In this blogpost, Haridya Iyengar, Student, Jindal Global Law School, Haryana, writes about what is a joint venture, the difference between joint venture, collaboration and merger and also mentions the advantages and disadvantages of creating a joint venture
A joint venture with another company is an excellent opportunity to grow your own company without making an outright purchase of another company. This paper will tackle the aspects of entering into a joint venture agreement in India.
What is a Joint Venture?
Two parties which may be companies or individuals, incorporate a company in India. The business of one party is transferred to the company and as consideration for this transfer, shares are issued by the company and subscribed by that party. The other party subscribes for these shares by providing money. The two parties divide the shares in agreed proportion and commence the new business.
Why Engage in A Joint Venture?
- It helps you use an established distribution channel which, another company can use to sell its products.
- A parent branch of a foreign company in India attracts higher taxes than, a joint venture company.
- The principle amount is larger or easier to acquire when capital is combined with another company.
Difference between Joint Venture, Collaboration and Merger
| Joint Venture | Collaboration | Merger |
| A joint venture is a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control implies an agreement where no party has complete control over the economic decisions taken by the company. | A collaboration, on the other hand, is a layman’s term and is not part of any accounting standard. It means the coming together of two or more parties for the purpose of sharing expertise. | In a merger, two companies combine to become one. In this case, a company goes out of existence leaving its assets, accounts and liabilities to the acquiring company.
|
Advantages of Joint Venture
There can be significant advantages in creating a joint venture:
- It helps businesses expand into areas which had a high barrier of
- Helps gain expertise without hiring more staff.
- Helps leverage patents and technology developed by other countries.
- Gives an opportunity to establish a presence in a market which is new and untapped.
Disadvantages of Joint Venture
There are some pitfalls of entering into a joint venture:
- The objectives might turn out to be unrealistic and might not cater to a common goal.
- Both companies will have to cope with each other’s work culture, staff, management style and working relationships.
- There can be poor tactical decisions caused due to a misunderstanding of the roles of each company.
Conclusion
While Joint ventures help a company grow, prosper and expand into a new market they can be highly complex. There needs to be excellent communication between the senior management teams of each partner.
