Foreign direct investment with subscription to new equity capital of an existing company:
It is the inflow of the foreign equity capital into Indian company. This investment is in the form of of issue of New Capital by an Indian company. The investor may form a completely owned subsidiary as well without involving any Indian company. In this case, there is acquisition of control in proportion of the new shareholding pattern.
Foreign direct investment by purchase of shares:
It is the inflow of the foreign equity capital into India. This is a corporate transaction of acquisition of existing ownership.
Foreign joint venture:
It is same as the foreign equity inflow in the form of foreign direct investment idhar by subscription of New Capital or by purchase of shares. The process of foreign direct investment gives birth to a foreign joint venture.
Foreign business alliance:
This is same as a joint venture from the perspective of the Indian company in which foreign direct investment is made.
India entry strategy:
India entry strategy means the strategy by a foreign direct equity investor regarding all aspects of making equity investment in India with or without an Indian partner in its areas of his interest. So, it is necessarily an FDI strategy and possibly a joint venture strategy as well.
Unincorporated joint venture :
In this, two companies enter into a contract without incorporating any new company (or any legal entity in the nature of a body corporate). However, they setup a completely separate administrative and management mechanism (possibly at a separate physical place) and share all the work, liabilities, risks and profits. The money directly invested by the foreign company (through a trust, partnership, or maybe even without them, etc) is again called foreign direct investment. The payments under the contract happen as if they are payments under “a very complex transaction” between two different parties.
Unincorporated joint venture and the relationship defined in it is called a strategic alliance from the perspective of both the parties.
Contractual joint venture:
The new administrative, management, accounting set up (without incorporating a new company ) for the execution and operation of a new project and managed in an agreed way is called contractual joint venture. Note that every JV does have a contract, but it is not sufficient requirement for them.
The agreement governing the unincorporated joint venture or the strategic alliance is called a cooperative agreement.
Mergers and acquisitions:
Mergers are the corporate transactions are in which the existing companies combine to form new and different entities. They cannot be called as joint ventures. In acquisitions, if the existing management of the acquired company retains a substantial shareholding & continues in the management playing a substantial role, then it is called a joint venture through acquisition of shares. Against this, in those joint ventures where typically a new company is formed, nothing happens to the legal existence of the investing companies. Keeping their own existence intact, they create a new company or sign a cooperative agreement. In the contractual joint ventures, they don’t even form a new company.
Foreign institutional investment:
It is the inflow of foreign capital but not necessarily as equity. The foreign institutional investors can directly make equity investment in Indian companies. However, it has limitations of exposure in single company in terms of maximum equity day can hold in a company. This limitation is extremely low as compared to foreign direct investment. They have absolutely no role in the control and management of a company. An Indian company, also can have only relatively small total Stake of all the foreign foreign institutional investors. They cannot make a group of investors in a company and influence the management.
Foreign owned and controlled Indian company (FOCC):
Even if there is hundred percent foreign ownership through FDI route and even if none of the shareholders or directors or key managerial persons is Indian by citizenship, the company will be called local company, domestic company or Indian company if it is registered in India under the Companies Act. This kind of configuration is important from the perspective of further investment through this company & effective taxation on business proceeds till they are received at the hands of shareholders. Similarly, IOCC means Indian citizen (resident or not) hold 50% plus control or equity.
It is a company registered in a foreign country and operating in India through a liaison office, a project office or a branch office in India or e-commerce portal. None of these three types are any type of body corporate and activities we can carry out our very limited.
Overseas direct investment:
It is the equity investment made by an Indian company outside India.
A Joint Venture is governed primarily by the Companies Act, Indian Contract Act, the Foreign Exchange Management Act & several financial & business laws. Corporate JVs will also be subject to the India tax laws, labor laws and state-specific shops and establishment legislation acts, Competition Act, and various industry-specific laws.
Foreign Direct Investment (FDI) Policy by Ministry of Commerce & Industry is governing policy.
Overseas Corporate Bodies (OCBs incorporated outside India)
Any resident/entity outside India
Foreign companies owned by NRIs
Foreign trusts, etc owned by NRIs
NRIs resident in Bhutan and Nepal
Citizens of Nepal and Bhutan
Citizen/entity of Pakistan & Bangladesh (under Government route)
OCB should not be under adverse notice of RBI
Indian partnership firm
Indian proprietary concern
Indian trusts for project, business purposes
Indian alternative investment investment vehicle.
Business management trusts
Investee should not engaged in agriculture, plantation, real estate
Fully and compulsorily convertible debentures
Fully and compulsorily convertible preference shares
Optionally convertible with a minimum lock-in period
Partially convertible preference shares
Non-convertible preference shares with a minimum lock-in period
Investment can be made in a lump sum fashion or in phased installments. Where the assets more than 250 crores or a turnover of more than 750 crores is involved, in joint ventures through the foreign direct investment, an approval from the competition Commission of India is required.
FDI investor does not require any prior approval from Govt. of India or RBI.
Government approval route:
An approval from the government is required from the Department of Industrial Policy & Promotion (DIPP) of Ministry of Commerce and Industry.
The treatment of investment in different sectors is different. The extent of foreign direct investment in several sectors is allowed up to hundred percent are restricted to a lower level (requiring involvement of a local partner) with or without government approval.
Sectors where FDI is allowed under 100% Automatic route:
Sectors where up to 100% FDI is allowed under Govt route
Sectors where partial FDI is allowed under either route
Sectors where less fDI is allowed under automatic rule and more under government approval rule
Sectors where FDI is not allowed
Getting international financial capital for growth and expansion of the company
Getting skills, processes, management, technology, etc.
For development of Greenfield and brownfield projects with large capital outlay
Access to the sectors and business activities where hundred percent FDI is not allowed
Access to a very large market
Higher rate of return on equity
Access to knowledge and experience of Indian partner in doing business in India
No risk of errors in a new business environment due to lack of knowledge
Pre-established marketing set up
Access to locally known brand
Synergy of Technical Advancement and operational excellence
Abscess to the large business network in a new place
Speedy project clearances due to local connection
Quick Awareness of the local legal and regulatory environment
Joint venture gives an opportunity to know possibility of a Merger
Agreements for Technology Transfer, Use of Brand Name, Royalty Payment etc. are accorded approval by automatic route.
India allows free of charge repatriation of profits once the entire tax, etc liabilities are met. Exit can be done repatriating all the tax and other liabilities are settled.
This is an understanding whereby a new, independent, legal corporate entity is created in accordance with the agreement of the two parties. The associated parties provide respective contributions to the capital or assets. This structure is ideal for long-term arrangement. Partnership firms are not permitted for JV by foreign resident in India, however exceptions are made in case of non-resident Indians or persons of Indian origin. Setting up a new company provides the most flexibility as the entity can be structured according to the specifications, intentions, and obligations of the associated parties. In place of a company, a limited liability partnership is also possible.
The key characteristics of equity-based joint ventures are as following:
Agreement to create a new entity or to join into ownership of the other
Shared responsibilities, liabilities & risks arrangements
Shared profits or losses
This type of joint venture a legal entity is not created. This type of agreement is preferred in situations that involve a temporary task (it still comes to a lot many years) or a limited activity. It is less risky equity joint venture as exit is relatively easier. Tax and commercial factors lead to formation of unincorporated joint ventures. The parties will state the rights, duties, and obligations expected of the parties to the contract and treatment of third parties. The JV contract will also state the period of contract. It will define the legal relationship between the parties, mostly as equal entities to a task.
Types of contractual joint ventures and business alliances
Business alliance through MOU:
Two businesses can associate with each other through a memorandum of understanding. MOU is not legally enforceable but it narrates the intent of future association and paves a way for a definitive final contract.
Business alliance through Contract:
Two businesses can associate with a business contract for any purpose of executing joint projects, joint marketing, long term supply, long term seller buyer relationship, technology transfer, etc.
They have features of both equity joint ventures and unincorporated joint venture.
Technology transfer agreements
Joint product development
Marketing and promotional collaboration
Who will bring in what resources in what proportion – capital, assets, manpower, technology?
What business will the new company will be engaged in?
What will be the composition of the board of directors?
What will be the method of passing a board resolution (majority / consensus)?
Who will be the chairman, managing Director of the company?
What will be the powers of the Managing Director and board of directors?
What will be the division of decisions between the board of directors and the joint venture partners?
Who will manage the administration and human resources?
Where from the corporate policies will be derived?
Who will how the banking and financial powers ?
Who will do project development?
Who will manage the manufacturing operations?
Who will be responsible for marketing?
Who will be responsible for technical matters like selection of machinery, choice of technology, production planning etc.?
Who will decide about future expansion projects or major capital expenditure?
What will be the frequency of meetings of the partners?
How will the partners control the board of directors?
What is the records if one of the partners fails to fulfill his duties?
What will be the schedule of activities?
What happens if there are slippages from the Schedule?
What will be the mechanism of resolution of differences in management opinions and decision?
Who will represent the joint venture to the media?
What will be the exit route?
Will there be of first right of refusal?
What will be the methodology of valuation of the shares?
Name of the new company
Objective of agreement
Scope of the joint venture;
Products to be manufactured and marketed by the new company.
Ratio and amount of equity participation by parties
Arrangement of loans by the parties & from other sources
Chairmanship of the meetings
Appointment of CEO/MD
Structure of board of directors
Structure of Management
Remuneration payable to working partners or directors
Schedule of proposed actions after execution of the JV agreement
Targets / Milestones to be achieved
Procedure for review of operations
Decision making mechanism
Rights and authority is of the parties
Specific obligations of the parties
Treatment of distribution of profit
Transferability of shares
Management of conflict of interest
Change of control
Protection of sensitive information
Assignment of the contract
Alternative Dispute Resolution mechanism;
Venue and seat of arbitration
Term of contract
Treatment of common expenses
Important decisions with the consent of partners
Access to parties to assets of company
Change of control
Assignment of contract to third parties
Representations and warranties
Break of deadlock
Schedule of standards
Service level schedule
Apohan’s services forgetting foreign direct equity investment:
Preparation of overall FDI strategy of the company in an Inception report
Understanding client objectives
Preparation of client profile
Orientation of client management for the joint venture process
Preparation of the desired profile of the foreign investor
Identification of the foreign investor
Preparation of teaser
Preparation of investor presentation
Preparation of information memorandum
Preparation of project profile in which FDI is sought
Anonymous advertising in print media, online media, social media
Circulation of opportunity among investor forums, business forums, online deal platforms
Non disclosure agreement between principals
Preparation of a Business plan
Preparation of time Schedule of investment requirement
Determination of mode of issue of equity
Determination of type of equity
Preparation of nature of amendments in MOA & AOA
Preparation of of drafts of board resolutions for internal approvals
Preparation of mutual India between principles
Analysis of investment proposals by FDI investors
Basic due diligence of the investor
Preparation of the financial model
Preparation of valuation for various levels of Equity stakes in the company
Evolution of strategy on sharing of control
Preparation of key strategic terms of joint venture agreement
Analysis of investment proposal by investor
Selection of accounting, taxation and secretarial experts
Valuation for the purpose of taxation through certified valuers
Preparation of document list for data room
Preparation of cloud based data room documents
Preparation of for data room with all the documents
Answering queries of investors and provision of documents
Compilation of data for specific query
Preparation of term sheet
Preparation of draft business transfer agreement
Assistance in due diligence
Assistance in board meeting and General Meeting as special expert invitee
Preparation of disclosure schedule
Identification of due diligence agency for reverse due diligence
Assistance in negotiation of business transfer agreement
Assistance in execution of the investment document
Assistance in understanding the investment payment process
Resolution of deadlocks
Key inputs on integration process
Hand holding support for management of joint venture after the deal