A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. Partnerships and joint ventures can be similar but in fact, can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project. Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product or intellectual property rather than joint or collective profits, as is the case with a general or limited partnership. A joint venture, like a general partnership, is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants, since the joint venture itself has no legal status. Once the Joint venture has met its goals the entity ceases to exist.
There are no separate laws governing Joint Venture, however, agreement regulating a Joint Venture must be as per Indian legal guidelines and principals. A joint venture agreement sets out the terms, conditions, rights and duties/responsibilities of each party to the venture. The agreement might also describe what the venture is about and how long it will last.
FORMS OF JOINT VENTURE
Joint Venture can be classified either as Incorporated or Unincorporated based on their constitution. In the case of Incorporated Joint Venture, A new entity is incorporated which can be a company or a Limited Liability Partnership? The entities formed are separate and ventures occupy equity in the newly formed entity as per agreement. While unincorporated, joint venture may include formation unincorporated entity as a partnership or mere agreements for a specific purpose.
- Company: Here the parties to the Joint Venture would create a joint venture company, under the Companies Act, 2013 and would hold the shares of such company in proportion as defined by the greement. This arrangement can also be termed as Equity/Corporate JV.
The advantages of using a corporate entity are:
- an independent legal identity to the JV;
- a better management and employee structure;
- limited liability and the flexibility to raise finance; and
- Survival despite a change in its ownership.
The documents of incorporation, i.e. the Memorandum of Association (the “MoA”) and Articles of Association (the “AoA”) of the JV Co. should be suitably drafted to reflect the rights, intentions, and obligations of the parties.
- Limited Liability Partnership: Limited Liability Partnership Act, 2008 (“LLP Act”) introduced limited liability partnerships (“LLPs”) in India. An LLP is a beneficial business entity as it provides the benefits of limited liability to its partners and allows its members to organize their internal structure as a partnership based on an agreement, at the same basic features of a corporation including separate legal identity.
The government has permitted FDI in LLPs, through the Government approval route, only for LLPs operating in sectors/activities where 100% FDI is allowed.
- Partnership: A partnership firm created under the Partnership Act, 1932, represents a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. A partnership JV is unincorporated forms of JV which represent the business relationship between the parties with a profit motive. This is reflected in the tax regime, whereby partners are separately assessed even though the profits are computed as if the partnership were a separate entity. This JV has inherent disadvantages including unlimited liability, limited capital, no separate identity etc.
See more at: http://blog.wazzeer.com/joint-venture-agreement-rule-book-every-investor/#sthash.bU8FhSAM.dpuf
APPROVAL OF GOVERNMENT
Based on the route of Investment, proper approval is required. Currently, only atomic energy, gambling, lottery business and retail trading sectors are prohibited from receiving foreign investment.
Apart from the prohibited sectors, Investment in India would typically fall under two categories, the ‘Automatic Route’ or the ‘Approval Route’.
1. The Automatic Route refers to an investment that does not require any prior government approval (and only requires certain filings with the Reserve Bank of India, the central regulatory bank). The Automatic Route is available for a range of sectors and applies if the level of foreign investment does not exceed the specified percentage (if less than 100 per cent is permitted) and the foreign investor does not have a previous venture or tie-up in India in the same field.
- The Approval Route applies when prior approval from the Foreign Investment Promotion Board. (‘FIPB’) would be required before the FDI can be made. FIPB approval will also be required where more than 24 per cent foreign equity is invested for the manufacture of items reserved for the ‘Small Scale Industries’. For it, provisions of Press Note 1 (2005) series should be carefully evaluated
Apart from above other approvals are also required depending upon the Industry Joint venture intends to enter.
ESSENTIALS TO REMEMBER WHILE DRAFTING YOUR JOINT VENTURE AGREEMENT:
- Specifically laying out the function of the joint venture
- Approvals Required
- Due diligence
- Flexibility to include change in law and technology
- Clear identification of the rights and duties of each party
- The allotment of costs and expenses,
- The ownership of the results and their commercial exploitation,
- the distribution of the profits and possible losses,
- The duration of the venture in the case of unincorporated joint ventures.
- The structure of the joint venture, eg whether it will be a separate business in its own right
- The objectives of the joint venture
- The financial contributions you will each make
- Whether you will transfer any assets or employees to the joint venture
- Ownership of intellectual property created by the joint venture
- Management and control, eg respective responsibilities and processes to be followed
- How liabilities, profits, and losses are shared
- How any disputes between the partners will be resolved
- Exit strategy
