Embarking Joint Ventures

an Indian perspective

CS Makarand Lele
Chairman WIRC
Partner MRM Associates
makarand.lele@mrmcs.com
 What is joint venture
Definition of JV FDI regulations
Two or more people coming together
For common cause
Pooling of resources
Combination of strength
Venture risk undertaking, commercial
speculation, exposure to risk
Human element
Unlocking values
Creation of assets
 Ingredient of JV
Business as objective
Commercial terms
Technology
Sharing of benefits & risks
Responsibilities sharing
Relationship between parties
Entry and Exit options
Disputes
Settlements
 Advantage to foreign
partner
Mitigation of risk in open venture
Use of local partners infrastructure
Plug & play
Understanding local business environment/
market/ legal structure/ compliances
Goodwill & contacts of local partner
Raw material source
Skilled manpower
Limiting competition
Regulatory requirements to have local
partner
Investment tax benefits in their country
 Expectations of Indian
Partner
Funds
Technology
Skills
Trade mark , brands, IPR
Export markets
Value addition in Indian market
Goodwill
 Expectations of Foreign
Partner
Entry to Indian market
Availability of Skilled resources
Low cost of production
Outsourcing hub
Transparency
Compliances
Reasonability
 Types of Ventures
In Existing Entities
Acquisition of stake
Change of ownership of holding company
Technology collaboration
In New Entity
Acquiring demerged entity
New JV company equity participation
Loan funding
Technology collaboration
Tendering/ quoting for BOT/ PPP/
Greenfield projects - SPV
 Applicable Laws
Industrial Policy & FDI regulations
FEMA
Company law
SEBI laws & Listing agreement
Contract Act: Section 27 agreement to
restrain trade or profession is void. Non
compete
Stamp Act: duty payable as per state act
IPR laws
Competition law : Big JV needs to check this
for combination & comply with section 6 of
the act i.e. prior intimation & approvals
 Steps to form a JV
Market Analysis & viability study
SW analysis
Negotiations
MOU defining principal terms &
conditions
Due diligence & representations
Legal documentation
Approvals & permissions
Launching
 Due Diligence
Financial & Legal covering :
Company background & history
Status & compliances for group companies
Finance, tax, accounting
Borrowings, loans, investments
Manufacturing, marketing, distribution
Contracts, licenses, approvals
Corporate compliances
Properties
Litigations & disputes
Pollution & potential threats
Employees & HR
Ownership
IPR rights
 Important points for JV
Form of Organization
Permissions & approvals
Financial projections
Capital requirements
Infrastructure set up
Human resources
Technical analysis
Costing for products/ services
Analysis of competition & Market
Environmental impacts
CSR & other social aspects
Options available to foreign
JV partner
Equity participation

Technology Transfer: Royalty/ Know how

fees

Control the composition of Board &

Management

Debt Funding
 Moving ahead.
Plan
Recognize war areas
Understand strength & weakness
Be realistic about demands
Team has only one leader
Negotiate
Listen & Understand your partner
Dont argue
Dont hurt the ego of other professional
Affirmative & polite approach
Dont loose the temper
Keep difficult issues pending for next meeting
Drafting
What is a good draft?
Document should create a confidence
Clear, clean & simple
Avoid vague terms
Control on versions
Good Document can never be
a substitute to a bad partner
``

CS is the master of
documentation``
 Structuring JV Agreement
How much share each party will have?
How is the composition of the Board?
Who and how the JV will be operated & managed
Rights relating to shares
Protection of minority interest
Valuation of IPR
Pay out policy Dividend/ Buy back
Representation & warranties
Compensation policy for senior management team
Non compete
Compliances
Taxation
Penalties
Arbitration & settlement of disputes
Exit Route
Winding up/ Termination/ Closure
 Important terms of JV
agreement -1
Equity participation 11%, 26%, 51%, 76%
Board structure Equal numbers or %
based representation? Who will be a
chairman? casting vote?
Management right to appoint MD &
other KMP, Committees, powers & duties
Contribution by partners financial, bank
guarantees technical, R&D support,
manufacturing, marketing, day to day
management
 Important terms of JV
agreement -2
Minority Protection Affirmative vote, right to buy
out, proper exit route
Veto/ Affirmative Vote : items requiring Board
approvals, items requiring shareholders approval
Quorum different from requirement of
affirmative vote, quorum at adjourned meeting,
practical approach, consent by circular
resolutions, video conferencing meetings
Restriction on Transfer of Shares Transfer
includes all actions relating to shares & voting
rights, lock in period, general restrictions, inter se
transfer, affiliate, pledge & hypothecation in
ordinary course of business
Special Rights relating to shares Tag along, Drag
along, Right of first refusal, pre-emption right.
 Important terms of JV
agreement-3
Dead lock resolution one party should have
clear right to decide, third party reconciliation,
out right purchase, distribution of assets by
demerger, Put call option, Seal Bid method
Arbitration dispute, appointment of
arbitrators, jurisdiction, award, decree,
enforcement
Force Majeure natural calamities beyond the
control of the parties
Termination sun set clause, events, procedure,
right of the parties after terminations,
compensation
Exit Route no ambiguity, fair for each party
 Important terms of JV
agreement- 4
General Terms & conditions
Jurisdiction
Severability
Representation & Warranties by the parties
Conditions precedent to closing
Closing events & procedures
Deed of adherence
exchange of documents
Copies of the agreement
Annexure
 Articles of Association
Copy JV terms to articles
Validity of obligations on parties
Conflict between articles & JV agreement
Enforcement
Information in public domain

BINDING NATURE OF SHAREHOLDERS

AGREEMENT
The Company shall abide by the Shareholders agreement made
between the Company and its shareholders and carry the same
into effect so far as it concerns the company. The Articles of
Association of the Company shall be amended in conformity with
the Shareholders Agreement. In the event of inconsistency
between the provisions of Shareholders Agreement and the
Articles of Association, the provisions of the Shareholders
Agreement shall, to the extent permitted by law, prevail. The
members shall exercise, their voting rights attached to their
Shares to alter the Memorandum of Association and the Articles of
Association in a manner consistent with Shareholders Agreement.
 Registration & Stamping
Payment of stamp duty
Execution outside India & copies brought
into the state
Affixing of Stamps
Registration under State Registration Act
Payment of cess
 Governing FDI/ FEMA
regulations
Investment by foreign incorporated entity
Automatic/ Approval route
Sectoral caps
Capital Account transactions
External Commercial Borrowing regulations
Payment of royalty & technical know how fees
Acquisition of property in India
Current Account transactions
Establishment of place of business in India LO/
BO
Pricing guidelines for issue of securities
Press Note 1 of 2005 conditions removed w.e.f.
1.4.2011
KYC norms & guidelines for money laundering
 Important aspects of FDI
regulations
The term Capital is defined in FDI policy and
includes fully, compulsory & mandatory
Convertible Preference Shares and Debentures
(FCCB), Any other instrument, partly paid share
and warrants is not capital & can be issued to
resident outside India only after approval
through the Government route.
Payments for royalty, lump sum fee for transfer
of technology and payments for use of
trademark/ brand name caps were removed and
were put under automatic route vide RBI circular
dated 13/05/2010, with effect from 16.12.09.
 Important aspects of FDI
regulations
RBI revised the method of valuation of shares for
issue & transfer effective from May 2010
In case of Listed Companies the price should be
worked out in accordance with the SEBI
guidelines, as applicable.
For unlisted Companies valuation to be done by
SEBI registered Category - I Merchant Banker or a
Chartered Accountant as per the Discounted Free
Cash Flow Method.
The new method is expected to yield a higher
valuation as it would take into account the
potential of the business as opposed to the
accounting approach of the earlier methods.
 Break _____out

Golden hand shake goals achieved, efflux of time

Deadlock
Disputes
Boredom
Failure in achieving objectives
Changes in regulations
Incapacity of parties - insolvency/ bankruptcy/
closure
Impossibility to achieve objectives
Consequence
Achieving termination
Simplified separation
Role of CS
 Few issues in JV
Post implementation issues

Enforceability of Transfer Restrictions

Non compete

Provisions of the Competition act

Thank you