This article is written by Milendra Jain, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.com.
Table of Contents
Introduction
As the proliferation of the global market is never-ending because of which India has seen various Cross-border joint ventures (“JV”) emerging since the last two decades creating a viable commercial hub for various foreign entities investing in India through a tactical partnership. JVs have become a major feature of the international business structure due to increased global competitiveness and technological innovation. Baehal Software Ltd., Indo Russian Aviation Ltd., Indo-Russian Helicopters Ltd., HALBIT Avionics Pvt. Ltd., TATA SIA Airlines Ltd. (Vistara), TATA Consumer Products Ltd., Bharti AXA General Insurance Company Ltd., VE Commercial Vehicles Ltd., ICICI Lombard General Insurance Ltd., Neumesh labs Pvt Ltd., are some flourishing JVs in India. The rationale behind the JV varies from case to case according to business objectives such as expansion, development of the new products, moving into new markets, strategic collaboration, and other internal and external factors. The foreign market offers different opportunities and risks. Therefore, JVs are used to enter into new markets and to access their resources jointly with the other entities as the cost of failure might be too large to be borne single-handedly. 
Cross-border joint venture
As per the provisions of the Companies Act, 2013 ‘Joint Venture’ is recognised as a distinct legal concept as ‘a joint agreement, whereby the parties that have joint control of the arrangement have the rights to its net assets of the arrangement’. Therefore, a cross-border Joint Venture is often described as the joining together of two or more business partners from separate jurisdictions to exchange resources, share risks and divide rewards from a joint enterprise. Also, JV connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. A JV’s must be:
- A separate entity;
- Having an active management involvement;
- Having an ownership interest by the parties to the JVs;
- Sharing profit and losses among the parties.
The basic principle of the JVs is the joining of the various entities and forming a separate entity with an object of sharing capabilities and expertise. Wherein foreign companies join with their Indian counterparts and contribute towards capital and technical know-how for the success of the venture. Any entity constituted by an association of companies jointly undertaking a commercial enterprise wherein they will contribute assets and will share risks and have a community of interest is considered as a JV.
Basic elements of a cross border joint venture
- Contractual agreement: To constitute a JV, parties enter into expressed contracts for a specific business purpose.
- Joint property interest: Parties to a JV contribute tangible and intangible assets in order to fulfill the specified business purpose.
- Common goals and objectives: Parties to the JV shares common goals and objectives associated with the constitution of the JV
- Specified limited purpose: JV is constituted for limited/specified duration with a specific business objective associated with the parties to the JV.
- Sharing profits and risks: As the resources are scarce and the risk of operating alone in an unfamiliar jurisdiction can be unnerving. Therefore, managing such risks and profits can be enhanced by constituting the JV.
Modes of the cross border joint venture
The JV can be incorporated and unincorporated or may be either structural or contractual. The main classification of the JV is equity-based JV or corporate-based JV. Following are the most common structures to constitute the JV:
- Company,
- Limited liability partnership,
- Unincorporated partnership,
- Cooperation agreement or strategic alliances.
However, incorporating a company is the most common recourse to constitute the JV.
Advantages of the cross border joint venture
- Access to new markets: With the formation of the JV, the parties seek to access the new markets with the help of indigenous entities in order to expand their portfolio in different regions and sectors.
- Increase in capacity and access to greater resources: As each party to the JV contributes certain financial resources as per the arrangement and access to market results in access to greater resources available which results in an increase in the capacity of the JV.
- Sharing technical expertise and know-how: JV often brings technical expertise and know-how as a foreign entity can bring technology and the indigenous party can bring essential knowledge of the local market where such JV is established.
- Shared investment: Parties to the JV bring a certain amount of investment in form of capital in order to constitute the JV, which tends to give financial support to such JV.
- Synergy benefits: The formation of the JV results in the cooperation among the parties to achieve a greater good than achieving individually.
- Sharing of risks and costs: As the JV is formed by association of various parties undertaking commercial enterprise wherein, they share risks and costs jointly.
- New product development: Parties to the JV aid the development of products and services through their expertise.
- Time-limited: Generally, the JV is time-barred or formed for a limited period of time for fulfilling the objectives of the JV. Such limitation ensures easy exits upon fulfillment of the all-business goals as stated in the JV agreement.
- Diversification and client outreach: JV allows the parties to operate at a larger scale by giving access to a larger market, more diverse products, and services in the new market which will diversify their business and outreach more clients.
Disadvantages of the JV
- Unreliable partners: As the partners are the key considerations of the JV and the separate nature of the JV can result in the unreliability of the partners.
- Unclear objectives: Vague business objectives of the JV can create uncertainty in the performance of the JV.
- Lack of communication: As the different parties are involved in the JV, there can be lack of communication among the parties.
- The difference in culture and management: Foreign entities forming JV with the indigenous entity may create differences in culture and management which may result in poor coordination and communications.
- Less flexible relationship: Certain times the conditions in the agreement between the parties reduces the flexibility, thus parties are not flexible enough to change and accommodate the evolving needs of the business.
- Expertise imbalance: The parties may also discover that there is an imbalance of the expertise due to other parties’ insufficiency to deal with the matter in issue.
- Lack of commitment: An equal commitment by the parties is extremely unlikely as a lack of expertise or know-how might cause a lack of commitment among other parties.
- Difficult to exit: Sometimes it is difficult for a party to exit a JV if a contract is involved.
Various documents required for the cross border joint venture
The formation of a JV involves several documents which are important and necessary in order to constitute a relationship between the parties through JV. Initially, the party finds the partners which are best suited and have initial consensus over the object sought through the process of Due Diligence (DD). Post DD, the parties so identified enters into a Letter of Intent (LoI) or Memorandum of Understanding (MoU) expressing the interest and intention to enter into an Agreement. Further, different documents are required for forming different forms of the JV as follows:
- JV as a company incorporated under the company law of India:
- Joint Venture Agreement (JVA)/Shareholders Agreement (SHA); and
- Memorandum of Association (MoA) and Article of Association (AoA) of the JV; and
- Other agreements as necessary such as IPR related agreements etc.
2. Limited Liability Partnership (LLP) under Limited Liability Partnership Act, 2008:
- LLP agreement; and
- Other agreements as necessary such as IPR related agreements etc.
3. Partnership:
- Partnership agreement; and
- Other agreements as necessary such as IPR related agreements etc.
4. Cooperation/strategic alliance based on a contractual arrangement:
- Cooperation agreement; and
- Other agreements as necessary such as IPR related agreements etc.
Foreign parties entering into India through foreign direct investment
Any foreign party that seeks to make an investment through constituting the JV in India must comply with the legal requirements associated with foreign direct investment, along with Foreign Exchange Management Act, 1999. Recently, India has announced new restrictions on foreign investment from neighboring countries. However certain relaxation has been introduced by increasing the sectoral cap of investment through government and automatic route in various sectors in India.
Importance of the joint venture agreement
JVA is the foundation stone for the formation of the JV, wherein the parties enter into a legal document to undertake an economic activity together wherein various objectives, rights, liabilities are stated in order to define a contractual relationship among the parties and to define such relationship various clauses has to be incorporated in the JVA. Following are some important clauses of JVA:
- Intellectual Property Rights
- Representations and Warranties
- Non-Compete and Non-Solicit
- Indemnity
- Investment
- Conditions Precedent
- Management
- Tag Along and Drag Along
- Non-Assignment
- Technical Know-How
- Termination
Conclusion
India’s economic growth is attracting various business houses across the globe as evidenced by significant growth in the inflow of FDI in India in recent past years through various modes of alliances. Collaboration between the entities through JV has played a significant role in the development of a specific sector in India’s economy, along with the increasing international competition.
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