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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...

Approval of foreign equity is not limited to 74% and to high priority industries. Please see Foreign Investment in India . steel. luxury railways. 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. automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities.All the joint ventures in India require governmental approvals. The approval can be obtained from either from RBI or FIPB. not covered under the automatic route. A response is given within 6 weeks. The entire hydrocarbon sector. Besides the 37 high priority areas. Foreign investment is also welcomed in many of infrastructure areas such as power. and telecommunications. In other special cases. electronics. coal washeries. if a foreign partner or an NRI or PIO partner is involved. a joint venture is covered under automatic route. a special approval of FIPB is required.Sector wise Guide for sector wise guidelines under automatic route. Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). there is the high-powered Foreign Investment Promotion Board ("FIPB"). 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. Full foreign ownership (100% equity) is readily allowed in power generation. An application to the Reserve Bank of India is required. including . coal washeries. For major investment proposals or for those that do not fit within the existing policy parameters. 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. In case. but government approval is required. then the approval of Reserve bank of India is required. Greater than 74% of equity and areas outside the high priority list are open to investment.

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. Negotiations require an understanding of the cultural and legal background of the parties. 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. In view of the country's improved balance of payments position. 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. Force Majeure Holding shares Transfer of shares Board of Directors General meeting. refining and marketing of petroleum products has now been opened to foreign participation. Before signing a Joint Venture Agreement the following must be properly addressed:        Dispute resolution agreements Applicable law. . The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. producing.exploration. How to Enter into a Joint Venture Agreement? Selection of a good local partner is the key to the success of any joint venture. Before signing the joint venture agreement. this requirement may be eliminated. the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage.

Break of deadlock Termination.             CEO/MD Management Committee Important decisions with consent of partners Dividend policy Funding Access. The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period. . Change of control Non-Compete Confidentiality Indemnity Assignment.

There are no separate laws for joint ventures in India. The Companies incorporated in India. 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. Drafting of Memorandum & Understanding Incorporating detailed terms & conditions of carrying on business in the form of Joint Venture Company. shares are issued by the company and subscribed by that party. A Joint Venture may be any of the business modules available. 1. to handle a particular contract. It is incorporated or established like a private limited company or a public limited company under the Indian Companies Act. possibly a new company. and distribution of profits (or losses). 1956. collaborate to jointly carry on the business of the company and its shares are taken by the said third party through payment in cash. They.Promoter shareholder of an existing Indian company and a third party. However. present unique problems in equity ownership. The other party subscribes for the shares in cash. Constitution of the joint venture Company – Private or Public. 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. operational control. and in pooling of resource for large projects. Location of Registered office of the Joint Venture Company viz-a-viz location of . are at par at domestic companies. Other option could be to setup a separate joint venture business. 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. even up to 100% foreign equity. Business of one party is transferred to the company and as consideration for such transfer. Top Incorporation of Joint Venture Company (JV).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. There are no separate laws for incorporation of joint venture Company in India. The partners own shares in agreed proportion in the company and agree how it should be managed. JVs are advantageous as a risk reducing mechanism in new-market penetration. however.

of the joint venture partner.2000 as amended from time to time.5/2000 dated 03.05. availability of raw material. Section 372A will apply requiring prior Board decision of the Indian company as well as special resolution of its shareholders. the Articles of Association should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners. ARTICLES OF ASSOCIATION To avoid contradictions. With the on going liberalization more general permissions of RBI are expected. However RBI has granted general permission as to:    i. In brief.2000 as amended from time to time. there is no need to seek Central Government’s approval. power and other infrastructure facilities in view of nature of business of JV. whichever is more. (Regulated by Reserve Bank’s Notification FEMA. 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 company’s] paid-up capital and free reserves or 100% of its free reserves.05. i.Investment in securities/shares in India (Regulated by Reserve Bank’s Notification FEMA 20/2000-RB dated 03. labour.Maintenance of bank accounts in India and deposits with Indian/firms/companies (Regulated by Reserve Bank’s Notification FEMA. 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 . Selection of nominees / alternate directors on behalf of non resident shareholders / directors.Investments in immovable properties in India.05. If a foreign company acquires the shares. 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.2000. 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. Proposed name of JV keeping in view the present name / trade name etc.21/2000-RB dated 03. as amended from time to time. NON RESIDENT PARTNER In case one of the partners of the joint venture company is a non resident.  Project. APPROVALS If the entering party have a previous venture tie up or arrangement in the same field. i. 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}.

A response is given within 6 weeks. In other special cases. The Government has outlined 37 high priority areas covering most of the industrial sectors. 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. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Besides the 37 high priority areas. a special approval of FIPB is required. there is the high-powered Foreign Investment Promotion Board ("FIPB"). electronics. Approval of foreign equity is not limited to 74% and to high priority industries. then the approval of Reserve bank of India is required. automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities. Full foreign ownership (100% equity) is readily allowed in power generation. For major investment proposals or for those that do not fit within the existing policy parameters. luxury railways. or received late. Foreign investment is also welcomed in many of infrastructure areas such as power. 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.Sector wise Guide for sectorwise guidelines under automatic route. . 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. steel. Please see Foreign Investment in India . coal washeries. In case. 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. Greater than 74% of equity and areas outside the high priority list are open to investment. The approval can be obtained from either from RBI or FIPB. IMPORTANT CLAUSES OF A JOINT VENTURE AGREEMENT Selection of a good local partner is the key to the success of any joint venture. If any of the approvals are not received. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks.specified period. a joint venture is covered under automatic route. An application to the Reserve Bank of India is required. but government approval is required. The entire hydrocarbon sector. coal washeries. 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 agreement cannot be enforced and the joint venture cannot proceed on the basis of the Agreement. not covered under the automatic route. and telecommunications. 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. Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's").

this requirement may be eliminated. Negotiations require an understanding of the cultural and legal background of the parties. 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. . 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. Indian Income Tax Act. producing. In view of the country's improved balance of payments position. international laws and applicable Indian Rules & Regulations and procedures. Indian Companies Act. the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. 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. refining and marketing of petroleum products has now been opened to foreign participation. Before signing the joint venture agreement. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting Chartered Accountants Firm well versed in Foreign Exchange Management Act.including exploration.