Local (Indian) Joint Ventures

Joint Ventures 

The perspective:

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.

Strategic alliance:
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.

Cooperative agreement:
The agreement governing the unincorporated joint venture or the strategic alliance is called a cooperative agreement.

Legal and regulatory framework for international joint ventures

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.

Types of shares/securities issued under foreign direct investment

Common equity
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, an approval from the competition Commission of India is required.

Benefits of Joint Ventures

Getting national & 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 new sectors and business activities
Access to a very large market
Access to knowledge and experience of partner
No risk of errors in a new business environment due to lack of knowledge
Pre-established marketing set up
Access to a brand
Synergy of Technical Advancement and operational excellence
Abscess to the large business network in a new place
Joint venture gives an opportunity to know possibility of a Merger
Agreements for Technology Transfer, Use of Brand Name, Royalty Payment etc.

Types of joint ventures in India

Equity joint ventures

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. 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 Ownership
Shared management
Shared responsibilities, liabilities & risks arrangements
Shared profits or losses

Contractual joint ventures

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.

Hybrid joint ventures

They have features of both equity joint ventures and unincorporated joint venture.

Types of contractual joint ventures by purpose

Technology transfer agreements
Joint product development
Purchasing agreements
Distribution agreements
Marketing and promotional collaboration
Intellectual advice

Checklist of factors before forging a joint venture

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?

Typical contents of joint venture agreement:

Name of the new company
Objective of agreement
Scope of the joint venture;
Geographical limits
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
Capital structure
Chairmanship of the meetings
Appointment of CEO/MD
Management Committee
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
Dividend policy
Change of control
Anti-compete clauses
Protection of sensitive information
Assignment of the contract
Alternative Dispute Resolution mechanism;
Applicable law
Venue and seat of arbitration
Term of contract
Conditions precedent
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
Applicable law
Force Majeure
Technical schedule
Schedule of standards
Quality schedule
Service level schedule

Apohan’s services for formation of local Indian JVs:

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 JV Partner
Preparation of teaser
Preparation of investor presentation
Preparation of information memorandum
Preparation of project profile
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