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What is a Joint Venture

A joint venture is a strategic alliance where two or more parties, usually businesses, form a partnership to share markets, intellectual property, assets, knowledge, and, of course, profits. A joint venture differs from a merger in the sense that there is no transfer of ownership in the deal. This partnership can happen between goliaths in an industry. Cingular, for instance, is a strategic alliance between SBS and Bellsouth. It can also occur between two small businesses that believe partnering will help them successfully fight their bigger competitors. Companies with identical products and services can also join forces to penetrate markets they wouldn't or couldn't consider without investing tremendous resources. Furthermore, due to local regulations, some markets can only be penetrated via joint venturing with a local business. In some cases, a large company can decide to form a joint venture with a smaller business in order to quickly acquire critical intellectual property, technology, or resources otherwise hard to obtain, even with plenty of cash at their disposal. 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. 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 Reg No: 29-02-32-6845-2102 1 of 10

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joint venture company. The liability of the parent company is also greater in case of a branch office.

Reasons for forming a joint venture

Internal reasons 1. 2. 3. 4. 5. 6. Build on company's strengths Spreading costs and risks Improving access to financial resources Economies of scale and advantages of size Access to new technologies and customers Access to innovative managerial practices

Competitive goals 1. 2. 3. 4. 5. 6. Influencing structural evolution of the industry Pre-empting competition Defensive response to blurring industry boundaries Creation of stronger competitive units Speed to market Improved agility

Strategic goals 1. Synergies 2. Transfer of technology/skills 3. Diversification

Reasons for dissolving a joint venture

1. 2. 3. 4. 5. 6. 7. Aims of original venture met Aims of original venture not met Either or both parties develop new goals Either or both parties no longer agree with joint venture aims Time agreed for joint venture has expired Legal or financial issues Evolving market conditions mean that joint venture is no longer appropriate or relevant

Issues that need to be considered while entering into a Joint Venture

Because strategic alliances are built on trust and convergent goals, one of the main risks you can face may occur if the partners are from different cultures. Reg No: 29-02-32-6845-2102 2 of 10

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They may not trust operating a certain "way" or have divergent goals. Even with similar strategic goals, two partners who lack trust in each other may lack the willingness to reciprocate. When joint venturing, be prepared to give and take. This sharing principle should govern the entire process. Many potential joint ventures, including large-scale projects, have died before the ink on the contract was dry, because of divergent goals and self-serving attitudes, which are not in synch with the essence of the joint venture. One example of this was the British Aerospace/Taiwan Aerospace alliance. After tough negotiations, the two parties signed an agreement during a celebrated ceremony in Taiwan. Soon after, Taiwan announced its wish to pull out of the deal. Why? Because their goals were divergent. Taiwan wanted to acquire new technology, which the British refused to give away, and the British wanted to capture new markets in Asia, which Taiwan refused to grant. A joint venture concept is only effective when there is a true willingness to move forward together. Not even signed contracts have value if mutual trust and acceptance of the terms are not present. It is actually better not to consider a joint venture project if motives from either side are questioned by the other side. A graceful exit before any legal obligation takes effect will most likely prevent an inevitable failure. The risks involved are therefore simple to evaluate. You can: Waste your time Lose money Let go of important technology Gain nothing of significance in return Squander your credibility

Even though these and other risks in joint ventures are present, the rewards can far outweigh pitfalls. It is important to completely evaluate your risks, and do your homework before and during the process.

.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 Reg No: 29-02-32-6845-2102 3 of 10

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these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required. 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.

Entering 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 multijurisdictional laws and procedures.

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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.

When are joint ventures used

Joint ventures are not uncommon in the oil and gas industry, and are often co operations between a local and foreign company (about 3/4 are international). A joint venture is often seen as a very viable business alternative in this sector, as the companies can complement their skill sets while it offers the foreign company a geographic presence. Studies show a failure rate of 30-61%, and that 60% failed to start or faded away within 5 years. (Osborn, 2003) It is also known that joint ventures in low-developed countries show a greater instability, and that JVs involving government partners have higher incidence of failure (private firms seem to be better equipped to supply key skills, marketing networks etc.) Furthermore, JVs have shown to fail miserably under highly volatile demand and rapid changes in product technology.[citation needed]

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Some countries, such as the People's Republic of China and to some extent India, require foreign companies to form joint ventures with domestic firms in order to enter a market. In addition, joint ventures are practiced by a joint venture broker, who are people that often put together the two parties that participate in a joint venture. A joint venture broker then often make a percentage of the profit that is made from the deal between the two parties If you can't beat 'em, join 'em. Two heads are better than one. United we stand. If you are a business owner who wants to significantly increase market reach, break down barriers to entry in your market, or simply generate skyrocketing revenues in a shorter amount of time, these old adages are becoming more and more relevant. According to the Commonwealth Alliance Program (CAP), businesses anticipate strategic alliances accounted for 25% of all revenues in 2005, a total of 40 trillion dollars. This figure has been steadily growing over the past few years as more solopreneurs and Work At Home Parents (WAHPs) decide to unite to augment their odds of survival in a highly competitive global environment. You are about to learn one of the most powerful tools I know of for being successful in today's competitive business atmosphere. I'm of course talking about Joint Ventures, or specifically, teaming up with another person, group of persons, or business entity for the purpose of expanding your business influence and creating a more powerful market presence. Joint Ventures are in, and if you're not utilizing this strategic weapon, chances are your competition is, or will soon be, using this to their advantage.... possibly against you! Our primary goal is to make you a successful joint venturer. This will happen if you are an informed entrepreneur. Thus, it is necessary for us to dive into the technical aspects of joint ventures. Specifically:

SETTING UP A JOINT VENTURE IN INDIA

India is witnessing a revolution both in the context of liberalization and globalization of the Indian economy and transacting business through Joint ventures set up with foreign partners across various industry sectors. This article sets forth some important steps for forming a Joint Venture Company in India. 1. Types of joint ventures. Reg No: 29-02-32-6845-2102 6 of 10

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Three most common types of joint venture companies may be described as follows[a] Two parties, who/which may be individuals or companies, one of them non resident or both residents , 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. [B] Alternately, the above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business. [C] 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. 2. Incorporation. In case a new joint venture company has to be formed in India, the following are pertinent issues to decide: [A] Formalities {1} whether the joint venture company will be a public or a private limited company, {2} the place of Registered Office of the Joint venture Company, {3} propose a name of the joint venture company and check its availability from the Registrar of Companies {ROC} where the registered office of the company is to be situated and the company is to be incorporated, {4} choose the subscribers to the Memorandum of Association which will obviously include the partners to the joint venture and their nominees, {5} prepare the Memorandum and Articles of Association in consultation with the joint venture partners , get them printed and suitably stamped, and submitting the same with required documents like statutory declaration u/s 33 of the Companies Act 1956 {Act} and Form no.18 u/s 146 of the Act regarding address of the registered office, to ROC along with fees payable. {6} On receipt of certificate of incorporation, the new company may start business, {i} in case of private company, immediately. {ii} in case of public company ,after obtaining certificate of Commencement of Reg No: 29-02-32-6845-2102 7 of 10

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Business for which the company has to file with the ROC prospectus/statement in lieu of prospectus, and the statutory declaration u/s 149 of the Companies Act 1956, duly stamped. [B] Articles To avoid contradictions, the Articles of Association should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners. [C] Non resident partner 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 u/s 19 and 29 of Foreign Exchange Regulation Act 1973 {FERA}. However RBI has granted general permission vide its notification dated 26-4-1993, as amended, u/s 19{1}{d} and u/s 29{1}{b} of FERA to a non resident Indian citizen / person of Indian origin to subscribe to the memorandum and articles of association of a company for the purpose of incorporation in India. And such company is also permitted to issue shares to the non residents subject to the condition that the total face value of shares is not to exceed Rs 10,000/-, the company will not engage in the activity of agriculture / plantation/dealing in real estate other than its development and the company files a declaration with RBI within 90 days of its incorporation. With the on going liberalization more general permissions of RBI are expected. 3. Inter-corporate investment u/s 372A of Companies Act. Where an Indian company [partner] acquires shares of the joint venture company which is exceeding 60% of its [Indian companys] 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. 4.Approvals 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. 5. Important clauses of a joint venture agreement. Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a Reg No: 29-02-32-6845-2102 8 of 10

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memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture 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 The proportion of shareholding in the joint venture company Specify nature of shares, indicate their transferability conditions. Composition of the Board of Directors, Appointment of Chairman, Quorum of Board meetings ,Casting vote provisions. General meeting. Appointment of CEO/MD. Appointment of Management Committee. Important decisions with mutual consent of partners. Dividend policy. Funding provisons. Access conditions. Change of control/exit clauses. Anti-compete clauses Maintaining Confidentiality Indemnity clauses. Assignment. Break of deadlock. Dispute Resolution. Applicable law. Force Majeure. Termination provisions.

Laws governing Joint Venture agreement in India

Mergers and Acquisitions in India are governed by the Indian Companies Act, 1956, more particularly Sections 391 to 394. This Act consolidates provisions pertaining to mergers and acquisitions and other related issues of compromise, arrangements and reconstruction. Though mergers and acquisition may be initiated through agreements between the parties, the process remains largely court driven as the sanction of the concerned High Court is required for bringing such a merger/acquisition into effect. Under the existing law in India, the scheme for merger and/ or acquisition or any such arrangement should be approved by a majority in number representing not less than 3/4th in value of shareholders/creditors present and voting during the General Body Meetings of the companies concerned. However, different courts in Reg No: 29-02-32-6845-2102 9 of 10

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India follow different procedures of holding meetings of the creditors and shareholders or dispensing with the requirement of such meetings. The Government has a role to play in this process and it acts through an Official Liquidator (OL) or the Regional Director of the Ministry of Company Affairs. After hearing all the concerned parties including shareholders, the concerned High Court approves Acquisition and Merger proposals. Compared to Mergers and Acquisitions, Joint Venture arrangements are easier to set up under Indian law. Joint Venture companies can be formed by entering into a Joint Venture Agreement for incorporating a new company with equity participation of the joint venture parties or by picking up equity stakes in an existing company.

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