India has witnessed a splendid rise in foreign companies placing their stakes in Indian businesses since it opened its economy in 1991. The rise in foreign investment in India has also risen due to companies wishing to benefit from the meteoric rise of the Indian economy.

There exist multiple gateways via which a foreign company can enter, operate, and make profits along with the Indian companies. The foreign company can merge with an Indian company or acquire one straight away but that would require carrying out research, looking up for a potential company in the preferred sector, negotiating the process, carrying out Due Diligence, etc which is a very time-consuming process, and could miss out on timing the potential opportunity for exploitation.

The most preferred and fastest route by all the foreign entities to step into India is through Joint Venture (hereinafter JV). Over the years the layman in his day-to-day life observed that Here-Honda and Maruti-Suzuki merged and carried out the case. However, the right word terminology for it is the word of Joint Venture.

A JV is a collaboration of two or more legal entities for a strategic alliance of operations, services, skill sets or so where companies leverage their services to achieve a common goal in a particular sector as they have their share over capital or assets and share profit and loss.

For example: A US hardware company is looking to expand into India. Setting up a factory, purchasing land, registering the business, and getting everything operational can be a long and complicated process. A quicker and more efficient alternative would be for the company to ship the parts to India and partner with a local firm to handle the assembly and sales through their established distribution network.

Why a Joint Venture?

The global proliferation of business and commerce has given an international dimension to JVs. A joint venture is a highly flexible concept, and the nature of any particular joint venture will depend to a very large extent on its facts and the resources and wishes of the parties. The primary reasons why a foreign firm should consider a JV are listed below;

1. Two ventures can combine resources, capital, and employees and leverage each other's primary capabilities and expertise for a faster execution beating the competition.
2. Shared allocation of accountabilities over a product or service regarding manufacturing, logistics, sales, marketing, etc. which lowers the production cost hence ramping up revenue.
3. Sharing of Profit and Loss in the business vertical along with the liabilities as mutually agreed.
4. Both parties can concentrate on business expansion, production, profits, and growing their revenue.
5. Diversification in business opens up. JV can be for all the capabilities of a company or only a particular vertical. Hence it opens up possibilities for foreign companies to reach a wider distribution.
6. Combining the research and development teams to form a product or offer a service that could edge out the competition for them. Much needed Technological advancement can be done by blending the finest brains from both ventures.
7. The local company can produce, manufacture, and serve across sectors as per the instructions of the foreign company in countries where foreign companies do not have the freedom to operate at desired levels due to laws and regulations.
8. The parties can decide the duration for which they want to pursue this JV.

Vital Factors to Consider in a Joint Venture: However, as tempting as the JV sounds, there are some critical points that both ventures need to carefully execute.

• Scope and Purpose: The parties primarily need to be crystal clear about their purpose, goals, objectives, resource allocation, commitments, time duration, and what they wish to achieve. This also includes the decision of the name of the JV company, its place of business, negotiating the MoA & AoA, etc.
• Equity participation and split: The parties need to decide the Shareholding pattern. The proportion can be split 50/50, but if not split equally then there always will be a minority shareholder whose interest and protection need to be accounted for as the majority shareholder probably has a higher control over the business. Disagreement over any business decision or dispute between shareholders can hinder the JV.
• Management of Business and its capital: The parties have to arrive at common ground on who will manage the business of the JV company, which comprises onboarding new employees, clients, managing the accounts along with tracking the investments in the company as missing out on key details often leads to disputes.
   

Forms of Joint Ventures:

JVs may be either contractual or structural, or both. They may be vertical or horizontal in the chain although the main classification of JVs is as equity JV and contractual JV. For setting up a JV in India by a foreign company can be executed through the means of:

1. Equity JV: In this JV, both the companies align and form a new company, where they share the shareholders' equity ownership. It helps in maintaining separate ownership, separate business transactions, and also creates a wall of transparency where all the business goes through the JVC, so that potential disputes when commercials are high are avoided.
• Features:
• You can be a shareholder in the JV company.
• You can oversee all the operations in the JV company.
• You have access to the book of accounts and profits.
• A JV company has a separate legal entity, hence limiting your liabilities.
• Future investments can be made by parties to obtain more shares.
• Buyout, transfer, or liquidation of equity-like options are available.
• RBI approval is needed for big investments whose investment cap varies from sector to sector.
   
2. Contractual JV: In this type of JV, both the parties align their purpose, objectives, and definitions in a contractual agreement. This setting allows the parties to combine resources, and streamline processes for better efficiency and quality for a better output. This type of JV is entered into by the parties when they desire to collaborate for a temporary amount of time over a particular project or bid, as it does not create a separate corporate identity or equity capital.

 
• Features:
• Speedy setting up than a JV company.
• The Agreement limits the liability.
• Can have as many JV partners as you like.
• Control over JV only by the Agreement.
• The functioning, operations of the JV, and obligations of the parties along with the Exit is governed by the agreement.
• No bracket or limit on transactions.
• Incorporation and compliance capital is saved.

Setting Up a Joint Venture

Before setting up a JV a lot of work is done in the background. It starts with finding a potential JV partner and then follows with Negotiations. Once this is all done, a proper Due Diligence is done to make sure that all the pieces fit through the lens of Law, Tax, and Finances of the partners. Once the checkpoints signal a green flag, the parties then proceed to share a Memorandum of Understanding (Mou) or a Letter of Intent (LoI) after which the JV structure is determined.

• Incorporated JV: When a legal entity is incorporated between the venture parties then the following documents are considered important:
  1. A Private Limited Company
     • JV Company in the form of a Private Limited
     • JV Agreement / Shareholders Agreement
     • MOA/AOA for the new entity.
  2. JV company in the form of a Limited Liability Partnership (LLP)
     • A Limited Liability Partnership Agreement.
        
• Unincorporated JV: When the JV is formed without a company but on contractual terms then the following documents are considered important:
  • A legal JV Agreement between the two ventures.
  • Joint Product Development Agreement
  • Marketing Agreement
  • Distribution Agreements
  • Any other agreement as deemed necessary in that particular sector.
     
• JV Regulators in India: When it comes specifically to JV, there exist no specific laws in India that articulate it. JV are mostly governed by the respective legal structure that they are incorporated in.
  • Equity JV company is regulated by the laws of the country it is incorporated. In India, the E JVC is governed, formed, and regulated by the laws, and regulations listed below:
    1. Companies Act, 2013
    2. Competition Act, 2002
    3. Partnership Act, 1932
    4. Foreign Trade (Development and Regulation) Act, 1992
    5. Industrial Policy and Procedure
    6. Policy for Foreign Investment
    7. Indian Contract Act, 1872
    8. Foreign Exchange Management Act, 1999
    9. Foreign Exchange Regulation Act, 1973 ("FERA")
    10. SEBI Guidelines, Regulations, Notifications & Circulars
  • When it comes to a Contractual JV, all the governance is done by the clauses incorporated in the JV Agreement. Since this type of JV is more like a collaboration structure, the Indian Partnership Act governs it.
     
• Notable JVs in India:
  1. Jio-BP: A new age JV created between RIL & BP to sell fuel and provide advanced mobility solutions to vehicle owners, fleet owners, truck drivers, and the aviation industry. The joint venture leverages Reliance's presence across the country and its millions of consumers through the Jio digital platform. RIL was the majority shareholder with 51% equity holdings and BP owned the rest 49%.
      
  2. Panasonic-IOCL: Recently the state-run Indian Oil Corporation Limited stated that it will enter a JV with the Japanese electronic brand Panasonic for the production of lithium-coin cell batteries and offer energy solutions in India. The companies have already signed a binding term sheet and are expected to reach a final agreement by early 2025.

End Notes:

1. Baruah, R. (2024) IOCL, Panasonic to form joint venture to make lithium-ion cells, mint. Available at: https://www.livemint.com/industry/energy/iocl-panasonic-to-form-joint-venture-to-make-lithium-ion-cells-11711891672446.html (Accessed: 19 November 2024).
2. Reliance and BP launch 'Jio-BP' partnership: BP india news: BP india - home (2020) BP. Available at: https://www.bp.com/en_in/india/home/news/press/reliance-and-bp-launch-jio-bp-partnership.html (Accessed: 19 November 2024).