Joint Venture with Foreign Company (International Joint Venture)

Basic
1. Contractual Agreement: JVs are established by express contracts that consist of one
or more agreements involving two or more individuals or organizations and that are
entered into for a specific business purpose.
2. Specific Limited Purpose and Duration: IJVs are formed for a specific business
objective and can have a limited life span or be long-term. IJVs are frequently established
for a limited duration because (a) the complementary activities involve a limited amount
of assets; (b) the complementary assets have only a limited service life; and/or (c) the
complementary production activities will be of only limited efficacy.
3. Joint Property Interest - Each IJV participant contributes property, cash, or other
properties and organizational capital for the pursuit of a common and specific business
purpose. Thus, an IJV is not merely a contractual relationship, but rather the
contributions are made to a newly formed business enterprise, usually
a corporation, limited liability company, or partnership. As such, the participants acquire a
joint property interest in the assets and subject matter of the IJV.
4. Shared Profits, Losses, Management, and Control - The IJV participants share in the
specific and identifiable financial and intangible profits and losses, as well as in certain
elements of the management and control of the IJV.

Reasons for forming

1. Risk sharing – Risk sharing is a common reason to form a JV, particularly, in highly
capital intensive industries and in industries where the high costs of product development
equal a high likelihood of failure of any particular product.
2. Economies of scale – If an industry has high fixed costs, a JV with a larger company
can provide the economies of scale necessary to compete globally and can be an
effective way by which two companies can pool resources and achieve critical mass.
3. Market access – For companies that lack a basic understanding of customers and the
relationship / infrastructure to distribute their products to customers, forming a JV with the
right partner can provide instant access to established, efficient and effective distribution
channels and receptive customer bases. This is important to a company because
creating new distribution channels and identifying new customer bases can be extremely
difficult, time consuming and expensive activities.
4. Geographical constraints – When there is an attractive business opportunity in a
foreign market, partnering with a local company is attractive to a foreign company
because penetrating a foreign market can be difficult both because of a lack of
experience in such market and local barriers to foreign-owned or foreign-controlled
companies.
5. Funding constraints – When a company is confronted with high up-front development
costs, finding the right JV can provide necessary financing and credibility with third
parties.
6. Acquisition barriers – When a company wants to acquire another but cannot due to
cost, size, or geographical restrictions or legal barriers, teaming up with a company in a
JV is an attractive option. The JV is substantially less costly and thus less risky than
complete acquisitions, and is sometimes used as a first step to a complete acquisition
with the JV. Such an arrangement allows the purchaser the flexibility to cut its losses if
 the investment proves less fruitful than anticipated or to acquire the remainder of the
company under certain circumstances

Following points should be taken care

1. Applicable law;
2. Shareholding pattern;
3. Composition of board of directors;
4. Management committee;
5. Frequency of board meetings and its venue;
6. General meeting and its venue;
7. Composition of quorum for important decision at board meeting;
8. Transfer of shares;
9. Dividend policy;
10. Employment of funds in cash or kind;
11. Change of control;
12. Restriction/prohibition on assignment;
13. Non-compete parameters;
14. Confidentiality;
15. Indemnity;
16. Break of deadlock;
17. Jurisdiction for resolution of dispute; and,
18. Termination criteria and notice.

Types of JV in India
Equity joint venture

This is an understanding whereby an independent legal entity is created in accordance with the
agreement of two or more parties.

The associated parties undertake to provide money or other resources as their contribution to the
capital or assets of the corporate entity.

This structure is ideal for long-term, broad-based joint ventures, and include joint venture
companies and joint venture limited liability partnerships (LLPs).

Contractual joint venture

This type of joint venture might be used where the organization of a detached legal entity is not
needed or the creation of such a separate legal entity is not feasible.
This type of agreement is preferred in situations that involve a temporary task or a limited activity,
or the JV needs to be established for a limited term.

Choosing a business structure

Though a joint venture in the form of an incorporated company is the most popular recourse
among foreign investors in India, other types of JVs are also available:

Incorporated

 Company; or,
 Limited Liability Partnership.

Unincorporated

 Partnership; or,
 Cooperation agreement/strategic alliances.

In case of a company JV, the parties to the arrangement may either incorporate a new
companyor collaborate with the promoters of an existing company. Setting up a new
company provides the most flexibility as the entity can be structured according to the
specifications, intentions, and obligations of the associated parties.