THE KEY CONSIDERATIONS SURROUNDING JOINT VENTURE AGREEMENTS IN INDIA
Considerations surrounding joint venture agreements in India while the present state of affairs indicates a negative GDP growth for a majority of developed countries, experts believe that India shall continue to maintain a positive GDP growth with a slight fall. For this reason, India is being seen as a lucrative investment destination due to strategic advantages and commercial incentives. Besides, India offers a stupendous internal market for various products and services. These factors have made India a desirable location from both producer’s and consumer’s perspectives.
As simple as it sounds, the foreign businesses entering India still lack the required market knowledge and skills to operate a business in the local market. Therefore, foreign businesses should enter a “Joint Venture“ with Indian businesses. A Joint Venture (VC) may be defined as any arrangement whereby two or more parties co-operate to run a business or to achieve a commercial objective. In simple terms, it can be understood as a symbiotic relationship between two or more businesses where resources of partners are mutually put to use and create a strategic fit that benefits all the involved parties. In the present scenario, the Indian businesses will provide local insights, whereas the foreign businesses can put their technical know-how and management process to use.
At times a joint venture might be confused with the partnership, and these terms are often used interchangeably. However, there exists a slight difference between the two. A joint venture is majorly governed by the terms and conditions of the Joint Venture Agreement (hereinafter referred to as JV agreement), whereas a Partnership is governed by the statutory provisions of The Indian Partnership Act, 1932. Also, a partnership can be entered into only by natural persons, whereas there is no such restriction in the case of Joint Ventures.
Forms of Joint Venture
Joint ventures are basically of two types:
- Equity Joint Venture – In this form of the joint venture, a separate legal entity is created in accordance with the Agreement/Contract between the parties. The parties then provide their contributions to such venture in the form of capital or other assets of the newly formed entity. This type of venture is said to have better management and employee structure and is best suited for the long term, broad-based Joint ventures.
- Contractual Joint Venture –This type of joint venture is best suited for situations where a particular task is to be performed for a limited period. In such instances, creating a separate legal entity may not be feasible for the parties. Instead, they set out the objectives of the joint venture in the form of an agreement. The contributions and functions of parties concerning such a venture shall be laid down in the agreement as well. Considerations Surrounding Joint Venture Agreements In India
Purposes of forming a Joint Venture
The purposes of forming a Joint venture are multifold. Some of them are as enlisted as below:
- Utilization of resources – Running a successful business in modern times requires a huge pool of resources ranging from financial backup to manpower. Joint ventures prove to be an efficient way to put resources of parties to optimum use and reducing the cost of running the operation.
- Exploiting expertise of parties – Different parties to a joint venture may have expertise on a particular front of running a business. Sharing these capabilities on mutually agreed terms would provide synergistic benefits to parties as well as a competitive edge in the market.
- Sharing Liabilities – A joint venture also offers a way to manage the risk associated with new ventures. It provides a way to share the risk involved and reduces the pressure on each partner by limiting exposure.
- Market Access – Joint ventures are the most popular ways to enter new geographies, market segments, and product markets. In India, certain sectors remain restricted for foreign investments and a local partner with certain shareholding is a regulatory necessity for making investments.
- Business Diversification – A joint venture provides an opportunity for an entity to diversify its business into other non-core sectors and at the same time providing an easy exit option for the same. It can also be set up as a prelude to a merger or only for part of the business.
Key Clauses in a Joint Venture Agreement
Drafting a Joint venture agreement should not be overlooked as something trivial; instead, it should be drafted with great precision. A JV agreement usually includes the below-enlisted clauses that ascertain the nature and operation of a venture:
1.Object and Scope of Joint Venture – The first clause in a JV agreement includes the objective of the venture and specifying the details for which the said venture is being formed. It also sets out the intricacies of a JV and indicates its nature.
- Management Committee –Parties need to ascertain how the board of directors will be constituted and who will be its members. The parties can decide upon the number of directors, appointments, methods of voting, etc.
- Obligations of parties – This clause enlist the obligations of each party and how they are going to contribute to the venture. Every party may contribute in its way in the form of capital, technical know-how, assets, etc. Non-compliance to it at any stage may warrant consequences.
- Profit repatriation – For smooth functioning of any venture profits must be fairly distributed by parties as agreed upon by them. This clause provides a mechanism for the same and makes the process of profit repatriation fairly easy.
- Intellectual property rights – Businesses are requiring the sharing of intellectual property vet out the needs and essence of protecting their intellectual property in the agreement. Non-compliance with these clauses can bring legal proceedings upon parties.
- Implications of non-commitment of clauses–Violating the terms of the agreement can have severe implications upon parties. These violations can either render the entire agreement void or specify the penalty stipulated for such violations.
- Exit Strategy – There can be numerous reasons to exit a joint venture. In such situations, it is beneficial for both parties to have a pre-determined exit strategy. The general exit options available are buy-sell agreements, unilateral sale rights, and put/call rights. The termination clause may also provide the termination of operations and liquidation and closure of the venture.
- Dispute Resolution – This clause dictates the dispute resolution process as agreed by the parties. It also states the jurisdiction of a court in which such action shall be brought in case of conflicts and the governing law. However, a majority of businesses have now undertaken steps to solve their disputes by way of Alternate dispute resolution mechanisms, which provides an easy and efficient way to settle disputes.
Joint ventures have proved to be an effective way of conducting business affairs and have notably contributed to the country’s economy. It is pertinent to mention that for a joint venture to run smoothly, compatibility between parties is of paramount importance. While entering into a joint venture, parties should have clear and consistent goals that they wish to achieve and their contributions to making it successful. The JV agreement should thereby include all the material facts of the venture and indicate each party’s responsibility so that there remains no lacuna in the future.
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