JOINT VENTURE OF COMPANY

Introduction

India’s economic growth is attracting business houses from across the world. The world is

looking at India as an ideal investment destination with strategic advantages and lucrative

commercial incentives. A Foreign retailer looking for investment in India has several operations.

If a foreign company does not want to incorporate an entity in India, it may set up laison or

branch office or may enter into franchise agreements with India partners. If a foreign company

instead decides to incorporate an entity under Indian law, the company may form a Joint Venture

(hereinafter “JV”).Joint Venture is a popular method to enter a country whose legal and business

environment is unknown. However, joint ventures face many hurdles – statutory as well as

relationship centered. Even after two and a half decades of liberalization, India imposes

restrictions on foreign investment in some sectors. Foreign companies also need to be aware of

the corporate structures that they can choose when working in India. Sometimes a contractual

joint venture is a better option than an equity-based joint venture. The choice of model of joint

venture is, of course, determined by the objectives hat the partners have and whether they intend

their relationship to be long term or short term. This Guide attempts to throw light on the options

available to foreign nationals and companies when entering into joint ventures in India. As and

when the Indian partner is selected and broad contours of the relationship underlying the joint

venture have been firmed up, it is necessary to create the legal documents that will bind the

parties together. At this stage, it is necessary to draft, negotiate and execute a Shareholders’

Agreement or Joint Venture Agreement. Surely, it is not easy to freeze the terms of a relationship

to a well-drafted document that will stand the test of time. This Guide gives some key points that

are critical in this regard.

In India until recently, almost all equity-based ventures were structured in the form of a

company. However, with the government permitting foreign investment in Limited Liability

Partnership (LLP) Firms, there is significant interest in LLP firms. Articles of Association is a

most important document that controls the management and operations of a company. Generally,

not sufficient attention is given to drafting of Articles. We give a brief write-up on the relevance

of careful drafting of Articles in a joint venture company. In case of an LLP, Partnership

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Agreement determines the relationship between partners. We have tried to give some guidance

about drafting of a Partnership Deed for an LLP firm.

PURPOSE FOR ESTABLISHING A JOINT VENTURE

JVs are envisaged as alliances that yield benefits for the JV partners by offering a platform to

attain their business goals, which would be difficult or uneconomical to attain independently.

Establishing a JV with an ideal partner provides a fast way to leverage complementary resources

available with the other partner, share each other’s capabilities, access new markets, strengthen

position in the current markets, or diversify into new businesses. India Inc. has come of age and

is not just an investment destination but also an aggressive investor. Indian companies have

exhibited, in the recent past, their ambition to venture into the quest for overseas expansion. The

main obstacles for Indian companies in achieving expected levels of global presence are

deficiencies in terms of product quality, technology, infrastructure and even management

processes. These deficiencies can be negated by way of an alliance with a foreign counterpart

who is a strategic fit. Alliances between those possessing varying expertise and capabilities in

technology, marketing and distribution, etc. are necessary to meet the growing needs of modern

business.

A. Leveraging Resources

B. Exploiting Capabilities and Expertise

C. Sharing Liabilities

D. Market Access

E. Flexible Business Diversification

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TYPES OF JOINT VENTURES

Contractual Joint Venture (CJV)

In a contractual joint venture, a new jointly agreement to work together but there is no agreement

to give birth to an entity owned by the parties who are working together. The two parties do not

share ownership of the business entity but each of the two parties exercises some elements of

control in the joint venture.

A typical example of a contractual joint venture is a franchisee relationship. In such a

relationship the key elements are:

a. Two or more parties have a common intention – of running a business venture

b. Each party brings some inputs

c. Both parties exercise some controls on the business venture

d. The relationship is not a transaction-to-transaction relationship but has a character of relatively

longer duration.

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Generally speaking, the above four can be called as the distinguishing characteristics of a

Contractual Joint Venture as opposed to a Contractual Transaction-based relationship.

Foreign companies often resort to contractual joint ventures when they do not wish to invest in

the equity capital of a business in India even though they wish to exercise controls and want to

decide the shape that the venture takes. For example, a foreign company may have a Technology

Collaboration agreement with an Indian company whereby the foreign company controls all key

aspects of running the business. In such a case, the foreign company may like to retain the option

of taking equity at a future date in the Indian company run by its technology. This will mean that

though to begin with the venture is a contractual joint venture, the parties may convert it into an

Equity based joint venture at a later date.

Equity Based Joint Venture (EJV)

An equity joint venture agreement is one in which a separate business entity, jointly owned by

two or more parties, is formed in accordance with the agreement of the parties. The key operative

factor in such case is joint ownership by two or more parties.

The form of business entity may vary – company, partnership firm, trusts, limited liability

partnership firms, venture capital funds etc. From the point of a foreign company, the most

preferable form of business entity is either a company or a limited liability partnership firm. We

shall discuss this aspect in detail in the next section.

Who Can Set Up Equity Based JV in India

Generally speaking, any non-resident entity can set up an equity-based joint venture in India.

However, some entities face restrictions under FDI Policy of Government of India. The

restrictions are as follows:

1. Citizen or entity of Pakistan can invest only after approval of Government of India. They

cannot invest in defense, space, atomic energy and sectors prohibited for foreign investment.

2. Citizen or entity of Bangladesh can invest only after approval of Government of India.

However, there are no barred areas as in the case of entities from Pakistan.

3. NRI residents in Nepal and Bhutan as well as citizens of Nepal and Bhutan can invest on

repatriation basis subject to investment coming in free foreign exchange (USD or EURO)

through normal banking channels.

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4. A Foreign Institutional Investor (FII) can invest only under the Portfolio Investment Scheme

which limits the individual holding of an FII to 10% of the capital of the company and the

aggregate limit for FII investment to 24% of the capital of the company. This aggregate limit of

24% can be increased to the sectoral cap / statutory ceiling, as applicable, by the Indian

Company concerned through a resolution by its Board of Directors followed by a special

resolution to that effect by its General Body and subject to prior intimation to Reserve Bank of

India. The aggregate FII investment, in the FDI and Portfolio Investment Scheme, should be

within the above caps.

5. A Foreign Venture Capital Investor (FVCI) duly registered in India may contribute up to

100% of the capital of an Indian Company under the automatic route and may also set up a

domestic asset management company to manage the fund. Such investments are subject to the

relevant regulations and FDI policy including sectoral caps, etc. SEBI registered FVCIs are also

Allowed to invest under the FDI Scheme, as non-resident entities, in other companies, subject to

FDI Policy and other regulations.

Forms of Equity Based JV

1. Company – A limited liability company is the most preferred structure for joint

Venture entities in India. Government also encourages investment being in the form of equity

capital of a company incorporated in India. Companies in India are mainly of two types – private

limited and public limited. After the coming into force of Companies Amendment Act, 2015

there is no minimum share capital prescribed for either private limited company or public

limited company. Earlier, the minimum prescribed share capital for a private limited company

used to be Rs. 100,000- and for a public limited company, it used to be Rs. 500,000-. A private

limited company must have at least two

Shareholders, while a public limited company must have seven shareholders. The only exception

to this is a one-person company. The shareholders may be foreign citizens or foreign companies.

Companies Act 2013 makes it mandatory that at least one director of every company is resident

of India.

2. Partnership Firm – Such an entity is not permitted for joint ventures by foreign

Residents in India in most of the cases. Exceptions are made in case of Non Resident Indians or

Persons of Indian Origin residing out of India. However, such exceptions are subject to various

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conditions. Generally speaking, a foreign company should not think of using partnership firm as

a vehicle for a joint venture.

3. Limited Liability Partnership (LLP) Firm– LLP Firm structure is regulated in

India by the Limited Liability Partnership Act, 2008. Foreign investment in LLP Firms was not

permitted before November 2015. Government of India has now allowed foreign investments in

LLP firms subject to certain restrictions. LLP Firms are partnership firms with limited liability of

partners. An LLP Firm combines the convenience of a partnership firm with the limited liability

feature earlier found only in a company. An LLP Firm needs minimum two partners. It also

requires minimum two Designated Partners out of which at least one should be resident of India.

The two partners can also be appointed as Designated Partners. There is no requirement of

minimum capital contribution to incorporate an LLP Firm.

THE LEGAL STATUS OF JOINT VENTURE CORPORATIONS

Joint Venture companies are the most preferred form of corporate entities for Doing Business in

India. There are no separate laws for joint ventures in India. The companies incorporated in ndia,

even with up to 100% foreign equity, are treated the same as domestic companies. A Joint

Venture may be any of the business entities available in India. 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.

 "Corporate JV" includes both company JVs and LLP JVs. These are regulated by the:

Companies Act 2013 (Companies Act) (company JVs).

Limited Liability Partnership Act 2008 (LLP Act) (LLP JVs).

A company JV may also be subject to the Securities Contract Regulations Act 1956, Securities

and Exchange Board of India Act 1992 and the Depositories Act 1996 if it has listed or intends to

list its securities (that is, shares, debentures and so on) on a stock exchange.

In addition, the following may apply, depending on the nature of the JV and the industry the JV

is engaged in:

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Tax laws.

The Foreign Exchange Management Act 1999 (FEMA).

Labour laws (such as the Minimum Wage Act 1948, Industrial Disputes Act 1947, and state-

specific shops and establishment legislation).

The Sale of Goods Act 1930.

The Competition Act 2002.

Other industry-specific law

Case law: Commissioner of Customs vs Gammon India Ltd. on 4 April 2003

During one of the hearings, in response to a question that had earlier been put by the bench as to

what exactly the legal status of joint venture in Indian law, the departmental representative

submitted an opinion signed by the Additional legal Adviser to the Ministry of Law. In this

opinion, the Additional legal Adviser has said that the joint venture in question is not

a legal entity or a company registered under the Companies Act, 1956. Counsel for the

respondent relies upon this opinion to say that it is only the lead partner of Gammon India Ltd.,

who will be liable for expenses for all the consequences of the import. He further contends that

the clarification given by the Department of Revenue will only apply when the joint venture is

concerned. The departmental representative also relies upon a Circular dated 7-3-2002 of the

Ministry of Finance, Department of Revenue, drawing the attention of the Commissioners to the

Explanatory Notes to the budget papers in which it has been clarified to the contractor/sub-

contractor for the construction of roads is a joint venture concern. The concession can be availed

only in respect of the joint venture and not in respect of imports made by individual

partners/constituents of joint venture and this had earlier been the intention of the notification.

 We accept the point made by the Counsel for the respondent that the importation has been made

by Gammon India Ltd. by carrying out the project, which has been awarded to the joint venture.

However, that has not answered the objection that the department has raised that the importation

has to be made by a contractor for the project. That contractor, clearly, is not Gammon India Ltd.

We will now consider the Supreme Court's judgment that is relied upon by the respondent. New

Horizons Ltd. filed a writ petition in the Delhi High Court against the decision of the Department

of Telecommunications, Hyderabad, refusing to consider the offer made by it in response to a

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tender for printing telephone directories from Hyderabad. The offer was rejected because it did

not submit evidence to show that it had undertaken compiling and printing for supply of

telephone directories to the capacity of 50,00,00,000/-, one of the qualifications for tendering.

New Horizons claimed that it was a joint venture company established by four companies and

that one of these companies was established to publish Singapore telephone directory and yellow

pages and other such directories. The Supreme Court concluded that the words in the conditions

relating to experience in the tender notice did not justify exclusion of New Horizons Ltd. from

consideration. It further said, assuming that this was not so, that it still could not be construed to

mean that the experience should be of the "tender in its name only". It came to the conclusion

that New Horizons Ltd, was in fact a joint venture as claimed by the tender and therefore, the

experience of its various constituents that would be taken into consideration by the tender

evaluation committee. It in effect lifted the veil covering on the corporate person to look at the

reality. We do not see how this helps the case of the respondent. We are not concerned with the

situation in which there is any dispute as to the legal status of the joint venture or of the importer.

It is not denied by either side that the joint venture in question is not a separate legalentity. It is

nothing other than an association of two persons who have come together to achieve a specific

commercial objective. In this case, there is no reality behind the face, which is different from

what appears before us, and we do not have to resort to any such method to discover any reality

in existence.

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Documentation in a JV

Establishing a JV involves a series of steps and selection of the best partner after proper due

diligence is the most significant of all. Once a partner is identified, a memorandum of

understanding (“MoU”) or a letter of intent (“LoI”) is signed by the parties expressing the

intention to enter into definitive agreements. JV transactions demand efficient, clear and

foolproof documentation. Depending upon the nature of the JV structure, definitive agreements

would be drafted.

Essentially a JVA/SHA provides for the method of formation of the JV company and sets out the

mutual rights and obligations of parties for the purposes of conducting the JV and the manner in

which the parties will conduct themselves in operating and managing the JV. A further purpose

is to prescribe, as far as possible, for what will happen if difficulties occur.

In the case of non-corporate joint venture structures, the basic objectives of any formal

arrangement between the participants will be substantially similar to that of a shareholders’

agreement. The arrangement generally reflects, where appropriate, the absence of a separate

legal vehicle and the fact that the joint venture may relate to a project of finite duration.

The JVA/SHA or other agreements related to the JV necessarily requires proficient legal drafting

and should clearly incorporate all the relevant clauses that specify the mutual understanding

arrived at between both parties as to the formation and operations of the JV. The successful

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implementation and smooth functioning of the JV depends on the definitive agreements and

hence it is critical to draft it in the best possible manner without any room for ambiguity. A

convoluted and vague documentation can be fatal to the JV and hamper the interest of the

parties. The following are the most significant clauses that are to be carefully incorporated into

the JVA:

Object and scope of the joint venture;

￭ Equity participation by local and foreign investors and agreement to future issue of capital;

￭ Financial arrangements;

￭ Composition of the board and management arrangements;

￭ Specific obligations;

￭ Provisions for distribution of profits;

￭ Transferability of shares in different circumstances;

￭ remedying a deadlock;

￭ Termination;

￭ Restrictive covenants on the company and the participants;

￭ Casting vote provisions;

￭ Appointment of CEO/MD;

￭ Change of control/exit clauses;

￭ Anti-compete clauses;

￭ Confidentiality;

￭ Indemnity clauses;

￭ Assignment;

￭ Dispute Resolution;

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￭ Applicable law

￭ Force Majeure etc.

Memorandum & Articles of Association

The Companies Act, 2013 requires every company to have a Memorandum of Association

(“MoA”) and Articles of Association (“AoA”). The MoA and AoA are the charter documents of

the company.

The JV agreement is between partners and does not bind the JV Company unless its terms are

included in the AoA of the JV Company. Therefore, it is necessary to specifically incorporate the

terms of the JVA / SHA into the AoA of the JV Company. In India, the AoA and MoA prevail

over the JV agreement and the Act prevails over the MoA and AoA. In the light of principles laid

down by the courts in number of cases, and the statutory provisions contained in sections 7 and

14 of the Act it could be said that anything contained in any document, which is inconsistent

with the provisions of the Act or the MoA or AoA of the company, is ineffective and cannot be

enforced. In order to avoid conflicts arising between the agreement and the AoA, it is usual to

include a provision in the JV agreement to the effect that if the AoA is inconsistent with the

provisions of the JV agreement, then the parties will amend the MoA and AoA accordingly. The

main requirement in the MoA will be to make the main object clause sufficiently wide to cover

the company’s proposed activities. The Memorandum of Association is in a way a flexible

document and can be altered by the shareholders in accordance with the provisions of the Act.

The objects specified in it, as required by the Act, cannot be overstepped. Any ultra vires activity

has serious consequences. A contract by a company on a matter not included in the

Memorandum of Association is, therefore, ultra vires. Therefore, the parties to the JV should

ensure that the current main objects of the company are vide enough to cover the proposed

activity of the JV Company.

Articles of Association are regulations for internal management of the company. They are the

rules or byelaws for the conduct of Board & Shareholders meetings, issue and transfer of Shares,

Powers & duties of Directors, Managing Director etc. The AoA will contain such of the basic

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rules of the company as are not set out in the agreement and will set out the different class rights

(if any) of shareholders.

Dissolution and Termination of Joint Venture

The dissolution and termination of a joint venture are governed by partnership law relating to

dissolution and termination.  In areas where the Uniform Partnership Act (Act) is applicable,

dissolution and termination of a joint venture is governed by relevant provisions contained in

Act.  However if there is any written agreement made by joint venture parties to the contrary,

then such written agreement would determine a joint venture’s dissolution.

A joint venture can be terminated in the following situations:

if there is an agreement between joint venture parties to terminate a joint venture;

if it is apparent that a joint venture is not profitable;

On death of a joint venture member if service offered by such joint venture member cannot be

substituted by another person.

A joint venture can also be dissolved by judicial dissolution.  Under the Act, a court can grant a

judicial dissolution on the following grounds:

if a joint venture member is shown to be of unsound mind;

if there is disharmony and dissension among parties to a joint venture;

if a joint venture member becomes in any other way incapable of performing his/her part of a

joint venture contract;

if a joint venture member has been guilty of any conduct that may in turn be prejudicial to a joint

venture business;

if a joint venture member willfully or persistently commits a breach of a joint venture agreement;

if a joint venture business can only be carried on at a loss; and

On other circumstances that render a dissolution equitable.

However, courts have observed that judicial dissolution of a joint venture corporation having two

50% stockholders is discretionary and it is to be decided according to the circumstances arising

in the particular case.

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Generally, a joint venture agreement would contain a date for its termination.  Where a joint

venture is established for a particular period, such joint venture would get terminated by

expiration of that period.  However, affairs relating to winding up all claims and obligations and

accounting will continue even after such termination.

Where parties to a joint venture do not enter into any agreement as to termination of that joint

venture, a joint venture can be terminated at will.  A joint venture can be dissolved by will, by

conduct, or words of the parties to the joint venture agreement.  If there is mutual consent, then a

joint venture can be terminated at any time.

In the case where a joint venture is established for a particular purpose, then such joint venture

will terminate on satisfaction of such objective.  In addition, if satisfaction of such objective

were impracticable then a joint venture would terminate at the point of of impracticability.

In order to terminate a joint venture, the following conditions must be satisfied:

there must be an intention to dissolve the joint venture enterprise; and

such intention must be communicated to all parties to a contract by unequivocal acts; or

If there is an agreement between parties as to termination, then notice must be served to all joint

venture members according to the joint venture agreement.

However, some courts have observed that there is no requirement that notice of dissolution be

communicated to each and every member of a joint venture.

Upon dissolution, a surviving joint venture is entitled to the joint venture property’s possession

and is also authorized to wind up its business.  Where no one takes possession, a joint venture

property will be sold.  However in the case of thoroughbred race horses, sale will be conducted

only after determining whether any party to a joint venture had authority to continue the venture

even after termination.  Sometimes courts will order the liquidation of the business as well.

However, a joint venture will continue to exist even after its dissolution, if a joint venture is

liable to pay any damages for any joint venture activities.  Thus, joint venture members are

jointly liable for injuries to third parties due to negligence arising from their mutual undertaking. 

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Joint venture members can be sued individually and found liable for damages caused by a joint

venture.

Without dissolving the entire joint venture enterprise, a party to a joint venture can be terminated

from a joint venture if s/he refuses to substantially perform his/her obligations. Provided notice

of relationship, termination must be served to such joint venture party.

EXAMPLES

Joint Venture of Mahindra & Renault

MAHINDRA

• Set up as a steel trading company in 1945

• In 1947, introduced the utility vehicle

• Key operation on 18 industries

RENAULT

• French car making company

• Known for its Engine manufacturing and Design

Why JV?

For Mahindra

• Mahindra & Mahindra, the fourth largest Indian vehicle maker wanted to extend its range to

passenger and family cars

• To increase their Engine efficiency

• Renault follows a strategy of profitable growth (high quality, innovative range of vehicles and

services) For Renault

• Entering the Indian market

• To establish international market

Higher Spacious vehicle

• High efficiency Diesel engine

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• 44000 satisfied customer

• Exported to SA, Srilanka etc.

Why Renault exits from Logan JV?

• Cost

• Not so good looks

• Excise duty (4.2 mts)

• Poor marketing promotions

• Manufacturing environment

• The two partners have had serious differences over the future of the venture, especially as the

only model from the company

• The Logan has seen its sales go down by over 60 per cent in 2009-10, selling only 5,332 units

• Mahindra & Mahindra renamed the 'Logan' sedan as ‘Verito’

• Renault agreed to continue to support M&M and Logan through a license agreement and

supply key components, including the engine and transmission

• M&M could use the Logan brand for 18 months after which it was to drop the Renault badge

from the product as well as dealerships

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