In this article, Ishita Raghav pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the Joint Venture and Strategic Investment.
What is Joint Venture?
Joint Venture can be defined as a partnership between two or more parties (companies or individuals) coming together to form a separate legal entity with an intention to carry out certain commercial objectives. The parties coming together to form Joint Venture take an active role in all the decision making.
In the Joint Venture, ‘joint’ literally means coming together and ‘venture’ means a project or an investment. In Joint Venture, each party contributes finance, technology, marketing techniques or physical assets as required for the project. What makes Joint Venture different and beneficial from other modes of investment is that when Joint Ventures are created between two or more parties, the Joint business in no manner interferes or affects the individual business of the respective parties. Therefore, they are free and independent to maintain their respective businesses whilst handling Joint Venture.
Joint Venture can be formed for a specific purpose or for the continued business relationship. There are many business forms in which Joint Venture can be created such as, company, partnership firm or limited liability partnership. Agreement forming the Joint Venture is called Joint Venture Agreement which provides for the manner in which shareholders of the respective companies decide the ratio of the distribution of shares among them. This agreement is also called as Shareholders Agreement (SHA).
What are the Kinds of Joint Venture?
Joint Ventures are namely of two kinds:
- Equity Joint Venture
- Contractual Joint venture
Equity Joint Venture
In Equity Joint Venture, a separate legal entity is created under which various parties provide for the required resources to fulfill their objectives. This type of venture is usually suited for long-term broad projects.
Contractual Joint Venture
Contractual Joint Venture, on the other hand, doesn’t necessarily require for creating a separate entity, thus projects involved in it are of temporary in nature, formed only for limited period.
Formation of Joint Venture Agreement
Formation of Joint Venture agreement (or shareholders agreement) is very important and should not be overlooked as something trivial. This document is not executed for filing any procedural law or for any government use but is formed to create an understanding between the parties through clauses which are binding in nature. Such an agreement should be created with precision. The important aspects covering this agreement are:
- Who will bring the required resources like finance, manpower, technology into the business?
- The business to be formed should be in the form of a company, limited liability partnership or partnership.
- How will Board of Directors be constituted and who shall be its members?
- How the decisions will be finalized i.e. via consent or majority and in what ratio?
- Who shall be the chairman of the company?
- How will expenditures be decided? Who will sign the checks?
- How will marketing and advertising techniques be used?
- What will be the implications of non-commitment of clauses mentioned in the agreement?
- How will the disputes be addressed? What will be the formation of an arbitration agreement, mentioning the place, applicability of laws?
- The Manner of exit route and how to value equity shares and properties at the time of winding up of the company?
As an investment decision, Joint Ventures are being considered better by most businessmen today. Joint Venture gives an edge over other investment methods because one can easily access new markets and new customers.
Sharing technology or finance with other parties bring greater and better efficiency in the work. A huge amount of risk is shared with other participating parties, thus risky decisions can be made with confidence. There is greater access to specialized resources like efficient staff and better technology. The participating companies can continue doing their respective business without any interference from outside. Winding up of Joint Ventures will not affect the businesses of the participating parties.
Though being attributed to many such advantages, Joint Venture also contain certain disadvantages which should be well understood. If party’s objectives are not clearly communicated with each other it can lead to a lot of chaos, which can be harmful for the business. When Partners bring in different kinds of resources and expertise, management of both the companies are mixed together due to which co-operation might suffer. Exclusive business deals with other parties might be restricted by participating parties due to competition issues.
TATA Starbucks Private Limited – Recent Successful Venture
Joint Venture has proved to be very successful in India and this can be understood from one of the recent successful venture – TATA Starbucks private limited. It was formerly known as, Tata Starbucks Limited. It is a joint venture between two major companies, Starbucks Corporation, which is a coffee house chain company with headquarters in Washington, US and TATA Global Beverages, an Indian company. Starbucks had intentions of accessing Indian markets in the early 2007 but it was only in 2012 that a 50-50 joint venture with TATA Global Beverages was formed. Today TATA Starbucks Private Limited owns and operates Starbucks outlets in various parts of India. The venture goes with a brand name called “Starbucks, A TATA Alliance”.
On 19th October 2012, the first Starbucks outlet was opened in Mumbai city of India. Apart from the usual products offered internationally, Starbucks in India has some Indian style product offerings such as Tandoori Paneer Roll, Elaichi Mewa Croissant, and Murg Tikka Panini to suit Indian customers. All espressos sold in Indian outlets are made from Indian roasted coffees supplied by Tata Coffee . The Tata Group and Starbucks Corporation also collaborated on some ventures outside India. Starbucks Reserve Tata Nullore Estates became the first Indian coffee to be roasted and sold at Starbucks home city of Seattle in 2016 .
Strategic Investment is very similar to Joint Ventures in which an investing company makes an investment in a smaller company, usually a startup, with an aim not just for simple profit but for a bigger commercial goal. Usually, when an investor takes risk of investing funds into a new company or a project, their foremost aim is for better returns. In Strategic Investment, investments are made with much larger and broader aspects, which vary from company to company.
Strategic Investments are done to raise the credibility of the targeted smaller companies which are having difficulty in accessing markets. There are various reasons for large companies to strategically invest in smaller companies such as the small companies might be having better technology. Also, small companies might become a prospective client of investing companies sometime in future and many more
Smaller companies prefer acquiring funds from Strategic Investment and not forming any Joint Venture with them is that when investments are raised from the strategic alliance, the autonomous status and independence of these smaller companies are still intact, they are free to operate and work in the manner they prefer. Also, in this kind of investment, smaller companies can avail funds from more than one company, which is definitely not possible in the Joint Venture. Investing companies too prefer Strategic Investment over joint ventures as less risk is involved and profits are made to available only when smaller companies are doing well. It is rather easy and convenient to exit from such an investment as compared to joint ventures.
Strategic Investment as a mode of investment suits those companies which are looking forward to sharing technology with other companies. Thus, instead of spending time and efforts on building new technology, investors can simply provide funds to smaller companies and share technology with them. This method saves cost to the large extent. In Strategic Investment, investor’s money is also protected, as funds are invested in exchange of some ownership rights like the purchase of certain types of shares, this way investing company gains ownership right over small companies and safeguard their interest from time to time. This being said, such investments have their own downfalls because in reality the process of identifying such target companies and evaluating further procedures can be very expensive and there is no guarantee of such experiments to be accurate and profit worthy.
Key Differences Between Joint Venture And Strategic Investment
If investors are looking for better returns and to grow together with other companies, both Joint Ventures and Strategic Investment are valid options but the ideal choice should be made only after understanding and comparing the two. The summary of this comparison is given below:
|Joint ventures are formed like a business organization wherein the principal parties work together with an aim to carry out certain financial activity.||Strategic investment, on the other hand, is an agreement between two (two or more ) companies to work together for better results.|
|On forming a Joint Venture, a separate entity may or may not be created.||In Strategic Investment, there is no need to create a separate entity.|
|Joint Ventures are formed with an objective of sharing risk between two or more parties. In joint ventures parties are more confident in their new line of business as not only profit but also risk and liabilities are shared between them.||In Strategic Investment the objective is to gain maximum reward out of the alliance. Businesses are more credible and better in economic value when assets of two or more companies are brought together.|
|The management involved in Joint Venture is bilateral. The new company formed or the new project assigned will have employees and staff from both the companies, this ensures neutrality and confidence in teamwork.||On the other hand, the relation of companies in Strategic Investment is more like an acquisition, hence team involved in it are delegated from the investing company.|
|In order to exit from the arrangement of Joint Venture, the principal parties can either file for dissolution of the new company or liquidate the company by selling its shares for a price.||In strategic investment, when returns are not up to the mark or parties wish to terminate the agreement they can stop investing in smaller companies on proving them a notice for the same. Exiting from such arrangements is comparatively simpler in strategic investments.|
|In Joint Venture principal parties are free to work independently in their respective businesses. Forming a joint venture will not harm their autonomy in their other private activities.||In Strategic Investment, independence of smaller companies is usually lost. Investments are usually made in exchange for sharing control in the business and hence investing company to a large extent get involved in former company’s management.|
Thus after analyzing both Joint Venture and Strategic Investment, it can be observed that while making the investment decision in profit worthy projects is important for every growing company, the final decision should be made only after considering all the aspects. The best method is the method which suits one’s situation and only after taking legal advice, measuring one’s risk capacity and analyzing the markets should one decide between the Joint Venture and Strategic Investment.