the onus of explanation for modifications and changes in a joint venture collaboration largely on the foreign partner, therefore, a clear drafting and expression of intent is essential at the time of initiating the joint venture agreement.
Although the choice of the type of joint venture under the strategic classification may affect the contents of the joint venture agreements, the main differences, from the contractual perspective, are found between the two different types of joint venture under the constitutional classification.
The first essential step in drafting the joint venture agreement of an unincorporated joint venture should be the identification of the project that the parties will be engaging in. If the parties are not clear about the purposes of their relationship, it will be difficult to determine the specific obligations of the parties under the agreement.
Considering that a clear identification of the rights and duties of each party is the basis of a successful relationship between the venturers , these aspects should be thoroughly discussed.
In particular, these discussions should address essential issues such as the contribution of the venturers to the project, the allotment of costs and expenses, the ownership of the results and their commercial exploitation, the distribution of the profits and possible losses, and the representations and warranties that parties intend to make to third parties.
Another important matter to focus on is the duration. In particular, it is necessary to indicate not only the time frame required for the performance of the project and, therefore, of the collaborative relationship of the venturers, but also the deadlines concerning the performance of each obligation and/or activity by the parties. These provisions will be useful in evaluating potential breaches of a venturer’s duties under the joint venture agreement.
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