“A pessimist sees the difficulty in every opportunity, whereas an optimist sees the opportunity in every difficulty.”
~Winston Churchill, British prime minister
Having said the lines stated by the famous British prime minister, Winston Churchill, with the help of this article we are going to take you through the journey of setting up a joint venture in India. We would also like to enrich your knowledge of the facts and the legalities that one can face while setting up a joint venture in India.
A joint venture is a business arrangement in which two or more parties agree to pool their resources to accomplish a specific task. This task can be a new project or any other business activity. Each of the participants in a joint venture is responsible for profit, losses and the cost associated with it. However, the venture is its entity separate from the participants’ other business interests.
Although a joint venture is a partnership in the colloquial sense of the word, it can be formed using any legal structure that includes corporations, partnerships and limited liability company are the other business entities that can be employed.
One must keep in mind the following points which need to be assessed before signing on entering into a joint venture contract;
- One must have a detailed study of the applicable law for the joint venture.
- One must have considerable knowledge about the shareholding pattern.
- One must be aware of the composition of the board of directors and the management committee.
- One must have decided upon the frequency of board meetings and general meetings and their venue.
- One must also know the composition of the quorum for important decisions at the board meeting.
A joint-venture company is a tactical partnership for two or more people or companies that agree to put in goods and services or capital to form a uniform commercial project for any successful joint venture. In India, compatibility between contracting parties is the key to maintaining a successful joint venture. The associated parties should have a clear goal and the condition should be written out in the clauses of the joint-venture agreement.
The establishment of a joint venture company is the most preferred form of corporate structure for foreign investors doing business in India.
We often come across people having questions like what are the benefits of choosing a joint venture project in India?
The answer to this lies in the following facts stated below;
- In sectors where a hundred per cent FDI is not allowed in India, a joint venture is the best medium offering a low-risk option for companies wanting to enter into the vibrant Indian market.
- All companies registered in India, even those with up to a hundred per cent overseas equity are considered the same as local companies
- Corporate joint ventures are regulated by the companies act 2013 and the Limited liability partnership act 2008
- Corporate joint ventures will also be subject to the country’s tax laws. The foreign exchange management act of 1999, labels laws such as the Code of wages act, 2019, the industrial disputes act, 1947 and the state-specific Shops and Establishment Legislation. The competition act of 2002 and various industry-specific laws.
- A joint venture can be formed with any of the business entities existing in India as well
- Having stated some advantages of setting up joint ventures in India, we do have to keep an eye on the legalities of forming a joint venture in India. There are two types of joint ventures namely Incorporated and Unincorporated.
An unincorporated joint venture acquires a separate legal entity, perpetual succession and its rights and obligations, whereby it can see you and be sued. A joint venture can be incorporated as a limited Layi Bitti company under the companies act or LLP under the Limited liability partnership act 2008.
To avoid being the permanent and formal culprit vehicle the unincorporated joint venture can be established in the nature of a simple partnership firm or a strategic alliance governed by the joint venture agreement which stipulates all nuances of the relationship, including the rights and obligations among the parties with the third parties.
As per the Indian partnership act, 1932, it is not compulsory to register a partnership firm. However, registration of a partnership firm is recommended as the registration carries certain distinct advantages. For example, registration of a partnership firm is conclusive proof of a partner being a member of a partnership.
Joint ventures are either equity-based or contractual and are either under equal ownership or majority-minority ownership. In a contractual joint venture, there is an agreement to collaborate without creating a jointly separate entity. Such contractual joint ventures made a wall around a particular issue such as entry into a new market technology, collaboration and revenue sharing and can be most commonly found in the form of the franchisee, arrangements, licensing agreements, purchasing and distribution agreements.
Joint ventures may comprise jointly, controlled entities, controlled acids or jointly controlled operations. The jointly controlled entity may be incorporated. On the other hand, jointly controlled acid and jointly controlled operations are unincorporated and are governed by the agreement signed between the parties.
Joint ventures are either brownfield or greenfield when a joint-venture entity is established by the virtue of contribution or transfer of existing assets or businesses by the partner’s entity it is called a brownfield entity, whereas a greenfield entity is a new entity that acquires assets and establishes a business from scratch.
There are some rules which are specifically related to foreign joint ventures parties as there were several initiatives which have been taken by the government of India towards liberalisation of various key sectors in India such as defence, telecom insurance, and railway infrastructure, thereby leaving very few sectors in India where foreign investment is restricted. Some sector-specific rules have to be followed for foreign investors. For example, in the pharmaceutical sector where non-compete clauses are not permitted in foreign investment or joint-venture agreements. The aviation sector ( security clearance for foreign personnel). Single brand retailing ( where is 30% domestic sourcing norms for foreign direct investment FDI beyond 51%). The defence sector( where is the joint venture company along with the manufacturing facility should have a maintenance and life support cycle facility for the product being manufactured in India). The multi-brand retail ( bare minimum amount to be brought in as FDI would be US dollars, a hundred million and 30% of the value of procurement of manufactured or processed products will be sourced from Indian micro, small and medium-sized industries that have a total investment in plant and machinery not exceeding then US dollar 2 million).
Any foreign party that seeks to invest in a joint venture in India must comply with the legal requirements associated with FDI in India including the provisions of the foreign exchange management act 1999, which provides for India’s foreign exchange management regime and regulates the conditions governing foreign exchange and investment into and out of the country. Currently, the Indian legal regime governing foreign investment permits persons who are residents outside India to invest in securities of Indian companies subject to the sectoral capital prescribed by the government of India for investment can be made under the automatic route or the approval route.
The legal regime of taxation including tax treaties ratified by India also specifically provides for rules applicable to foreign parties that are investing in India. Further, in the event of the parties to the international transaction related to the transfer, pricing regulations, and DTP regulations would also be attracted to such a transaction and the foreign party shall have to comply with such regulations.
The documents required for creating a joint venture can broadly be classified into three categories;
- Memorandum of undertaking or the letter of intent.
- Definitive agreements depend upon the chosen structure.
- Other agreements such as technology, transfer agreement or the BTA etc.
Lastly, I would conclude by stating some tax considerations which might arise for the joint venture parties and the joint-venture entity and how they can be lawfully mitigated. A joint venture entity can be set up either directly or indirectly by the way of setting up an intermediary holding company in an offshore jurisdiction. Any means applied by the shareholders from the sale of shares of the joint-venture entity which are held by the investor as capital assets are characterised as a capital gain and are taxed under the income tax act, 1961, the IT Act which provides the taxability of an entity that is resident in a jurisdiction with which India has signed a double taxation avoidance agreement. DTAA would be governed under the provisions of the IT act or the relevant ETA, whichever is more beneficial to such non-resident taxpayers. India has made the General anti-avoidance rule effective from 1 April 2017. However, it’s important to note that the tax benefits under the relevant DTAA claimed by a non-resident shareholder would not be available where such a non-resident has been set up with the main purpose of obtaining a tax benefit, where there was no commercial jurisdiction for investing through an intermediary holding company.
In this context, one would need to constantly be updated with and take note of the ever-changing international tax landscape action 15 of the base erosion and profit. Shifting the BEPS programme initiated by the Organisation for Economic Co-operation and Development provides the multilateral convention to implement tax treaty-related measures to prevent the BEPS.
The multilateral convention seeks to amend the existing network of bilateral tax treaties and seeks to deny benefits available under the tax treaties to residents of the signatory countries where the principal purpose of setting up an entity in the relevant contracting state is to avail such benefits.
To sum up, there are no separate laws for joint ventures in India. Contractual joint ventures are governed by the partnership act 1932 because it is like a partnership agreement that is binding by the legal agreement and no separate entity is formed.