All about Joint Ventures

CA Kapil Goel

A Joint venture is an arrangement in which 2 or more individuals /companies / partnership firms /corporations/legal entities come together to undertake an economic or research activity by entering into an agreement. The parties agree to create a new entity by contributing capital and share income, expenses, liabilities and control in newly formed entity.

 There is no restriction for entering into a Joint Venture in India, except for capacity to contract under the law.  Any person competent to contract, a company, partnership firm or a corporation can enter into a Joint Venture 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 as same as domestic companies. A Joint Venture can be formed in any of the business entities available in India. It can be in the form of partnership firm , corporation or any other business entity which the parties may choose.

A Joint Venture can be formed for any lawful business purpose. Joint Ventures are mainly formed for the purpose of technology transfer, research and development, supply of technological know-how etc. Interestingly, the foreign companies mainly form Joint Venture for gaining market access in a particular country.

There is no specific procedure for forming a Joint Venture except for negotiations, due diligence and signing a joint venture agreement, apart from what the parties decide to follow. Joint Ventures are limited to the purpose for which they are formed. They can be in the form of partnership firm or company as decided by the parties. In case of Joint Ventures in form of a company, there has to be provisions for transfer and allotment of shares between the entities entering into the Joint Venture. In case of Joint Ventures with foreigners and foreign companies, necessary approval is required.

Any Joint Venture requires a partner, so there has to be two or more partners for forming a Joint Venture. The objective and purpose of the undertaking are agreed upon and a Memorandum of Understanding or a Letter of Intent is signed by the parties deciding the basis of the future Joint Venture agreement. The Joint Venture Agreement is entered into between the parties on the terms as agreed upon between the parties. It is advised that the Memorandum of Understanding and the Joint Venture Agreement are prepared by lawyers or Chartered Accountants as Joint Venture agreements at times involve complexities. Before signing the Joint Venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding of the rights and liabilities of the parties and other issues at a later stage.

Any person/company/partnership firm/corporation while entering into a Joint Venture must keep the following things in mind:

a)      Screening of prospective partners.

b)      Joint development of a detailed business plan.

c)      Due diligence of other parties.

d)     Terms of dissolution of  the Joint Venture.

e)      Appropriate structure of Joint Venture e.g. partnership, company etc.

f)       Contribution of assets made and to be made in the Joint Venture by each party.

g)      Special allocations of income, gain, loss or deduction to be made among the partners

h)     Compensation to the members providing services, and

i)        Jurisdiction and dispute resolution procedure relating to Joint Venture.

There is no separate law governing the formation, conduct and termination of joint ventures in India and Contract Act governs for contracts and if it is in the form of  company, then the Companies Act should complied with. It is the purpose, rather than the choice of the parties, that determines the type or mode of the proposed Joint Venture. Therefore it is very important that the Joint Venture must provide the details of the rights and obligations of the parties as well as the objective and the functioning of the Joint Venture entity.  The purpose for which the Joint Venture is formed must be clearly specified in the Agreement. Also the right and the liabilities of the parties must be clearly stated along with the following:

a)      Name of the entity so formed;

b)      Termination or term of the Joint Venture if it is formed for a specific duration;

c)      Jurisdiction and dispute resolution procedure;

d)     Control of the Joint Venture entity;

e)      Investment of capital;

f)       Management committee;

g)      MD/CEO, if applicable;

h)     Indemnity;

i)        Non-Competency;

j)        Assignment.

If the Joint Venture is in the form of company, then provisions for allotment and transfer of the shares, appointment of Board of Directors, meetings of Directors, quorum etc. are required to be provided.

A Joint Venture is different from a company for the reason that a Joint Venture unlike a company is formed for a specific purpose or specific term, depending on the objective of such venture. Once the purpose or the term is complete the entity so formed under the Joint Venture agreement may come to an end. Joint Venture unlike a company is limited to a specific purpose or term, clearly defined by the parties.

A Joint Venture is useful for expansion of business and sharing risks involved in capital investments. Even a small enterprise can invest and can involve in new business activity and obtain profits. It minimizes the risks involved in high capital investments and promotes expansion of business activities.

There are a few risk factors involved in Joint Venture which one has to consider while entering into a Joint Venture. Adequate planning of the venture is a very important requirement, as inadequate pre-planning can result in the failure of the venture. There are also issues relating to Intellectual Property Rights and Confidentiality, which can lead to differences between the parties to the Joint Venture. Parties may not agree on issues of sharing of information and technology or control and management of the Joint Venture. Therefore, parties must discuss and negotiate the terms fully before entering into any Joint Venture to avoid conflicts of interests.

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