A joint venture is a combination of two or more parties (generally characterized by shared ownership, shared returns and risks, and shared governance) that seek the development of a single enterprise or project for profit, sharing the risks associated with its development.
The parties to the joint venture must be at least a combination of two natural persons or entities.
Companies typically pursue joint ventures for one of four reasons:
- to access a new market, particularly Emerging market;
- to gain scale efficiencies by combining assets and operations;
- to share risk for major investments or projects; or
- to access skills and capabilities
UNDERSTANDING A JOINT VENTURE
Although a Joint Venture is a partnership in the colloquial sense of the word, it can be formed using any legal structure: Corporations, partnerships, limited liability companies (LLCs), and other business entities can all be employed.
Despite the fact that the purpose of a JV is typically for production or research, one can also be formed for a continuing purpose.
HOW TO SET UP A JOINT VENTURE
Regardless of the JV structure, the most important document will be the agreement that sets out all of the rights and obligations of each party to the venture.
The objectives, the initial contributions of the parties, the day-to-day operations, the right to the profits, and the responsibility for losses are all set out in the JV agreement. It is important to draft it with care to avoid risking litigation down the road.
PROS OF JOINT VENTURES
1. Shared investment
Each party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company.
2. New market penetration
A joint venture may enable companies to enter a new market very quickly, as all relevant regulations and logistics are taken care of by the local player.
For example, A common joint venture arrangement is one between a company headquartered in country “A” and a company headquartered in country “B” that wants to obtain access to the marketplace in country “A.” With the formation of the joint venture, the companies are able to expand their product portfolio and market size, and the country B company obtains easy access to the marketplace in country A.
3. New revenue streams
Small businesses often face having limited resources and access to capital for growth projects. By entering into a joint venture with a larger company with more financial resources, the small business can expand more quickly.
The larger company’s extensive distribution channels may also provide the smaller firm with larger and/or more diversified revenue streams.
4. Synergy benefits
Joint ventures can offer the same type of synergy benefits that companies often look for in mergers and acquisitions – either financial synergy, which lowers the cost of capital, or operational synergy, where two firms working together increases operational efficiency.
5. Enhanced credibility
It typically takes a significant period of time for a young business to build market credibility and a strong customer base. For such companies, forming a joint venture with a larger, well-known brand can help them achieve enhanced marketplace visibility and credibility more quickly.
CONS OF JOINT VENTURES
Embarking on a joint venture requires relinquishing a degree of control. The vital decisions are being made by two or more parties.
The companies involved must go into the project with the same goals and an equal degree of commitment.
Extreme differences between the participants’ company cultures and management styles can be a barrier to success. Will the executives of an animation studio be able to communicate in the same language as the executives of a digital streaming giant? They might, or they might line up in opposing camps.
Setting up a joint venture multiplies the number of management teams involved. If one party undergoes a significant change in its business structure or executive team, the joint venture can get lost in the shuffle.
JOINT VENTURE UNDER THE COMPANIES ACT, 2013
“Joint Venture” would mean a joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement. The usage of the term is similar to that under the Accounting Standards.
There are various exemptions provided under the provisions of the Companies Act, 2013.
CONCLUSION
India is presently one of the world’s fastest growing economies with one of the largest domestic markets. Before 1991, India’s restrictive economic policies resulted in the unavailability of state-of-the-art products and technologies in the country.
While the situation has significantly improved since then, the Indian market is lagging behind developed economies in terms of the quality of products and services sold in the domestic market. In this context, joint ventures between foreign partners and Indian companies are a great way to bridge this gap.
Joint ventures can utilize the best in technology and local market knowledge in order to take advantage of India’s massive domestic market and, further, to use India as an attractive export hub. Recent exchange control liberalizations on payments to foreign technology providers will further spur JV activity in the country.
FREQUENTLY ASKED QUESTIONS (FAQS)
1. Does forming a joint venture need regulatory approval?
- In general, no. However, a joint venture may raise competition issues, if, for example, the joint venture will have a significant market share. In circumstances such as this, the joint venture may be subject to review by the Competition and Markets Authority and it can be a good idea to seek guidance from the outset.
2. What due diligence is needed when forming a joint venture?
- Due diligence will include checking your joint venture partner’s legal status, that they have the right to enter the joint venture, that they own assets they will be putting into the joint venture and so on. More broadly, due diligence aims to ensure any agreements you enter into are valid and to minimise the risk of future legal problems.
3. What are the main issues that need to be agreed with a joint venture partner?
- Issues to be considered include:
- the structure of the joint venture
- what the joint venture’s objectives are
- how it will be managed
- how it will be financed and what will happen if further funding is needed in the future
- what assets, including intellectual property, you will each contribute
- who will work for the new venture
- what information will be reported to you
- how profits will be shared
- who will own any intellectual property created by the joint venture
- how any disputes between the joint venture partners will be handled
- what exit routes will be available if you want to realise your investment in the joint venture, etc.
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