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TERM PAPER OF FINANCIAL MANAGEMENT MGT-333
DATE OF SUBMISSION: 24 OCTOBER 2010
SUBMITTED TO: MRS. SHIKHA DHAWAN LHST
SUBMITTED BY: NIHARIKA SARNA
‘Joint Venture’. its benefits. Thank you. Niharika Sarna . Shikha Dhawan for guiding me on various topics of the term paper with attention and care. risks measures and mistakes to be avoided during Joint Venture alliance. She has taken pain to go through the project and make necessary correction as and when needed. I would like to convey my deepest thanks to our Lecturer. I got sufficient knowledge about entering into a joint venture. I have learnt lot through this term paper. for I have completed my term paper effectively and moreover on time. Mrs.I am very thankful to everyone who all supported me.
2. Topic A Joint Venture Concept Objectives of Joint Venture Strategic reasons for one partner Types of Joint Venture Jointly controlled operations Jointly controlled assets Jointly Controlled entities 5. 3.CONTENTS Sr. 11. 13. 6. 4 5 5 6 6 7 7 7 8 9 9 A JOINT VENTURE CONCEPT: . Cause for concern Joint Venture in India Government approval for Joint Venture Entering a Joint Venture Program Requirements for Joint Venture agreement Mistakes to be avoided during Joint Venture Conclusion References 10 10 11 12 13 14 15 16 Pg. No. How does Joint Venture Work? Starting a Joint Venture Minimizing risks and maximizing success Joint Ventures are attractive for number of reasons 9. 14. 15. 8. 1. 16. 4. 12. 7. 10. No.
They are also formed to minimize business. the term 'JV' applies to more occasions than the choice of JV partners. Therefore. Within one. a joint venture may be a corporation. should it occur. The term JV refers to the purpose of the entity and not to a type of entity. on account of (a) Ignoring national objectives (b) Slow-growth (c) Parental control of funds and (d) Disallowing competition. in a third country. depending on a number of considerations such as tax liability. services. insurance. long-term business relationship. a partnership or other legal structure. Today. all the partners have to agree to dissolve the partnership whereas a finite time has to lapse before it comes to an end. banking. a limited liability enterprise. discouraged. as . travel space. JVs are normally formed both inside one's own country and between firms belonging to different countries. Also.A Joint Venture (JV) on a continuing basis is the normal business undertaking. It is similar to a business partnership with two differences: the first. Second. JVs usually combine different strengths in a field or are formed because of legal restrictions within a country. etc. JVs can be in the manufacture of goods. for example an insurance company cannot market its policies through a banking company. whereas an equity-based JV comprises a single business activity. Some JVs are also formed because the law of a country allows dispute settlement. tax and political risks. an individual normally cannot legally carry out business without finding a national partner to form a JV as in many Arab countries where it is mentioned that there are over 500 JVs in Saudi Arabia with Indians alone. The JV is an alternative to the parent-subsidiary business partnership in emerging countries. webhosting business. the JV may be an easier first-step to franchising. for example. a partnership generally involves an ongoing.
Objectives of Joint Venture: reducing 'entry' risks by using the local partner's assets inadequate knowledge of local institutional or legal environment access to local borrowing powers perception that the goodwill of the local partner is carried forward in strategic sectors. investment. through government incentives.McDonald's and other fast foods. the county's laws may not permit foreign nationals to access to local resources through participation of national partner influence of local partners on government officials or 'compulsory' requisite access by one partner to foreign technology or expertise. found out in China in the early difficult stage of development. job and skill growth through foreign Incoming foreign exchange and investment. often a key operate alone (see China coverage below) consideration of local parties (or through government incentives for the mechanism) again. and Strategic reasons of one partner: There may be strategic interests of one partner's alone: adding 'clout' (the influence of the other partner) to the enterprise build on company's of scale and strengths economies (international) hubs') advantages of size ('industrial .
even to act on someone’s behalf. Subsequent to its formation the JV can raise debt for additional capital. or a corporation (in the US). . A written contract is crucial for legal provisions. or a financial structure that is separate from the venturers themselves. partnership or other entity. 'globalize' without size economies of scale (e. These are: Jointly Controlled Operations Jointly Controlled Assets Jointly Controlled Entities Jointly Controlled Operations A jointly controlled operation is a joint venture that involves the use of the assets and other resources of the venturers rather than the establishment of a corporation. Indian and Israeli influencing structural evolution of the industry pre-empting competition defensive response to blurring industry boundaries speed to market market diversification pathways into R&D outsourcing pharmaceutical industries) JVs are formed by the parties’ entering into an agreement that specifies their mutual responsibilities and goals in an 'adventure. The JV partners can usually form the capital of the company through injections of cash alone or cash together with assets such as 'technology' or land and buildings. Each partner to the JV has a fiduciary responsibility. All JVs also involve certain rights and duties. subordinating one's personal interests to those of the other person or that of the ‘sleeping partner’. Types of Joint Venture: There are three types of joint venture.g. Upon its incorporation it becomes a company in most places.
For the moment. However. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. We will look at the "how’s" in our review of the Eight Critical Factors of Success. The critical aspect of a joint venture does not lie in the process itself but in its execution. partnership or other entity in which each venturer has an interest. Jointly Controlled Entities A jointly controlled entity is a joint venture that involves the establishment of a corporation. large or small. We all know what needs to be done: specifically. the joint venture and dedicated to the purposes of the joint venture. time-tested principle. by the venturers of one or more assets contributed to. it is easy to overlook the "how’s" and "what’s" in the excitement of the moment. or acquired for the purpose of. let's keep in mind that all mergers. need to be planned in detail and executed following a strict plan in order to keep all the chances of success on your side. it is necessary to join forces. and often the joint ownership. except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. as well as the objective of this strategic alliance. I suggest you seek the appropriate legal advice when entering such a business relationship. The entity operates in the same way as other entities. How does Joint venture works? The process of partnering is a well-known.Jointly Controlled Assets A jointly controlled asset is a joint venture that involves the joint control. . Although joint venture legal agreement templates can readily be found on the Internet. The "what’s" should be covered in a legal agreement that will carefully list which party brings which assets (tangible and intangible) to the joint venture.
which has already been developed by a company or by an individual? 5. Am I aware that in the vast majority of cases. or acquisition costs that are simply too high? 4. Are there local legal regulations I can bypass by partnering with a local business? 10. Do I have access to the right legal resources to structure the joint venture and insure all aspects are duly covered? 9. and how do I reach my target market? 2. Do I need to develop a know-how. merging activities. will result in an inevitable workforce reduction? How do I feel about letting go of some of my most faithful employees? 13. Is there a logical business partner that could help me develop a vertical or horizontal market penetration? 6.) . or operations? Is there a company I know which would have resources complementary to mine? 7. Do I have access to successful joint venturers who can share their experience with me? 11. even when not necessarily identical. Do I have all the human resources I need in marketing. but rather as one course of action among several others.Starting a Joint Venture To start a joint venture we should keep in mind the following questions and answer the important elements as we move forward: 1. production. Who are my competitors? If they are better at generating revenues and reaching the marketplace than me. How do I feel about combining resources? Do I like to lead by myself and act as a solitary business hero. Am I looking at partnering because I don't see another way out of my current business problems? (Joint venturing should not be considered as a last resort action. Do I understand that going through the decision process entails sitting down and taking the time to write a full-fledged joint business plan? 12. R&D. what do they have that I don't? 3. Are there geographical areas that will remain beyond reach without local partners. What do I sell. This decision needs to be taken in a careful and methodical manner. or am I fine with sharing the pie? Do I think it is better to own 20% of a $200 million company or 100% of a $1 million small business? 8.
Do I have all the support I need to go through this major change in my business life? If I am going through personal turbulences. Do I already know of a person or a company that I see has a real interest in partnering? Have I discussed this possibility with this person or with the person in charge of the targeted company? If yes. then it is time to start a high-level discussion to gauge the level of interest. and human resources to create a new entity under shared control. joint ventures (JVs) are becoming increasingly popular as a means for companies to form strategic alliances. and systems. What are my strengths and weaknesses? What are the threats and opportunities in my target market? 17. . They allow companies to enter into related businesses or new geographic markets or obtain new technological knowledge. Joint ventures are attractive for a number of reasons: They provide companies with the opportunity to obtain new capacity and expertise. Is my company in need of more credibility? Do I know of a potential joint venture target. In a joint venture. as well as learn how the business operates. what is the general feeling? If no. does it make sense to start such a major project? The following article highlights upon Minimizing Risks and Maximizing Success in Joint Ventures: As stock becomes a less valuable deal-making commodity and merger and acquisition activity declines. joint ventures also offer a creative way for companies to exit from noncore businesses. In this era of divestiture and consolidation. distribution networks. They have a relatively short life span (5-7 years) and therefore do not represent a long-term commitment. Companies can gradually separate a business from the rest of the organization while allowing a buyer to assess the true value of intangible assets such as brands. This is borne out by the fact that approximately 80% of all JVs end in a sale by one parent to the other. people. technology. two or more organizations agree to share capital.14. 15. which has the level of credibility I am seeking? 16.
Business of one party is transferred to the company and as consideration for such transfer. support. Joint Venture in India: A typical Joint Venture is where: 1. shares are parties. Among the most common causes of failure cited by CEOs in the Conference Board study were poor or unclear leadership. incorporate a company in India. There's an imbalance in the level of investment and expertise brought to the joint venture by the two parent organizations. The JV partners possess disparate. The JV's size is modest compared to the two parent organizations. corporate cultures and operational styles. and often conflicting. Two (individuals companies). The senior leadership and management teams for the joint venture receive inadequate identification. or . and compensation.Cause for Concern Here are some of the more common reasons for JV difficulties: The philosophy governing expectations and objectives of the joint venture is unclear.
but government approval is required. In other special cases. Promoter shareholder of an existing Indian company and a third party. Greater than 74% of equity and areas outside the high priority list are open to investment. Approval of foreign equity is not limited to 74% and to high priority industries. Full foreign ownership (100% . a joint venture is covered under automatic route. Besides the 37 high priority areas. 2. automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities. The other party subscribes for the shares in cash. 3. Foreign Investment in India . In case. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks.issued by the company and subscribed by that party. The approval can be obtained from either from RBI or FIPB. The Government has outlined 37 high priority areas covering most of the industrial sectors. and start a new business. a special approval of FIPB 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.Sector wise Guide gives the sector wise guidelines under automatic route. Government Approvals for Joint Ventures All the joint ventures in India require governmental approvals. A response is given within 6 weeks. The above two parties subscribe to the shares of the joint venture company in agreed proportion. collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash. who/which may be individual/company. 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. then the approval of Reserve bank of India is required. An application to the Reserve Bank of India is required. not covered under the automatic route. one of them non-resident or both residents. if a foreign partner or an NRI or PIO partner is involved.
steel. 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. managing director of Western Marine Shipyard Ltd. Entering a Joint Venture program 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. Before signing the joint venture agreement. This picture is showing Md Sakhawat Hossain. the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. refining and marketing of petroleum products has now been opened to foreign participation. The entire hydrocarbon sector. Negotiations require an understanding of the cultural and legal background of the parties.equity) is readily allowed in power generation. coal washeries. this requirement may be eliminated. 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. 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. Foreign investment is also welcomed in many of infrastructure areas such as power. 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). coal washeries. including exploration. producing. and telecommunications. electronics. In view of the country's improved balance of payments position. and A Rouf Chowdhury. Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones (EPZ's). managing director of Fishers . luxury railways. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector.
The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period. A fiduciary . All joint ventures are initiated by the parties' entering a contract or an agreement that specifies their mutual responsibilities and goals. 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. Under a joint venture. The parties have a mutual right to control the enterprise. CEO/MD Management Committee Important decisions with consent of partners Dividend policy Funding Access. The contract is crucial for avoiding trouble later. Each joint venturer has a fiduciary responsibility. the parties must be specific about the intent of their joint venture as well as aware of its limitations. the two companies will build fishing trawler with 350 tonnes capacity. and has the duty to act in Good Faith in matters that concern the common interest or the enterprise. and a duty to share in any losses incurred. Break of deadlock Termination. owes a standard of care to the other members.Shipyard Ltd. All joint ventures also involve certain rights and duties. exchange documents after signing a deal in Dhaka recently. Change of control Non-Compete Confidentiality Indemnity Assignment. a right to share in the profits.
Make sure you have an open door to leave the joint venture if for any reason it is not working out.responsibility is a duty to act for someone else's benefit while subordinating one's personal interests to those of the other person. Your credibility is at stake if you partner up with a company that has sub-standard products and services. you may be stuck in a no- .. If you simply hand over your client list. or simply not work.. 4. They’ll partner with others if you offer a percentage of the profits that’s too low. they are worth sharing the profits with. Sometimes. if they are worth pursuing. or if the idea is a valid one. Not taking the time to ensure that your partner has great-quality products and services and a solid reputation. targeted and loyal client base are the most wanted joint venture partners. When you choose a partner. Do your research about your potential joint venture partners and review their products and services before endorsing them as these issues will reflect on you and your business 2. Simply handing over your client list This can constitute breach of contract with your clients if you have committed to their privacy. and this forms part of the value you have to contribute to the joint venture relationship. Mistakes to be avoided during Joint Venture: 1. without testing your strategy first Any joint venture should involve a trial period to see if profits will show a real upwards trend. You’ve also worked very hard to build your client list. If you sign a long term contract. 3. it is imperative to choose one that has high-quality products and services as well as a good reputation within the industry. Offering your partner too small of a deal There has to be an incentive for your partner to engage with you. a company may look better on the surface than it really is. 5. Not devising an exit strategy Even the best of relationships can go sour. you have no point of leverage. and offering too small of a deal won’t make it worth their time and effort. Committing to a long term relationship from the beginning. So make this mental note. Remember that endorsers with a large.
Good communication skills are needed. Just make sure to do your homework right from the start. you different directions and the agreement regarding the joint venture will suffer. while providing a better service. Joint Venture marketing is very lucrative. Ii is necessary to turn the objectives of the joint venture into a working plan that fosters trust and teamwork. and avoid these pitfalls to ensure high returns on your investment of time. broad business techniques. There must be a clear understanding of what each joint venture partner will contribute and what they will get back. As with any marketing strategy. money and effort. If you are the larger business in a joint venture proposal. that you are clear about what your JV partners want and that they will know be what pulling you in want. Nobody expects you to pour unlimited funds into a smaller JV partner and a junior partner might be naturally fearful of losing their identity and loss of intellectual property.and grow profits. can help springboard your business to new success levels. also. test in small numbers first. A successful joint venture will help your business develop faster. Most the extensive financial assistance a large company can offer.increase market share. and with some forethought and planning. Make sure. make sure you are clear about what you want from the relationship. before rolling out fully. without the need to borrow . without the need for excessive advertising . you need to be open about your desire to take over and absorb your smaller partner. Be honest about this .win situation with no way to escape. . Unless you are all in anticipated outcome. CONCLUSION Before starting a joint venture. you a larger partner for their product line or advanced small businesses think of may want to team up with large customer base.there's nothing worse than committing yourself to a large company and finding they are less generous with their money than you had hoped. As a small business.
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