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. Click here for Types of companies and corporations in India.
A typical Joint Venture is where:
1.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.
2.The above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.
3.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.
Government Approvals for Joint Ventures
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.
How to Enter into a Joint Venture Agreement?
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.
- Management Committee
- Important decisions with consent of partners
- Dividend policy
- Change of control
- Break of deadlock
The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.
Drafting International Joint Venture Agreements
Madaan & Co. has helped US companies & Foreign companies in setting up their Joint Venture operations in India and other countries. Business Joint Ventures are more likely to be beneficial if Joint Venture Entry Strategies are carefully formulated. Negotiating Joint Ventures properly is very important for a win-win Joint Venture. Proper drafting of Joint Venture Agreements are very important for the success of any joint venture. We can help you in setting up your Joint Venture: from entry strategies, to negotiations to drafting agreements to compliance programs.