JOINT VENTURE IN INDIA
A JV is an Arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective. The below are the various forms of JV :
It may be on a long-term basis involving the running of a business in perpetuity or on a limited basis involving the realization of a particular project. It may involve an entirely new business, or an existing business that is expected to significantly benefit from the introduction of the new participant.
EQUITY BASED JOINT VENTURE /JOINT VENTURE IN THE FORM OF A COMPANY
Where the parties to the JV would create a Joint venture company (“JVC”) under the Companies Act, 1956
and would hold the shares of such company in an agreed proportion. This arrangement is termed as Equity based JV.
The advantages of using this Joint Venture are:
- It is a universally recognized medium which gives an independent legal identity to the JV;
- It puts in place a better management and employee structure;
- The participants have the benefit of limited liability and the flexibility to raise finance; and
- The company will survive as the same entity despite a change in its ownership.
The three most common ways of creating of joint venture companies may be described as follows:
Parties subscribe to shares on agreed terms: Parties to the JV incorporate a new company and subscribe to the shares of the company in mutually agreed proportion and terms, and commence a new business. The benefit of this route is that it allows structural flexibility in terms of creating an entity which is tailor-made to suit the specifications of both the parties. The documents of incorporation, i.e. the Memorandum of Association (the "MoA") and Articles of Association (the “AoA”) of the JV Co. would be suitably drafted so as to reflect the rights, intentions and obligations of the parties. There are certain reporting requirements (filing of Form FCGPR) with the RBI that need to be complied with when a foreign entity subscribes to shares of an Indian company.
Collaboration with the promoters of an existing company: A proposed JV partner can acquire shares of the existing company either by subscribing to new shares or acquiring shares of the existing shareholder(s). The MoA and the AoA of the existing company would be amended accordingly to incorporate the JVA into it.
Transfer of business or technology by one party and share subscription by the other: This type of JV takes place where one of the parties transfers its business or technology to the newly incorporated company in lieu of shares issued by the company. The other party subscribes to the shares of the company for cash consideration. In the event the foreign partner wishes to subscribe to shares by contribution other than by way of cash, then subject to certain exceptions, prior approval is required from the Government of India.