Joint Venture of Indian Companies with Foreign Companies

Author - Rashi Suri (Managing Partner) and Pradyun Chakravarty (Associate)

Joint Venture with foreign company in India refers to a form of strategic partnership in which two or more business entities work together to create a new business entity for higher productivity and economic gain. It represents the optimism of two companies that have come together to achieve marketplace goals that may be uneconomical and challenging in their own individual capacity.

Joint Venture in India

Given the constant proliferation of global markets, International Joint Ventures has become fundamental to commercial objectives. Joint Ventures in India are becoming a traditional business model since most foreign investments are made only through joint venture arrangements.

Under Indian law, a joint venture is primarily governed by the Indian Contract Act, the Foreign Exchange Management Act, 1999 (FEMA), Foreign Direct Investment (FDI) Policy, which also covers several aspects of corporate law.

Entity Options in a Joint Venture

Options for enterprises to form a joint venture are as:

• Corporations limited by shares (public and private)

• Corporations limited by guarantee (limited to the sum pledged)

• Corporations having unlimited liability (liability of every member is unlimited)

Duration and Purpose of Joint Venture

The length of a joint venture depends on the contractual terms between the parties. The Venture will continue until a contract stipulates. But where an agreement has lacked a definite duration, either party can terminate it at will.

If there is no express contractual term setting the duration of the agreement, there will have to be some evidence establishing the parties 'intent on the period.

If there is nothing to show the parties 'intention regarding the duration of the joint Venture, the aim of the joint Venture will be taken into consideration. A joint venture's purpose may be to complete a specified piece of work or to achieve a specific result. It is presumed that the parties intend to continue the relationship until the object has been completed.

Also, a Joint Venture agreement with foreign company may remain in effect only until the purpose of the agreement is ascertained as not being possible. When a joint venture has the purpose of buying land, building and selling a house in the property, the Venture will not be over once the parties receive the profit.  Only when the Venture is appropriately wound up by settling all dues that the joint Venture holds and issuing a proper accounting to each party in a joint venture will it be over. Thus, a venture is terminated at the expiry of the specified time, except for liquidation, accounting and settlement of assets and liabilities.

Benefits of Foreign party as a Joint Venture partner 

Having a foreign party as a joint venture partner in India can be of great benefit as it provides a quick way to indulge in complementary resources available with the other partner, share the capabilities of each other, access new markets and diversify new businesses.

Flexibility and Adaptability- JV gives you the option to enter into an equity or contractual arrangement. It is very adaptable as it can be started by introducing a new partner or starting an entirely new business with an existing project. Since JV is a temporary arrangement that implies that you are not committed to long-term businesses, it opens up a creative route for enterprises to enter non-core businesses while maintaining an easy exit option.

Accessibility- The JV with a foreign partner helps foreign investors to gain access to the strengths of others in terms of regional knowledge of the established market, infrastructure, product quality, technology, distribution channels, availability of cheap resources, labour costs, risk factors, etc.

Improved technology- A foreign party partner acts as a driving force for Indian business as they are equipped with state-of-the-art technology that is already being tested and tested on the global market. It leads to more economically developed and evolved products without compromising quality standards to meet the growing needs of modern businesses.

Shared liabilities- Since both parties have volunteered to share their responsibilities, the burden/pressure of loss, cost or service incurred will be lower for each partner. It encourages them to take risks in exploring new options even when higher returns are not up to par.

Increased capacity- Production and sales both increase due to the availability of advanced technology as well as cheap labour. Resources are also available at cost-effective prices and can be effectively used to boost returns. All the equipment and capital needed for your project can be conveniently made available. JV is a great way to reduce research and production costs without compromising product quality too.

Soaring high success rate- It allows Indian businesses to access new global markets and channels of distribution without geographical obstacles, gain insights and use each other's expertise to deliver exceptional results.

Eligibility criteria:

• In certain areas such as telecommunications, drugs & pharmaceuticals, hotel & tourism or foreign investment advertising up to 50%, 51% and/or 74% in the Joint Venture without RBI approval.

• A permit must be obtained from either the Foreign Investment Promotion Board ("FIPB") or the Secretariat of Industrial Approvals ("SIA") for more than 74 per cent of the total equity in a joint venture company or to establish a Wholly-Owned Subsidiary (WOS). Foreign companies that do not wish to join an Indian partner may set up liaison offices, branches or project offices, or WOS.

Due Diligence

A due diligence check should be conducted by foreign companies looking to do business in India, and vice versa.

The financial, legal, and compliance aspects of the enterprise or business are reviewed and documented during due diligence examination. The purpose is to identify if the business faces any risks or concerns.

Due diligence is usually performed on mergers and acquisitions, partnerships, joint ventures, and IPO cases. It should also be noted that companies in India must comply with various legal and regulatory requirements, and the tax system can be challenging to navigate. Due diligence is therefore required to ensure that the local company complies with all the necessary laws and regulations and provides the foreign company with accurate information on its business.

Through this due diligence process, the Indian and the foreign business get access to all the information, including the business's liabilities, reputation, and finances. Once the risks, challenges and potential opportunities are identified, both the Indian and foreign entities can decide whether they want to be together in the business.

Conclusion

Not only are the joint ventures happening in private sectors, but the government is also initiating to make the market reliable. Joint ventures FDI are used across sectors in India but are more prevalent in the high-tech, high-capital or high-tech skills sectors. Any foreign party seeking to invest in a joint venture in India must comply with the legal requirements relating to foreign direct investment (FDI), including the provisions of the Foreign Exchange Management Act 1999 (FEMA).