JOINT VENTURE

TERM PAPER

OF

FINANCIAL MANAGEMENT

MGT-333
DATE OF SUBMISSION: 24 OCTOBER 2010

SUBMITTED TO: SUBMITTED BY:

MRS. SHIKHA DHAWAN NIHARIKA SARNA

LHST

ACKNOWLEDGEMENT
I am very thankful to everyone who all supported me, for I have completed my term paper
effectively and moreover on time.

I would like to convey my deepest thanks to our Lecturer, Mrs. Shikha Dhawan for guiding
me on various topics of the term paper with attention and care.

She has taken pain to go through the project and make necessary correction as
and when needed.

I have learnt lot through this term paper, ‘Joint Venture’. I got sufficient knowledge about
entering into a joint venture, its benefits, risks measures and mistakes to be avoided during
Joint Venture alliance.

Thank you.

Niharika Sarna
 CONTENTS

Sr. No. Topic Pg. No.

1. A Joint Venture Concept 4

2. Objectives of Joint Venture 5

3. Strategic reasons for one partner 5

4. Types of Joint Venture 6

 Jointly controlled operations 6

 Jointly controlled assets 7

 Jointly Controlled entities 7

5. How does Joint Venture Work? 7

6. Starting a Joint Venture 8

7. Minimizing risks and maximizing success 9

8. Joint Ventures are attractive for number of 9

reasons

9. Cause for concern 10

10. Joint Venture in India 10

11. Government approval for Joint Venture 11

12. Entering a Joint Venture Program 12

13. Requirements for Joint Venture agreement 13

14. Mistakes to be avoided during Joint Venture 14

15. Conclusion 15

16. References 16

A JOINT VENTURE CONCEPT:

A Joint Venture (JV) on a continuing basis is the normal business undertaking. It is similar to
a business partnership with two differences: the first, a partnership generally involves an
ongoing, long-term business relationship, whereas an equity-based JV comprises a single
business activity. Second, all the partners
have to agree to dissolve the partnership
whereas a finite time has to lapse before it
comes to an end.

The term JV refers to the purpose of the

entity and not to a type of entity.
Therefore, a joint venture may be a
corporation, a limited liability enterprise,
a partnership or other legal structure, depending on a number of considerations such as tax
liability.

JVs are normally formed both inside one's own country and between firms belonging to
different countries. Within one, JVs usually combine different strengths in a field or are
formed because of legal restrictions within a country; for example an insurance company
cannot market its policies through a banking company. Some JVs are also formed because the
law of a country allows dispute settlement, should it occur, in a third country. They are also
formed to minimize business, tax and political risks.

The JV is an alternative to the parent-subsidiary business partnership in emerging countries,

discouraged, on account of

(a) Ignoring national objectives

(b) Slow-growth

(c) Parental control of funds and

(d) Disallowing competition.

JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-
hosting business, etc.

Today, the term 'JV' applies to more occasions than the choice of JV partners; for example,
an individual normally cannot legally carry out business without finding a national partner to
form a JV as in many Arab countries where it is mentioned that there are over 500 JVs in
Saudi Arabia with Indians alone. Also, the JV may be an easier first-step to franchising, as
McDonald's and other fast foods, found out in China in the early difficult stage of
development.

Objectives of Joint Venture:

 reducing 'entry' risks by using the local partner's assets

 inadequate knowledge of local institutional or legal environment
 access to local borrowing powers
 perception that the goodwill of the local partner is carried forward
 in strategic sectors, the county's laws may not permit foreign nationals to
operate alone
 access to local resources through participation of national partner
 influence of local partners on government officials or 'compulsory' requisite
(see China coverage below)
 access by one partner to foreign technology or expertise, often a key
consideration of local parties (or through government incentives for the
mechanism)
 again, through government incentives, job and skill growth through foreign
investment, and
 Incoming foreign exchange and investment.

Strategic reasons of one partner:

There may be strategic interests of one partner's alone:

 adding 'clout' (the influence

of the other partner) to the
enterprise
 build on company's
strengths
 economies of
(international) scale and
advantages of size ('industrial
hubs')
  'globalize' without size economies of scale (e.g. Indian and Israeli
pharmaceutical industries)
 influencing structural evolution of the industry
 pre-empting competition
 defensive response to blurring industry boundaries
 speed to market
 market diversification
 pathways into R&D
 outsourcing

JVs are formed by the parties’ entering into an agreement that specifies their mutual
responsibilities and goals in an 'adventure. The JV partners can usually form the capital
of the company through injections of cash alone or cash together with assets such as
'technology' or land and buildings. Subsequent to its formation the JV can raise debt for
additional capital. A written contract is crucial for legal provisions. All JVs also involve
certain rights and duties. Each partner to the JV has a fiduciary responsibility, even to
act on someone’s behalf, subordinating one's personal interests to those of the other
person or that of the ‘sleeping partner’. Upon its incorporation it becomes a company in
most places, or a corporation (in the US).

Types of Joint Venture:

There are three types of joint venture. These are:

 Jointly Controlled Operations

 Jointly Controlled Assets
 Jointly Controlled Entities

Jointly Controlled Operations

A jointly controlled operation is a joint venture that involves the use of the assets and other
resources of the venturers rather than the establishment of a corporation, partnership or other
entity, or a financial structure that is separate from the venturers themselves.
Jointly Controlled Assets

A jointly controlled asset is a joint venture that involves the joint control, and often the joint
ownership, by the venturers of one or more assets contributed to, or acquired for the purpose
of, the joint venture and dedicated to the purposes of the joint venture. Each venturer may
take a share of the output from the assets and each bears an agreed share of the expenses
incurred.

Jointly Controlled Entities

A jointly controlled entity is a joint venture that involves the establishment of a corporation,
partnership or other entity in which each venturer has an interest. The entity operates in the
same way as other entities, except that a contractual arrangement between the venturers
establishes joint control over the economic activity of the entity.

How does Joint venture works?

The process of partnering is a well-known, time-tested principle. The critical aspect of a joint
venture does not lie in the process itself but in its execution. We all know what needs to be
done: specifically, it is necessary to join forces.
However, it is easy to overlook the "how’s" and
"what’s" in the excitement of the moment.

We will look at the "how’s" in our review of the

Eight Critical Factors of Success. For the moment,
let's keep in mind that all mergers, large or small,
need to be planned in detail and executed
following a strict plan in order to keep all the chances of success on your side.

The "what’s" should be covered in a legal agreement that will carefully list which party
brings which assets (tangible and intangible) to the joint venture, as well as the objective of
this strategic alliance. Although joint venture legal agreement templates can readily be found
on the Internet, I suggest you seek the appropriate legal advice when entering such a business
relationship.
Starting a Joint Venture

To start a joint venture we should keep in mind the following questions and answer the
important elements as we move forward:

1. What do I sell, and how do I reach my target market?

2. Who are my competitors? If they are better at generating revenues and reaching the
marketplace than me, what do they have that I don't?
3. Are there geographical areas that will remain beyond reach without local partners, or
acquisition costs that are simply too high?
4. Do I need to develop a know-how, which has already been developed by a company
or by an individual?
5. Is there a logical business partner that could help me develop a vertical or horizontal
market penetration?
6. Do I have all the human resources I need in marketing, R&D, production, or
operations? Is there a company I know which would have resources complementary to
mine?
7. How do I feel about combining resources? Do I like to lead by myself and act as a
solitary business hero, or am I fine with sharing the pie? Do I think it is better to own
20% of a $200 million company or 100% of a $1 million small business?
8. Do I have access to the right legal resources to structure the joint venture and insure
all aspects are duly covered?
9. Are there local legal regulations I can bypass by partnering with a local business?
10. Do I have access to successful joint venturers who can share their experience with
me?
11. Do I understand that going through the decision process entails sitting down and
taking the time to write a full-fledged joint business plan?
12. Am I aware that in the vast majority of cases, merging activities, even when not
necessarily identical, will result in an inevitable workforce reduction? How do I feel
about letting go of some of my most faithful employees?
13. Am I looking at partnering because I don't see another way out of my current business
problems? (Joint venturing should not be considered as a last resort action, but rather
as one course of action among several others. This decision needs to be taken in a
careful and methodical manner.)
 14. Do I already know of a person or a company that I see has a real interest in
partnering? Have I discussed this possibility with this person or with the person in
charge of the targeted company? If yes, what is the general feeling? If no, then it is
time to start a high-level discussion to gauge the level of interest.
15. Is my company in need of more credibility? Do I know of a potential joint venture
target, which has the level of credibility I am seeking?
16. What are my strengths and weaknesses? What are the threats and opportunities in my
target market?
17. Do I have all the support I need to go through this major change in my business life?
If I am going through personal turbulences, does it make sense to start such a major
project?

The following article highlights upon Minimizing Risks and Maximizing Success in Joint
Ventures:

As stock becomes a less valuable deal-making commodity and merger and acquisition
activity declines, joint ventures (JVs) are becoming increasingly popular as a means for
companies to form strategic alliances. In a joint venture, two or more organizations agree to
share capital, technology, and human resources to create a new entity under shared control.

Joint ventures are attractive for a number of reasons:

 They provide companies with the opportunity to obtain new capacity and expertise.

 They allow companies to enter into related businesses or new geographic markets or
obtain new technological knowledge.

 They have a relatively short life span (5-7 years) and therefore do not represent a
long-term commitment.
In this era of divestiture and consolidation, joint ventures also offer a creative way for
companies to exit from noncore businesses. Companies can gradually separate a business
from the rest of the organization while allowing a buyer to assess the true value of intangible
assets such as brands, distribution networks, people, and systems, as well as learn how the
business operates. This is borne out by the fact that approximately 80% of all JVs end in a
sale by one parent to the other.
Cause for Concern
Here are some of the more common reasons for JV difficulties:

 The philosophy governing expectations and objectives of the joint venture is unclear.

 There's an imbalance in the level of investment and expertise brought to the joint
venture by the two parent organizations.

 The senior leadership and management teams for the joint venture receive inadequate
identification, support, and compensation.

 The JV partners possess disparate, and often conflicting, corporate cultures and
operational styles.

 The JV's size is modest compared to the two parent organizations.

 Among the most common causes of failure cited by CEOs in the Conference Board
study were poor or unclear leadership.

Joint Venture in India:

A typical Joint Venture is

where:

1. Two parties,
(individuals or
companies),
incorporate a company
in India. Business of
one party is transferred
to the company and as
consideration for such
transfer, shares are
 issued by the company and subscribed by that party. The other party subscribes for
the shares in cash.
2. The above two parties subscribe to the shares of the joint venture company in agreed
proportion, in cash, and start a new business.
3. Promoter shareholder of an existing Indian company and a third party, who/which
may be individual/company, one of them non-resident or both residents, collaborate to
jointly carry on the business of that company and its shares are taken by the said third
party through payment in cash.

Some practical aspects of formation of joint venture companies in India and the prerequisites
which the parties should take into account are enumerated herein after.

Government Approvals for Joint Ventures

All the joint ventures in India require governmental approvals, if a foreign partner or an NRI
or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In
case, a joint venture is covered under automatic route, then the approval of Reserve bank of
India is required. In other special cases, not covered under the automatic route, a special
approval of FIPB is required.

The Government has outlined 37 high priority areas covering most of the industrial sectors.
Investment proposals involving up to 74% foreign
equity in these areas receive automatic approval
within two weeks. An application to the Reserve
Bank of India is required. Foreign Investment in
India - Sector wise Guide gives the sector wise
guidelines under automatic route. Besides the 37
high priority areas, automatic approval is available for 74% foreign equity holdings setting up
international trading companies engaged primarily in export activities.

Approval of foreign equity is not limited to 74% and to high priority industries. Greater than
74% of equity and areas outside the high priority list are open to investment, but government
approval is required. For these greater equity investments or for areas of investment outside
of high priority an application in the form FC (SIA) has to be filed with the Secretariat for
Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100%
equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented
Unit (EOU) or a unit in one of the Export Processing Zones (EPZ's).

For major investment proposals or for those that do not fit within the existing policy
parameters, there is the high-powered Foreign Investment Promotion Board (FIPB). The
FIPB is located in the office of the Prime Minister and can provide single-window clearance
to proposals in their totality without being restricted by any predetermined parameters.

Foreign investment is also welcomed in many of infrastructure areas such as power, steel,
coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector,
including exploration, producing, refining and marketing of petroleum products has now been
opened to foreign participation. The Government had recently allowed foreign investment up
to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The
government is also examining a proposal to do away with the stipulation that foreign equity
should cover the foreign exchange needs for import of capital goods. In view of the country's
improved balance of payments position, this requirement may be eliminated.

Entering a Joint Venture program

Selection of a good local partner is the key to the success of any joint venture. Once a partner
is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the
parties highlighting the basis of the future joint venture agreement.

A Memorandum of Understanding and a Joint Venture Agreement must be signed after

consulting lawyers well versed in international laws and multi-jurisdictional laws and
procedures.

Before signing the joint venture agreement, the terms should be thoroughly discussed and
negotiated to avoid any misunderstanding at a later stage. Negotiations require an
understanding of the cultural and legal
background of the parties.

This picture is showing Md Sakhawat

Hossain, managing director of Western
Marine Shipyard Ltd, and A Rouf
Chowdhury, managing director of Fishers
Shipyard Ltd, exchange documents after signing a deal in Dhaka recently. Under a joint
venture, the two companies will build fishing trawler with 350 tonnes capacity.

Before signing a Joint Venture Agreement the following must be properly addressed:

• Dispute resolution agreements

• Applicable law.
• Force Majeure
• Holding shares
• Transfer of shares
• Board of Directors
• General meeting.
• CEO/MD
• Management Committee
• Important decisions with consent of partners
• Dividend policy
• Funding
• Access.
• Change of control
• Non-Compete
• Confidentiality
• Indemnity
• Assignment.
• Break of deadlock
• Termination.

The Joint Venture agreement should be subject to obtaining all necessary governmental
approvals and licenses within specified period. All joint ventures are initiated by the parties'
entering a contract or an agreement that specifies their mutual responsibilities and goals. The
contract is crucial for avoiding trouble later; the parties must be specific about the intent of
their joint venture as well as aware of its limitations. All joint ventures also involve certain
rights and duties. The parties have a mutual right to control the enterprise, a right to share in
the profits, and a duty to share in any losses incurred. Each joint venturer has a fiduciary
responsibility, owes a standard of care to the other members, and has the duty to act in Good
Faith in matters that concern the common interest or the enterprise. A fiduciary
responsibility is a duty to act for someone else's benefit while subordinating one's personal
interests to those of the other person.

Mistakes to be avoided during Joint Venture:

1. Not taking the time to ensure that your partner

has great-quality products and services and a solid
reputation.
When you choose a partner, it is imperative to choose
one that has high-quality products and services as well as a good reputation within the
industry. Sometimes, a company may look better on the surface than it really is. Your
credibility is at stake if you partner up with a company that has sub-standard products and
services. Do your research about your potential joint venture partners and review their
products and services before endorsing them as these issues will reflect on you and
your business
2. Offering your partner too small of a deal
There has to be an incentive for your partner to engage with you, and offering too small of a
deal won’t make it worth their time and effort. Remember that endorsers with a large,
targeted and loyal client base are the most wanted joint venture partners. They’ll partner with
others if you offer a percentage of the profits that’s too low. So make this mental note... if
they are worth pursuing, they are worth sharing the profits with.
3. Simply handing over your client list
This can constitute breach of contract with your clients if you have committed to their
privacy. You’ve also worked very hard to build your client list, and this forms part of the
value you have to contribute to the joint venture relationship. If you simply hand over your
client list, you have no point of leverage.
4. Not devising an exit strategy
Even the best of relationships can go sour, or simply not work. Make sure you have an open
door to leave the joint venture if for any reason it is not working out.
5. Committing to a long term relationship from the beginning, without testing your
strategy first
Any joint venture should involve a trial period to see if profits will show a real upwards
trend, or if the idea is a valid one. If you sign a long term contract, you may be stuck in a no-
win situation with no way to escape. As with any marketing strategy, test in small numbers
first, before rolling out fully.
Joint Venture marketing is very lucrative, and with some forethought and planning, can help
springboard your business to new success levels. Just make sure to do your homework right
from the start, and avoid these pitfalls to ensure high returns on your investment of time,
money and effort.

CONCLUSION

Before starting a joint venture, make sure you are clear about what you want from the
relationship. Make sure, also, that you are clear about what your JV partners want and that
they know what you want. Unless you are all in
agreement regarding the anticipated outcome, you
will be pulling in different directions and the
joint venture will suffer.

As a small business, you may want to team up with

a larger partner for their large customer base, broad
product line or advanced business techniques. Most
small businesses think of the extensive financial
assistance a large company can offer. Be honest about this - there's nothing worse than
committing yourself to a large company and finding they are less generous with their money
than you had hoped.

If you are the larger business in a joint venture proposal, you need to be open about your
desire to take over and absorb your smaller partner. Nobody expects you to pour unlimited
funds into a smaller JV partner and a junior partner might be naturally fearful of losing their
identity and loss of intellectual property. Good communication skills are needed.

There must be a clear understanding of what each joint venture partner will contribute and
what they will get back. Ii is necessary to turn the objectives of the joint venture into a
working plan that fosters trust and teamwork. A successful joint venture will help your
business develop faster, without the need to borrow - increase market share, without the need
for excessive advertising - and grow profits, while providing a better service.
REFERNCES:

I took the reference form the following internet sites while making my term paper on Joint
Ventures:
 http://www.articlesbase.com/business-articles/five-most-common-joint-venture-
marketing-mistakes-to-avoid-732252.html

 http://www.submityourarticle.com/articles/Christian-Fea-1480/assets-64642.php

 http://entrepreneurs.about.com/od/beyondstartup/a/jointventures_3.htm

 http://www.fbsc.ecu.edu.au/fina/html/joint_venture_procedures.cfm

 http://www.fws.gov/birdhabitat/jointventures/DefineJV.shtm

 http://www.hewittassociates.com/intl/na/en-
us/KnowledgeCenter/ArticlesReports/ArticleDetail.aspx?cid=1630

 http://madaan.com/jointventure.html

 http://www.sethassociates.com/setting_up_a_joint_venture_in_india.php

 http://www.frederickpearce.com/jv/jvconclusion.html

 http://legal-dictionary.thefreedictionary.com/Joint+Venture

 http://www.businessacademyonline.com/blog/joint-ventures-%E2%80%93-pros-and-
cons/

 http://www.dynamicexport.com.au/articles/legal/what-is-a-joint-venture/

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