What is Joint Venture and Joint venture Agreement?

What are Joint Ventures?

A joint venture is generally understood as technical and financial collaboration for the purpose of some projects fulfillment with existing companies. Companies lacking in some aspects such as technology, knowledge, assets or reach to the market are generally involved in joint ventures with other company because they are not able to achieve its goal on its own. Collaboration allows the first party to have an access to the resources of the other party without any expenditure for obtaining it.

Indian joint ventures are usually formed by two or more individuals/companies, one of whom may be non-resident, who collaborate to form an Indian private/public limited company with mutual contribution in the share capital.

Joint ventures exist in the form of companies, partnerships or joint working agreements.

Whether Approval is required from RBI for Investment in India?

FDI upto 100% or certain percentage is allowed under automatic route in those sectors which are not defined in the FDI policy of Indian Government

There are also some other sectors in which approval from the concerned Industry Ministry is required for investment. Before 24^th May, 2017 all the approvals were handled by the Foreign Investment Promotion Board (FIPB)

What is a Joint venture Agreement?

A Joint Venture Agreement is a legal document where two or more entities combine to do business or undertake an economic activity together. The parties either agree to form an agreement without incorporation of new entity but with the common intention of running a business or create a new entity by contributing equity and share the revenues, expenses and control of the enterprise in the proportion of their capital contribution.

Basic features of entering into Joint venture Agreement

• Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking.
• Right of mutual control or management of the property in enterprise.
• Right to share in the profit and loss of the property

Key questions that parties entering into Joint Venture Agreement should ask

• What business will the new company / LLP Firm be engaged in?
• How will the Board of Directors be constituted?
• How will the Board of Directors decide matters – by majority vote / by consensus?
• Who will be the Chairman, MD of the company and what will be there powers?
• Finance decisions will be taken by?
• What will be the Exit Route for one or both of the promoters / partners?
• What happens after the promoters / partners fall out?
• How to decide the price of equity shares / value of enterprise at the time of separation?

Clauses of Joint Venture Agreement

There is no legally prescribed format for a Joint Venture Agreement in India. However, it is advisable for a joint venture agreement to have the following clauses:

• Object and scope of the Joint Venture
• Equity participation clause of both the parties if joint venture is equity based by local and foreign investors and agreement to a future issue of capital
• Financial arrangements between both the parties
• The composition of the board and management agreements
• Specific obligations
• Provisions for distribution of profits
• Transferability of shares in certain circumstances
• Termination of the agreement by exit of the parties
• Restrictive covenants on the company and the participants
• Appointment of CEO/MD
• Anti-compete clause
• Confidentiality
• Indemnity Clause where both parties may indemnify each other against negligence, and violation of the JV agreement
• Duration of the Agreement
• Dispute Resolution
• Applicable law
• Force Majeure etc.

The above list is not exhaustive. Company may vary the agreement according to the business they are involved in.

This article cannot be construed as legal opinion and writer will not be liable for any claim. Any suggestions are welcome to increase the effectiveness of the article.