The Joint Venture Company in India

Joint Venture Company in India

The Joint Venture (JV) Companies are the most preferred module of corporate entities for doing business in India to achieve specific objectives of a partnership like temporary arrangement between two or more firms. JVs are advantageous as a risk reducing mechanism in new-market penetration, and in pooling of resource for large projects. The Companies incorporated in India, even up to 100% foreign equity, are at par at domestic companies. A Joint Venture may be any of the business modules available. There are no separate laws for joint ventures in India. They, however, present unique problems in equity ownership, operational control, and distribution of profits (or losses).

A typical Joint Venture is where: Two parties agree to co-operate their business in a limited and specific way wherein they 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. Other option could be to setup a separate joint venture business, possibly a new company, to handle a particular contract. The partners own shares in agreed proportion in the company and agree how it should be managed.
Incorporation of Joint Venture Company
There are no separate laws for incorporation of joint venture Company in India. It is incorporated or established like a private limited company or a public limited company under the Indian Companies Act, 1956. However, the following key issued should be addressed before establishment of Joint Venture Company:
1. To check sectoral cap for foreign direct investment (FDI) in the proposed joint venture.
2. Drafting of MoA & AoA Incorporating detailed terms & conditions of carrying on business in the form of Joint Venture Company.
3. Constitution of the joint venture Company – Private or Public.
4. Location of Registered office of the Joint Venture Company viz-a-viz location of Project, availability of raw material, labour, power and other infrastructure facilities in view of nature of business of JV.
5. Proposed name of JV keeping in view the present name / trade name etc. of the joint venture partner.
6. Selection of nominees / alternate directors on behalf of non resident shareholders / directors.
In case one of the partners of the joint venture company is a non resident, approval of Reserve bank of India {RBI} will be required for acquiring shares of the company and establishing place of business in India under the provisions of Section 6 of Foreign Exchange Management Act 1999 {FEMA}. However RBI has granted general permission as to:
1. Maintenance of bank accounts in India and deposits with Indian/firms/companies (Regulated by Reserve Bank's Notification FEMA.5/2000 dated 03.05.2000 as amended from time to time.
2. Investment in securities/shares in India (Regulated by Reserve Bank's Notification FEMA 20/2000-RB dated 03.05.2000, as amended from time to time.
3. Investments in immovable properties in India. (Regulated by Reserve Bank's Notification FEMA.21/2000-RB dated 03.05.2000 as amended from time to time. With the on going liberalization more general permissions of RBI are expected.
Where an Indian company [partner] acquires shares of the joint venture company which is exceeding 60% of its [Indian company's] paid-up capital and free reserves or 100% of its free reserves, whichever is more, Section 372A will apply requiring prior Board decision of the Indian company as well as special resolution of its shareholders. If a foreign company acquires the shares, this section will not be invoked as it applies only to a "company" defined under section 3 {1} [i] of the Act which does not take into account a foreign company.
If the entering party have a previous venture tie up or arrangement in the same field, the JV is not permissible without prior approval of Central Government provided that if investment in existing JV is less than 3% or if existing JV/Collaboration becomes sick or defunct, there is no need to seek Central Government's approval. In brief, The Joint Venture agreement should be conditional upon obtaining all necessary approvals/ consents/ licenses /permissions of appropriate agencies of Government of India like RBI/SIA etc within specified period. If any of the approvals are not received, or received late, the agreement cannot be enforced and the joint venture cannot proceed on the basis of the Agreement.
A Joint venture Agreement requires dexterous legal drafting and should incorporate clearly the relevant clauses that specify the mutual understanding arrived at between both parties as to the formation and operations of the Joint venture Company. A brief checklist of important clauses is as follows-
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.
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 sector wise 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 tele-communication 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.
Before signing a Joint Venture Agreement the following must be properly addressed:
1. Applicable law
2. Shareholding Pattern
3. Composition of Board of Directors
4. Management Committee
5. Frequency of Board Meeting & its venue
6. General Meeting & its venue
7. Composition of quorum for important decision at Board Meeting
8. Transfer of shares
9. Dividend policy
10. Employment of Funds in cash or kind
11. Change of control
12. Restriction /Prohibition on Assignment
13. Non-Compete parameters
14. Confidentiality
15. Indemnity
16. Break of deadlock
17. Jurisdiction for resolution of dispute
18. Termination criteria & notice
The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.