Joint Venture Agreements What is a Joint Venture?

Joint Venture companies are the most preferred form of corporate entities for Doing Business in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. A Joint Venture may be any of the business entities available in India. A typical Joint Venture is where: 1. Two parties, (individuals or companies), incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer; shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash. 2. The above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business. 3. Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them nonresident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash. Some practical aspects of formation of joint venture companies in India and the prerequisites which the parties should take into account are enumerated herein after. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office. .Government Approvals for Joint Ventures...

All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India is required. In other special cases, not covered under the automatic route, a special approval of FIPB is required. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required. Please see Foreign Investment in India - Sector wise Guide for sector wise guidelines under automatic route. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities. Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including

exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated.

How to Enter into a Joint Venture Agreement? Selection of a good local partner is the key to the success of any joint venture. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting lawyers well versed in international laws and multi-jurisdictional laws and procedures. Before signing the joint venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. Before signing a Joint Venture Agreement the following must be properly addressed:

Dispute resolution agreements Applicable law. Force Majeure Holding shares Transfer of shares Board of Directors General meeting.

CEO/MD Management Committee Important decisions with consent of partners Dividend policy Funding Access. Change of control Non-Compete Confidentiality Indemnity Assignment. Break of deadlock Termination.

The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.

What is a Joint Venture? Joint Venture Companies are the most preferred module of corporate entities for doing business in India to achieve specific objectives of a partnership like temporary arrangement between two or more firms. JVs are advantageous as a risk reducing mechanism in new-market penetration, and in pooling of resource for large projects. The Companies incorporated in India, even up to 100% foreign equity, are at par at domestic companies. A Joint Venture may be any of the business modules available. There are no separate laws for joint ventures in India. They, however, present unique problems in equity ownership, operational control, and distribution of profits (or losses). A typical Joint Venture is where:

Two parties agree to co-operate their business in a limited and specific way wherein they incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash. Other option could be to setup a separate joint venture business, possibly a new company, to handle a particular contract. The partners own shares in agreed proportion in the company and agree how it should be managed. 1.Promoter shareholder of an existing Indian company and a third party, collaborate to jointly carry on the business of the company and its shares are taken by the said third party through payment in cash.

Note:

The shareholder of such company would be Individual or body corporate The shareholder of such joint venture company may be one resident and one non resident or both residents. Top

Incorporation of Joint Venture Company (JV). There are no separate laws for incorporation of joint venture Company in India. It is incorporated or established like a private limited company or a public limited company under the Indian Companies Act, 1956. However, the following key issued should be addressed before establishment of Joint Venture Company:

To check sectoral cap for foreign direct investment in the proposed joint venture. Drafting of Memorandum & Understanding Incorporating detailed terms & conditions of carrying on business in the form of Joint Venture Company. Constitution of the joint venture Company Private or Public. Location of Registered office of the Joint Venture Company viz-a-viz location of

Project, availability of raw material, labour, power and other infrastructure facilities in view of nature of business of JV. Proposed name of JV keeping in view the present name / trade name etc. of the joint venture partner. Selection of nominees / alternate directors on behalf of non resident shareholders / directors.

ARTICLES OF ASSOCIATION To avoid contradictions, the Articles of Association should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners. NON RESIDENT PARTNER In case one of the partners of the joint venture company is a non resident, approval of Reserve bank of India {RBI} will be required for acquiring shares of the company and establishing place of business in India under the provisions of Section 6 of Foreign Exchange Management Act 1999 {FEMA}. However RBI has granted general permission as to:

i.Maintenance of bank accounts in India and deposits with Indian/firms/companies (Regulated by Reserve Banks Notification FEMA.5/2000 dated 03.05.2000 as amended from time to time. i.Investment in securities/shares in India (Regulated by Reserve Banks Notification FEMA 20/2000-RB dated 03.05.2000, as amended from time to time. i.Investments in immovable properties in India. (Regulated by Reserve Banks Notification FEMA.21/2000-RB dated 03.05.2000 as amended from time to time. With the on going liberalization more general permissions of RBI are expected. Top

INTER-CORPORATE INVESTMENT U/S 372A OF COMPANIES ACT Where an Indian company [partner] acquires shares of the joint venture company which is exceeding 60% of its [Indian companys] paid-up capital and free reserves or 100% of its free reserves, whichever is more, Section 372A will apply requiring prior Board decision of the Indian company as well as special resolution of its shareholders. If a foreign company acquires the shares, this section will not be invoked as it applies only to a "company" defined under section 3 {1} [i] of the Act which does not take into account a foreign company. APPROVALS If the entering party have a previous venture tie up or arrangement in the same field, the JV is not permissible without prior approval of Central Government provided that if investment in existing JV is less than 3% or if existing JV/Collaboration becomes sick or defunct, there is no need to seek Central Governments approval. In brief, The Joint Venture agreement should be conditional upon obtaining all necessary approvals/ consents/ licenses /permissions of appropriate agencies of Government of India like RBI/SIA etc within

specified period. If any of the approvals are not received, or received late, the agreement cannot be enforced and the joint venture cannot proceed on the basis of the Agreement. IMPORTANT CLAUSES OF A JOINT VENTURE AGREEMENT Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture agreement. A Joint venture Agreement requires dexterous legal drafting and should incorporate clearly the relevant clauses that specify the mutual understanding arrived at between both parties as to the formation and operations of the Joint venture Company. A brief checklist of important clauses is as followsSome practical aspects of formation of joint venture companies in India and the prerequisites which the parties should take into account are enumerated herein after. Top GOVERNMENT APPROVALS FOR JOINT VENTURES All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India is required. In other special cases, not covered under the automatic route, a special approval of FIPB is required. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required. Please see Foreign Investment in India - Sector wise Guide for sectorwise guidelines under automatic route. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities. Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector,

including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated. Top HOW TO ENTER INTO A JOINT VENTURE AGREEMENT? Selection of a good local partner is the key to the success of any joint venture. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting Chartered Accountants Firm well versed in Foreign Exchange Management Act, Indian Income Tax Act, Indian Companies Act, international laws and applicable Indian Rules & Regulations and procedures. Before signing the joint venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. Before signing a Joint Venture Agreement the following must be properly addressed:

Applicable law Shareholding Pattern Composition of Board of Directors Management Committee Frequency of Board Meeting & its venue General Meeting & its venue Composition of quorum for important decision at Board Meeting Transfer of shares Dividend policy Employment of Funds in cash or kind Change of control Restriction /Prohibition on Assignment Non-Compete parameters Confidentiality Indemnity Break of deadlock Jurisdiction for resolution of dispute Termination criteria & notice Force Majeure

The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.