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What is a Joint Venture?
Joint
Venture companies are the most preferred form of
corporate entities for Doing Business in India. There are no separate laws for
joint ventures in India. The companies incorporated in
India, even with up to 100% foreign equity, are treated
the same as domestic companies. A Joint Venture may be
any of the business entities available in India.
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here for Types of companies and corporations in India.
A typical Joint Venture is where:
Two parties, (individuals or
companies), incorporate a company in India.
Business of one party is transferred to the
company and as consideration for such transfer,
shares are issued by the company and subscribed
by that party. The other party subscribes for the
shares in cash.
The above two parties subscribe
to the shares of the joint venture company in
agreed proportion, in cash, and start a new
business.
Promoter shareholder of an
existing Indian company and a third party,
who/which may be individual/company, one of them
non-resident or both residents, collaborate to
jointly carry on the business of that company and
its shares are taken by the said third party
through payment in cash.
Some practical aspects of formation of
joint venture companies in India and the prerequisites
which the parties should take into account are enumerated
herein after.
Foreign
companies are also free to open branch offices in India.
However, a branch of a foreign company attracts a higher
rate of tax than a subsidiary or a joint venture company.
The liability of the parent company is also greater in
case of a branch office.
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All the joint ventures in India require
governmental approvals, if a foreign partner or an NRI or
PIO partner is involved. The approval can be obtained
from either from RBI or FIPB. In case, a joint venture is
covered under automatic route, then the approval of
Reserve bank of India is required. In other special
cases, not covered under the automatic route, a special
approval of FIPB is required. The Government has
outlined 37 high priority areas covering most of the
industrial sectors. Investment proposals involving up to
74% foreign equity in these areas receive automatic
approval within two weeks. An application to the Reserve
Bank of India is required. Please see Foreign Investment in India - Sector wise
Guide for sectorwise guidelines under
automatic route. Besides the 37 high priority areas,
automatic approval is available for 74% foreign equity
holdings setting up international trading companies
engaged primarily in export activities.
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 high-powered Foreign Investment Promotion Board
("FIPB"). The FIPB is located in the office of
the Prime Minister and 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 entire 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 51% 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.
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Selection of a good local partner is the
key to the success of any joint venture. Once a partner
is selected generally a Memorandum of
Understanding or a Letter of Intent
is signed by the parties highlighting the basis of the
future joint venture agreement. A Memorandum of
Understanding and a Joint Venture Agreement must be
signed after consulting lawyers well versed in
international laws and multi-jurisdictional laws and
procedures.
Before signing the joint venture agreement, the terms
should be thoroughly discussed and negotiated to avoid
any misunderstanding at a later stage. Negotiations
require an understanding of the cultural and legal
background of the parties.
Before signing a Joint Venture Agreement
the following must be properly addressed:
- Dispute resolution agreements
- Applicable law.
- Force Majeure
- Holding shares
- Transfer of shares
- Board of Directors
- General meeting.
- CEO/MD
- Management Committee
- Important decisions with consent of partners
- Dividend policy
- Funding
- Access.
- Change of control
- Non-Compete
- Confidentiality
- Indemnity
- Assignment.
- Break of deadlock
- Termination.
The Joint Venture agreement should be subject to
obtaining all necessary governmental approvals and
licenses within specified period.
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