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Corporate Establishment, Tax, Accounting & Payroll Throughout Asia

Establishing a Joint Venture in India


Establishing a Joint Venture in India

A
joint venture is a tactical Terms and conditions should be properly Where one or more legal methods are
partnership where two or assessed before signing the contract. used in the founding of the joint venture
more people or companies Negotiations need an understanding company to execute its operations is
agree to put in goods, of the cultural and legal background based on the partnership between the
services and/or capital to of the parties. The Joint Venture union parties, the results of which reproduce
a uniform commercial project. should be a subject matter to obtaining in the joint venture agreement entered
all required governmental approvals and into between the parties.
In sectors where 100% FDI is not licenses within specified period.
allowed in India, joint venture is best The licensing agreement, know how
medium to enter into Indian market. Before signing a Joint Venture contract agreement, technical services or technical
Joint venture offers a low risk option the below points must be properly assistance agreement, royalty payment,
for the companies wanting to enter assessed: franchise agreement and agreement
in vibrant market like India. For any including all other profit-making matters
successful JV into India, compatibility Applicable law including use of intellectual property
is important tool for both the parties. To Shareholding Pattern rights normally form annexes or
maintain a successful joint venture in Composition of Board of Directors attachments to the main J V Agreement.
India both the associated parties should Management Committee They can be signed simultaneously
have a long term goal and conditions Frequency of Board Meeting & its or after the joint venture Company is
should be written in the clauses in JV. venue recognized.
General Meeting & its venue
Why JV? Composition of quorum for important Recent Joint Ventures in India
Joint Venture companies are mainly decision at Board Meeting The Nissan Motor signed a Joint Venture
the chosen form of corporate houses Transfer of shares deal to make commercial vehicles,
for Doing Business in India. There Dividend policy engine and components in India. Ashok
are no separate laws for joint ventures Employment of Funds in cash or kind Leyland Nissan vehicles, the 50:50
in India. The companies registered in Change of control JV between ALL and Nissan Motor,
India, even with up to 100% overseas Restriction /Prohibition on has unveiled its first light commercial
equity, are considered the same as local Assignment product, “Ashok Leyland Dost”. The
companies. A Joint Venture may be any Non-Compete parameters 1.25 tonne payload capacity vehicle is
of the business entities existing in India. Confidentiality to hit the market in the second quarter
Indemnity of 2011-12.
How to enter in to JV in India? Break of deadlock
hoosing of a good home partner is Jurisdiction for resolution of dispute After Nissan, it’s Volvo’s turn to tap
the important tool to the success of Termination criteria & notice the same market. The Swedish truck
any joint venture. Once an associate maker is investing $375 million for
is selected normally a Memorandum Methods of Joint Venture in a joint venture with Eicher Motors,
of Understanding or a Letter of Intent India the third-largest commercial vehicle
is signed by the parties stressing the 1. Equity Joint venture manufacturer in India.
foundation of the future joint venture 2. Contractual Joint venture
agreement. The world’s largest retailer, Wal-Mart,
The Equity Joint Venture is an entered into a 50:50 joint venture with
A Memorandum of Understanding understanding whereby an independent Bharti Enterprises for wholesale cash-
(MoU) and a Joint Venture Agreement legal entity is created in accordance with and-carry business in India that will
must be marked after consulting the agreement of two or more parties. roll out 10-15 such outlets over seven
Chartered Accountants Firm well versed years. This also covers a supply chain
in Foreign Exchange Management The Contractual Joint Venture might and back-end logistics.
Act, Indian Income Tax Act, Indian be used where the organization of a
Companies Act, international laws and detach legal entity is not needed or the DragonWave Inc., a global supplier
applicable Indian Rules & Regulations creation of such a separate legal entity of packet microwave radio systems
and procedures. is not feasible. for mobile and access networks, and
Himachal Futuristic Communications

2 Establishing a Joint Venture in India


Ltd. (HFCL, are undertaking a joint procedure. Superlatively, management and central (tax) liabilities are met.
venture to provide leading packet constitution, control and safeguards Historically, there has never been
microwave solutions to the Indian should be agreed when preparing the an occurrence that India has failed
market. memorandum of understanding. to provide foreign exchange for
repatriation. Investment exit processes
Advantages of JV Structure of the Board of Directors are also fairly simple, and profits can
of the Company can be resolute by be repatriated once all the tax debt and
Following are the advantages of the the Joint Venture Agreement and other compulsions are fulfilled. Troubles
Joint Venture for a foreign investor: corresponding necessities can be made only arise when people escape or dodge
in the Articles of Association of the the already simple rules, or do so out of
Established distribution/ marketing set Company. Members to the Joint Venture ignorance.
up of the Indian partner can choose on the matters such as
total number of Directors, number of Exit Strategy
Available financial resource of the Directors to signify parties to the JVA, Joint ventures in India are normally
Indian partners appointment of Managing Director, planned for a particular period, and
Chairman. overseas companies should take the
Established contacts of the Indian length of such a lifespan acutely. Indian
partners which help smoothen the Therefore necessities can be made in the Joint Ventures often fall short because
process of setting up of operations Articles of Association of the Company. the domestic associates are not capable
It is universal to provide in the JVA, that to fund enough resources to expand
A JV also offers parties an opportunity every resolution of the Board linking the business as rapidly as the foreign
to jointly manage the risks associated to particular matters shall involve company had hoped for or because the
with new ventures. Through a JV they confirmatory vote of a mainstream local partners have a data advantage in
can limit their individual exposure by comprising at least one director each terms of the local conditions of doing
sharing the liabilities. representing the partners in the JV. business and have different interests
JVs offer many flexible business from the foreign firms. Though it
diversification opportunities to the Royalty might be contradictory instinctive, it
partners. A JV may be set up, as a For the automatic route, RBI permits is absolutely mandatory to determine
prelude to a full merger or only for lump sum payments not exceeding US$ the planned timing of the exit from
part of the business. 2 million. the joint venture at the beginning.
Certain market sectors remain The general exit options are: buy-sell
restricted for foreign investment Royalty payable is restricted to 5 % for agreements, unilateral sale rights, and,
and a local partner with a certain local sales and 8 % for exports, without put/call rights. On the other hand, the
shareholding in the company is a any constraint on the period of the Indian joint venture agreement may also
regulatory necessity for commencing royalty payments. The royalty limits are provide for the termination of operations
business and making investments. net of taxes and are calculated according and the liquidation and closure of the
to standard conditions. Imbursements venture. Any of those options can be
Types of JV are made through RBI. used independently or in combination
Though a JV in the form of incorporated with each other.
Company is the most famous among The royalty is measured on the source
foreign Investors, the other types of JV of the total ex-factory sale price of Removal of the condition
available are as follows: the product, except of excise duties, of prior approval in case of
minus the cost of the average bought- existing joint ventures/ technical
Incorporated out constituents and the landed cost of collaborations in the ‘same field
• Company imported components, irrespective of The government of India in an updated
• Limited Liability Partnership (LLP) the source of procurement, including foreign direct investment (FDI) policy
Unincorporated ocean freight, insurance, custom duties, stated simplification of joint venture
• Partnership etc. norms and opens up new areas for
• Cooperation Agreement / Issue of equity shares against lump sum overseas funds.
Strategic Alliances fees and royalty fees is allowed. For
over and above this norm, the firm has In a milestone decision, the government
Management to go to FPBI. of India has eased regulations for
It is important to have the same opinion investment by foreign companies
over the proposed management structure Profits repatriation that are present in India through joint
and to categorize which party has to India allows free of charge repatriation venture (JV) or technical collaboration.
organize early in the joint venture of profits once the entire domestic

Establishing a Joint Venture in India 3


Now, overseas companies will not released, companies have now been Registered User Agreement) with Indian
have to seek a no-objection certificate grouped into only two categories — organizations.
from the Indian associate for investing companies owned or controlled by
in the sector where the joint ventures foreign investors and companies owned Human resource
operate. These changes are part of the and controlled by Indian residents. Agreement of employment for
consolidated FDI policy (3rd revision). Elimination of this condition would give employees is generally governed by
The restructured policy permits overseas more confidence to investors who were the Indian Contracts Act, which is
firms in existing joint ventures to strangulated by their partners. fundamentally a codification of English
function independently in the same contract law. The hiring and firing of
business segment. Previously, they Pre incorporation Due Diligence staff is therefore normally subject to
needed prior approval from their Indian Overseas firms should conduct a formal the terms of the contract rather than any
partners. due diligence process to evaluate the inflexible employment act.
expectations and limitations of the
According to the updated policy the Indian associate, to check the validity Many overseas investors have their
commerce and industry ministry of the partners’ business operations, to customary service contracts amended to
released, companies have now been review the validity of the documents the degree that it is needed to obey the
grouped into only two categories — produced by the prospective partners, rules with Indian law or cultural norms,
companies owned or controlled by and to evaluate any risk factors such as the provision of “casual leave”
foreign investors and companies owned associated with the potential partners. or more reimbursement in kind rather
and controlled by Indian residents. than cash. A parallel way can be adopted
Elimination of this condition would give Tax consideration when drafting employee handbooks for
more confidence to investors who were Foreign firms should reach out to tax Indian company.
strangulated by their partners. advice at the beginning of an Indian
investment. India has a very low entry In order to generate a win - win condition
Removal of the condition of prior for creating a taxable presence. The for both, Indians and Foreign Investors,
approval in case of existing joint sale of shares in an Indian company is JV is a good tool to venture into a
ventures/ technical collaborations in usually taxed in India as capital gains, business opportunity. It is also important
the ‘same field even if the seller is not a resident of to say that lot depends on the communal
India. India taxes such capital gains at trust and confidence. Complying with
The government of India in an updated high, variable rates of taxation ranging the suitable measures and avoiding
foreign direct investment (FDI) policy from zero to around 30%. Therefore, communication gap are quite vital to
stated simplification of joint venture overseas are generally advised to invest the accomplishment of any JV.
norms and opens up new areas for through offshore jurisdiction. India has
overseas funds. tax treaties with Mauritius, Cypress, the
UAE, Singapore, and the Netherlands.
In a milestone decision, the government
of India has eased regulations for Intellectual property rights
investment by foreign companies India functions a system of listing for
that are present in India through joint IPR and is a participant to various
venture (JV) or technical collaboration. international IPR treaties. The
perception remains, that India is a
Now, overseas companies will not high-risk area for IPR shoplifting. A
have to seek a no-objection certificate foreign investor should carry out an
from the Indian associate for investing inspection to recognize what, if any, of
in the sector where the joint ventures its IPR will be uncovered to the Indian
operate. These changes are part of the market, and then consider whether it is
consolidated FDI policy (3rd revision). worth shielding.
The restructured policy permits overseas
firms in existing joint ventures to Processes that can be taken by an
function independently in the same overseas investor to protect its IPR
business segment. Previously, they include registration and the making of
needed prior approval from their Indian detailed provision in the joint venture
partners. agreement. Independent documentation
to the joint venture contract may also
According to the updated policy the be executed, such as a name and logo
commerce and industry ministry license agreement (also known as a

4 Establishing a Joint Venture in India


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