Joint Venture – The Best Entry Option in India for a Foreign Enterprise
The Indian marketplace opened up for foreign investors with the liberalization of the Indian economy. The Industrial sector was among the first sectors to be liberalized, which led to the wiping out of Industrial licensing except in a small number of sectors, which have been of tactical importance. There are various options available to a foreign enterprise for setting up operations in India among which one of the most advantageous is joint venture.
A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian Companies Act, 1956. Customized support is now offered to clients across the globe by D. Batra & Co. seeking incorporation in India. Fast-track incorporation service has been introduced by D. Batra & Co. which helps clients to form an Indian company in record time. The red-tapism era is almost over and with technology taking over, things move with great pace, unlike the perceptions of people across the globe who still consider India as a slow moving zone. The professionally trained team at DBC assists foreign entrants and effectively works out the legal formalities with the concerned departments like Incorporation of a company, registration with various government bodies and many more.
FACTORS TO BE CONSIDERED WHILE FORMING A JOINT VENTURE:
D. Batra & Co. offers liaisoning services in creating Joint Ventures with suitable companies in different sectors. In sectors where 100% FDI is not permitted and wholly owned subsidiaries cannot be set up, a foreign investor may enter the Indian market through joint ventures. Forming a joint venture encompasses a number of stages and a number of factors. Mentioned below are some of the essential steps to be taken by a foreign party to a Joint Venture:
The most important decision is choosing an appropriate local partner. A local partner can play a significant role in overcoming various legal complexities. The success of a joint venture project depends largely on choosing the right partner, in addition to having a well-defined agreement. A battery of eminent professionals at DBC assists the foreign entrants in not only making the preliminary research and analysis of the affairs of the local partner but also provide legal drafting services.
The next step is to identify a location for the proposed project. Choice of location depends upon the type of activity to be undertaken. If the activity relates to consumer goods sector, a variety of locations will be available due to the fact that a number of Indian partners can be easily found for such activities. However, in case of specialized industries, there may be limitations on the choice of location as the number of suitable partners for such activity is limited. Other important factors to be considered for this purpose are availability of infrastructural services and financial incentives such as preferential tax treatment.
Prior to commencing negotiation, confidentiality/ non-disclosure agreements may be entered into between the parties for the protection of strategic business information. Such agreements are enforceable in India. Another step taken at the initial stages of negotiation is to sign a MoU, which lays down the basic parameters of the project and contains the intention of the parties to enter into the Joint Venture, but is not legally binding.
This MoU is then used as a basis for the Joint Venture Agreement. The Joint Venture agreement/ shareholders agreement along with the Articles of Association constitute the by-laws of the Joint Venture Company. In order to give such agreement a binding effect, stamp duty has to be paid thereon. However, this document only binds the parties and not the company, except when its terms are incorporated in the Articles of the company. This document defines the mutual rights of the parties and also prescribes guidelines for efficient functioning of the company.
Some of the important clauses/provisions, which ought to be included in the Joint Venture agreement, are as follows:
a) Parties: The foreign party, ordinarily known as the original party, may be the parent, holding or subsidiary company of the investing company.
b) Approvals: The Joint Venture agreement is subject to the RBI and FIPB policies. In additions, approvals and licenses in respect of tax, registration, etc are also required.
c) Finance: This clause lays down the manner in which finances are to be raised for the business. It prescribes the amount of initial investment and the contributions to be made by each of the parties, in respect of additional funds, etc.
d) Object: The objects, scope, extent and the end product of the joint venture should be specified.
e) Shareholdings: This clause lays down the shareholding ratio between the parties in accordance with either the cash inputs or the assets brought in by them. It further states the class of shares to be issued and the rights attached thereto. Provisions relating to shareholders’ meetings, voting rights, future issue of share capital, transfer of shares, etc., are also stated in this clause.
f) Management: The constitution of the board to directors, provisions relating to meetings and resolutions therefore form the ingredients of this clause. Terms and conditions for expansion of business, appointment and removal of the senior management and service agreements are all stated in this clause.
g) Resolution of Disputes: The terms of this clause are to ascertain when a dispute is deemed to arise and the manner of settlement. The disputes are generally resolved using means of alternate dispute resolution. However, litigation may also be resorted to. The effects of such disputes on the JV shall be governed by the provisions of this clause.
h) Confidentiality: This clause is in the nature of prohibitory clause. It entails provisions for the preservation of the company’s secrets and strategic information.
i) Termination of Agreement: The conditions and circumstances, which lead to the termination of the Joint Venture agreement, such as, breach of agreement, insolvency, etc., are stated in this clause. The consequences of such termination are also mentioned hereunder.
Further, a ‘Force de majeure’ clause may be added to the above, which provides protection to parties to the agreement in case of any event beyond its control, which prevents it from performing its prescribed functions. Understanding all the legal jargon, D. Batra & Co. is assisting foreign entrants to smoothly cruise into Indian ventures by taking care of all the procedural aspects from the time of inception of the thought of entering into India till final establishment.