Joint Ventures

A joint venture is a new enterprise owned by two or more participants. It represents a combination of subsets of assets contributed by two (or more) business entities for a specific business purpose and a limited duration. It is essentially a medium to long-term contract which is specific and flexible. Though, the joint venture represents a newly created business enterprise, its participants continue to exist as separate firms. A joint venture can be organized as a partnership firm, a corporation or any other form of business organisation which the participating firms choose to select. It generally has the following characteristics:-

Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking. Joint property interest in the subject matter of the venture. Right of mutual control or management of the enterprise. Right to share in the property.

Thus, joint ventures are of limited scope and duration. They involve only a small fraction of each participant's total activities. Each partner must have something unique and important to offer the venture and simultaneously provide a source of gain to the other participants. However, the participants' competitive relationship need not be affected by the joint venture arrangement. Benefits of a Joint Venture Joint ventures perform a useful role in assisting companies in the process of restructuring. It can enable a firm to achieve market penetration into new areas overtime, enter and develop new product markets, expand into new geographic areas and participate in new technology driven value activities. They can also be used by smaller firms protectively as an element of long-range strategic planning. Thus, a small firm in a highly concentrated industry can negotiate joint ventures with several of the industry's dominant firms to form a self-protective network of counterbalancing forces. Joint ventures are formed with several motives:-

The main motive is to share the risks. It reduces the risks in a number of ways as the activities can be expanded with smaller investment outlays than if financed independently. The expressed purpose of most of the joint ventures is knowledge acquisition. The complexity of the knowledge to be transferred is a key factor in determining the contractual relationship between the partners. One or more participants may seek to learn more about a relatively new product market activity. This might concern all aspects of the activity or a limited segment like R&D, production, marketing or product servicing. A small firm with a new product idea that involves high risk and requires relatively large amounts of investment capital may form a joint venture with a large firm. The larger firm might be able to carry the financial risks and be interested in becoming involved in a new business activity that promises growth and profitability. In addition, the larger firm might thereby gain experience in the new area of activity that may represent the opportunity for a major new business thrust in the future. Tax advantages are a significant factor in many joint ventures. It also helps in expanding the firm's operations into foreign countries. The local partners contribute in the form of specialised knowledge about local conditions, which are essential to the success of the venture.

A joint venture may be subjected to several difficulties. As circumstances change, the contract might be too inflexible to permit the required adjustments to be made. The basic reasons for failure of a joint venture are:-

Inadequate preplanning for the joint venture. The hoped-for technology never developed. Agreements could not be reached on alternative approaches to solving the basic objectives of the joint venture. People with expertise in one company refused to share knowledge with their counterparts in the joint venture.

Parent companies are unable to share control or compromise on difficult issues.

A successful joint venture needs to fulfill the following requirements:-

Each participant has something of value to bring to the venture. The participants should engage in careful preplanning. The agreement or contract should provide for flexibility in the future. There should be provision in the agreement for termination including buyout by one of the participants. Key executives must be assigned to implement the joint ventures. A distinct unit be created in the organisational structure which has the authority for negotiating and making decisions.

Joint Ventures by Foreign Companies A foreign company can invest in an Indian company through a joint venture agreement (or as a wholly owned subsidiary) in the areas which are otherwise not reserved exclusively for the public sector or which are not under the prohibited categories such as real estate, insurance, agriculture and plantation. Foreign investment into India is governed by theForeign Direct Investment (FDI) policy and the Foreign Exchange Management Act, 1999 (FEMA). The Government has set up a Indian Investment Centre in the Ministry of Finance as a single window agency for authentic information or any assistance that may be required for investments, technical collaborations and joint ventures. It advises foreign investors on setting up industrial projects in India by providing information regarding investment environment and opportunities, the Government industrial and foreign investment policies, taxation laws and facilities and incentives and also assists them in identifying collaborators in India. For such foreign investments into India, a two tier approval mechanism has been provided:-

Automatic Approval Route:- FDI in sectors or activities to the extent permitted under automatic route does not require any prior approval either by Government of India or Reserve Bank of India (RBI). The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors. Foreign Investment Promotion Board (FIPB) Approval Route:- FDI in activities not covered under the automatic approval route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB).The FIPB has been set up in the Ministry of Finance to promote inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment. Approvals of composite proposals involving foreign investment or foreign technical collaboration are also granted on the recommendations of the FIPB. The companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. The proposals to FIPB shall contain the following information:-

Whether the applicant has any existing financial or technical collaboration or trade mark agreement in India in the same field for which approval has been sought; and If so, details thereof and the justification for proposing the new venture or technical collaboration; Applications can also be submitted with Indian Missions abroad who will forward them to the Department of Economic Affairs for further processing; Foreign investment proposals received in the Department of Economic Affairs are generally placed before the Foreign Investment Promotion Board (FIPB) within 15 days of receipt.

Also, the Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance,

investor facilitation and receiving and processing all applications which require Government approval. It also notifies all Government Policy decisions relating to investment and technology and collects monthly production data for select industry groups