Joint Venture in India – Frequently Asked Questions (FAQ)

1. What is a Joint Venture?

A Joint venture is an arrangement whereby two or more individuals or companies or

partnerships or corporations come together to undertake an economic or research
activity by entering into an agreement. The parties agree to create a new entity by
contributing capital and share revenues, expenses, liabilities and control of the newly
formed entity.

2. Who can form a Joint Venture in India?

There is no restriction for entering into a Joint Venture, except for capacity to contract
under the law. Any person above the age of 18 yrs and competent to contract, a
company, partnership firm or a corporation can enter into a Joint Venture in India.

3. Under which law joint ventures are formed 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. It can be in the
form of partnership, corporation or any other business entity which the parties may
choose to elect.

4. For what purpose Joint Ventures are formed?

A Joint Venture can be formed for any lawful business purpose. Joint Ventures are
mainly formed for the purpose of technology transfer, research and development,
supply of technological know-how. Interestingly, the foreign companies mainly form
Joint Venture for gaining market access in a particular country.

5. What is the procedure to be followed for forming a Joint Venture in India?

There is no specific procedure for forming a Joint Venture except for negotiations, due
diligence and signing a joint venture agreement, apart from what the parties decide to
follow. Joint Ventures are limited to the purpose for which they are formed. They can be
in the form of partnership or company as decided by the parties. In case of Joint
Ventures in form of a company, there has to be provisions for transfer and allotment of
shares between the entities entering into the Joint Venture. In case of Joint Ventures with
foreigners and foreign companies, necessary approval is required.

Any Joint Venture requires a partner, so there has to be two or more partners for
forming a Joint Venture. The objective and purpose of the undertaking are agreed upon
and a Memorandum of Understanding or a Letter of Intent is signed by the parties
deciding the basis of the future Joint Venture agreement. The Joint Venture Agreement
is entered into between the parties on the terms as agreed upon between the parties. It is
advised that the Memorandum of Understanding and the Joint Venture Agreement are
prepared by lawyers as Joint Venture agreements at times involve complexities. Before
signing the Joint Venture agreement, the terms should be thoroughly discussed and
negotiated to avoid any misunderstanding of the rights and liabilities of the parties and
other issues at a later stage.

6. What factors one should keep in mind while entering into a Joint Venture?

Any person/company/partnership firm/corporation while entering into a Joint Venture

must keep the following things in mind:

a) Screening of prospective partners

b) Joint development of a detailed business plan
c) Due diligence - checking the credentials of the other party
d) Terms of dissolution of  the Joint Venture
e) Appropriate structure of Joint Venture e.g. partnership, company etc.
f) Contribution of assets made and to be made in the Joint Venture by each party.
g) Special allocations of income, gain, loss or deduction to be made among the
partners
h) Compensation to the members providing services, and
i) Jurisdiction and dispute resolution procedure relating to Joint Venture.

7. What are the requisites of a valid Joint Venture agreement?

There is no separate law governing the formation, conduct and termination of joint
ventures in India and Contract Act governs for contracts and if a by way of company,
then the Companies Act should complied with. It is the purpose, rather than the choice
of the parties, that determines the type or mode of the proposed Joint Venture. Therefore
it is very important that the Joint Venture must provide the details of the rights and
obligations of the parties as well as the objective and the functioning of the Joint Venture
entity. The purpose for which the Joint Venture is formed must be clearly specified in
the Agreement. Also the right and the liabilities of the parties must be clearly stated
along with the following:
a) Name of the entity so formed;
b) Termination or term of the Joint Venture if it is formed for a specific duration;
c) Jurisdiction and dispute resolution procedure;
d) Control of the Joint Venture entity;
e) Investment of capital;
f) Management committee;
g) MD/CEO, if applicable;
h) Indemnity;
i) Non-Competency;
j) Assignment.
If the Joint Venture involves share capital, then provisions for allotment and transfer of
the shares, appointment of Board of Directors, meetings of Directors, quorum etc. are
required to be provided.

8. How is a Joint Venture different from a company?

A Joint Venture is different from a company for the reason that a Joint Venture unlike a
company is formed for a specific purpose or specific term, depending on the objective of
such venture. Once the purpose or the term is complete the entity so formed under the
Joint Venture agreement may come to an end. Joint Venture unlike a company is limited
to a specific purpose or term, clearly defined by the parties.

9. What are the benefits of a Joint Venture?

A Joint Venture is useful for expansion of business and sharing risks involved in capital
investments. Even a small enterprise can invest and can involve in new business activity
and obtain profits. It minimizes the risks involved in high capital investments and
promotes expansion of business activities.

10. What are the risk factors to be considered in a Joint Venture?

There are a few risk factors involved in Joint Venture which one has to consider while
entering into a Joint Venture. Adequate planning of the venture is a very important
requirement, as inadequate preplanning can result in the failure of the venture. There
are also issues relating to Intellectual Property Rights and Confidentiality, which can
lead to differences between the parties to the Joint Venture. Parties may not agree on
issues of sharing of information and technology or control and management of the Joint
Venture. Therefore, parties must discuss and negotiate the terms fully before entering
into any Joint Venture to avoid conflicts of interests.