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Joint efforts for Joint Ventures

September 6, 2018

Source: www.mca.gov.in

The modern-day business world is based upon multiple interdependent transactions. Often the parties team up with a view to work together for the common objective of earning profits. This arrangement benefiting the parties mutually has become a trending practice. One such mode is the formation of the Joint Ventures.

Joint Ventures

A joint venture (hereinafter referred to as “JV”) is a corporate structuring device whereby two or more parties join in to work for a commercial project. Based upon the intentions of the parties of the JV, it may be equity based or contractual, formed for perpetuity or specific time period. The entity which may be used for the purpose of joint venture include incorporated structures such as a company or a limited liability partnership or unincorporated structure like partnerships or strategic alliances.

Advantages of JV

JVs are highly beneficial corporate structures. Some of its benefits are listed below:

  • The parties to the JV contribute in terms of inputs and jointly own and manage the JV;
  • The parties share responsibilities and liabilities;
  • More risk mitigation;
  • JV allows greater access to the market and established contacts;
  • There is increased technology transfer;
  • There is recourse to greater expertise and knowledge;
  • Flexible business diversification

Agreement between the parties

A JV is establishment when the parties to the same agree to mutually acceptable terms and conditions to carry out a business jointly which may be in the form of the Memorandum of Undertaking or Letter of Intent as agreed between the parties and comprising of rights and obligations of the parties, consequences of breaches, termination, terms of payment, exit clauses, dispute resolution, force majeure, etc.

Legal framework

Depending upon the corporate structure the JV may be governed under the provisions of the Companies Act, 2013 or the Partnership Act, 1932 or the Limited Liability Partnership Act, 2008.

The transactions of the JV determine the applicability of the remaining laws such as Income Tax Act, 1961; Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”); the Minimum Wage Act 1948; Industrial Disputes Act 1947; State-specific Shops and establishment legislation; Sale of Goods Act 1930; Competition Act 2002, etc.

Foreign – Indian JV

Any non-resident entity can set up a JV in India subject to the provisions of FEMA and Foreign Direct Investment (hereinafter referred to as “FDI”) guidelines laid down by the Government of India. The foreign entity can enter into an engagement with an Indian party through either Automatic (without any prior Government approval) or Approval route (with the approval of the Government) considering the nature of the business, money involved and the prevalent FDI policies. Following types of JVs are recognized in India:

  • Entity which has more than 50% of the shareholding vesting with the Indian entity or it has the control over the board of directors – Domestic Entity;
  • Entity where more than 50% shares or control over the board of directors is in the hands of the foreign entity – Foreign Entity;
  • Entity which is equally owned and controlled by the foreign as well as the Indian entity in the ratio of 50:50 – Foreign owned Indian entity.

In the news

The increasing number of JVs are indicative of the fact that more and more parties are willing to work with one another. Not being restricted to local parties, India is now witnessing rise in the number of JVs which are a collaboration of foreign and Indian entities.

On August 27, 2018, one of the leading farm and construction equipment maker of India — Escorts, joined hands with Japan’s largest mobile crane manufacturer — Tadano.[1] The said JV aims to manufacture rough terrain and truck-mounted cranes in India wherein the stakes held by the Indian entity are 49% while those held by the foreign entity are 51%. The JV would cater to an expanding market in the 20-80 tonnage category.

[1]https://economictimes.indiatimes.com/industry/auto/lcv-hcv/escorts-inks-joint-venture-pact-with-japans-tadano-for-high-capacity-mobile-cranes/articleshow/65563159.cms

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