Treatment of Joint Ventures under Indian competition law

CHAPTERISATION:-

I. INTRODUCTION

II. THE PECULIAR AND COMPLEX PICTURE OF JOINT VENTURE

III. THE SCENARIO IN U.S AND OTHER JURISDICTION

IV. CONCLUSION
 CHAPTER I

INTRODUCTION

The phenomenon of fair competition in a free market is one of the stepping stone to a
healthy business environment. Competition is the existence of a rivalry in economic
perspective among players in a market that comes along with the fruits of production of high
quality goods or services and availability of appreciable amount of choices or options to the
customers. Such a healthy and competitive business environment has the capability of
bringing out the fullest economic growth potential to the national economy especially for
developing countries like India.

The Competition Act 2002 came into force on January 2003 and provided for the
establishment of the Competition Commission on October 2003 consisting of six members
appointed by the Centre and these six headed by a Chairperson. The main objectives of this
act are as follows

1. To anti-competitive practices that have adverse effect on competition in the market

2. To protect the interest of the consumers
3. To promote and sustain competition in the business environment
4. To ensure freedom of trade carried on by the players in the market

If the CCI founds any trade practices such as agreements of anti-competitive nature or
abuse of dominant position those which have an adverse effect on the competition in the
market it can pass a cease or desist order or an order imposing monetary penalty. Also the
Competition Act 2002, provides the confidentiality safeguard to enterprises acc. to sec 57
with the view that such information provided by the enterprise being commercially sensitive.
 CHAPTER III

THE PECULIAR AND COMPLEX PICTURE OF JOINT VENTURES

Joint ventures are business agreements engaged by individuals and corporations. To

be more specific these are temporary associations formed between two or more natural or
legal persons or organizations and such members not losing their independency. To be clearer
in a joint venture the companies enter into such agreement to pursue particular project. A
joint venture is different from that of arrangements like partnership, merger, where the nature
of such business arrangements is permanent. A joint venture is laid down by a joint venture
agreement. Is there is a joint venture a fiduciary relationship is thereby created. The
arrangement of joint venture also includes the concept of sharing profits and losses but that
doesn’t concur to the fact that it is a form of partnership. It is in joint venture wherein two
companies come together to carry out a specified task or business activity but in the case of
partnership a new combined venture is formed. Prior approval of the CCI is required along
with requisite filings under Combination Regulations for the creation of joint venture
involving asset transfer. The JV is for a specific period of time and such non-compete
restriction will prevail only till such Joint venture is valid. Any such post-termination
restrictions must be reasonable both in scope and duration (Niranjan Shankar Golikari v The
Century Spinning and Manufacturing Company Ltd1. and Gujarat Bottling Company Ltd. v
Coca Cola Company2). However, these non-compete provisions can be validly enforced even
after a member leaves the joint venture, if they are reasonable and not against public policy
(IP Holdings Asia Singapore (P) Ltd. v SEBI3)

For example: Ashok Leyland, Ashok Motors and Leyland Motors owed by (Hinduja
group), MAN Force MAN AG Germany and Force Motors (owned by Daimler) are joint
venture whereas Renault - Samsung TATA - JLR are subsidiaries and not joint ventures.

1
AIR 1967 SC 1098
2
AIR 1995 SC 2372
3
(2015) 2 SCC 68
 The subject matter of joint ventures can be encompassing all sorts of business
activities such as Sales, manufacturing, distribution, research and development, marketing
etc.

The section 3(1) of the Competition Act 2002 prohibits any enterprise or association
from entering into agreements that are susceptible to have appreciable adverse effect on
competition. The agreements are classified to horizontal and vertical ones based on their level
of operation. Arrangements those that are between enterprises operating at the same stage of
production are considered to be horizontal agreements and are considered to have adverse
effect on competition, whereas the vertical agreement being an arrangement between
enterprises operating at different level is not per-se anti-competitive.

However the Competition Act expressly excludes joint ventures from applicability of
this section provided such agreement is made with the view or purpose of increasing
efficiency in production, supply, distribution, storage and acquisition and so on. The concept
of joint venture was excluded with the view that it enhances pro-competitive practices and
promotes competition and efficiency in the market. But such business arrangements are also
prone to anti-competitive risks.

ADVANTAGES

Joint ventures provide advantages and benefits to the players in the market by
increasing efficiency in production and distribution thereby making the business grow faster
and creating good and fair competition amongst the players.

1. FINANCIAL ADVANTAGE

The significant boon of joint venture is the considerable reduction of financial burden as there
is respective contribution of capital by the participants as given by the JV agreement itself
(shared investment). Also the expenses are shared as the participants pool their resources
(shared expenditure).

2. TECHNICAL ADVANTAGE

The participants each of them possess enough scientific and technological resources that can
be shared amongst the participants helping each other progressing with great speed in the
market and get past technical impasse (sharing of scientific and technological knowledge).
3. ADVANTAGES IN THE MARKET OR ECONOMICAL SYSTEM

Erecting such joint ventures facilitates far more efficient and eased penetration in to the
market as the relevant regulations and procedures are carried out by the local player who is a
participant in the JV (new market penetration). Also it facilitates smaller participants
having compromised capital and resources to expand more by entering into a JV with a
relatively larger firm or participant (New revenue streams). They can also get synergy
benefits that are normally available in the case of mergers or acquisitions. It also helps in
gaining enough and appreciable amount of credibility in the market. New and small players
in the market don’t have enough reputation or credibility as it takes a significant amount of
tie to get such credibility, so they can enter into JV agreement with larger and credible
players in the market and thereby earning credibility for themselves (enhanced credibility).

4. ADVANTAGE IN INTELLECTUAL PROPERTY RIGHTS AND GAINS

Intellectual Properties have become an important asset in the commercial field. The expenses
paid while making use of such IPs or creating one can be reduced by entering into joint
venture agreements with firms that are having access to such IPs.

5. ECONOMIC GAINS

A bigger company having larger major or appreciable amount of share in the market is
obvious to have good revenue and economic gains with stable progress.

But not to forget, there are also risks offsetting up joint ventures

There may be new partners getting included in the JV who have a new set of objectives
and targets, in turn leading to miscommunication and minimal co-operation that may have
effect on the integrity and success of the firm. The consequences will be there will be
imbalance in the management and implementation of procedures and thereby leading to
individual attempt to attain their own agendas or objectives. When competitors collaborate
there is chance that their ability and intent to compete against each other gets compromised.
This might sometime lead to anti-competitive activities like

 Fixing of prices by the participants either directly or indirectly

 Competitors may end up dividing or allocating markets themselves
 Collusive tendering.
 CHAPTER III

THE SCENARIO IN U.S AND OTHER JURISDICTIONS

United States of America

In the United States, any Joint Venture that

 meets the criteria and specification of Section 7 of the Clayton Act

 Financial thresholds of HSR Act
 Notified to the FTC and DOJ for approval.

The JVs are usually analyzed according to the rule of reason, but can be considered subject to
violations per se under certain circumstances (Timken Roller v. United States 4 and Texcao v.
Dagher5).

GENERAL MOTORS –TOYOTA(FTC1984)

FACTS:

GM and Toyota production joint venture for new sub compact cars

ISSUE:

That GM would stop independent development of small cars and that JV would result in
exchanges of sensitive competitive information not required to achieve the JV’s benefits

BENEFITS:

Increased consumer choice of cars and reduced production costs to GM costs to GM

AGENCY RESPONSE:

JV permitted to proceed, but FTC order prohibited exchanges of information between the
parties regarding: –

1. The prices of cars or component parts produced by the JV that the parties would
market separately, than for the purpose of a supplier-customer relationship, and

4
341 U.S. 593 (1951)
5
547 U.S. 1 (2006)
 2. Sale or production forecasts, and costs for non-JV products

Boeing–Lockheed Martin (FTC 2007)

FACTS:
Boeing and Lockheed Martin formed a joint venture to combine the only two suppliers to the
U.S .government for heavy to medium launch services to put space vehicles into orbit. The
government purchased the space vehicles from three principal suppliers–Boeing, Lockheed
Martin and Northrop Grumman.

ISSUE:
The JV would create a monopoly, and that information exchanges would reduce competition
between the JV parties and other JV customers.

BENEFITS:
The DOD supported the JV as critical to national security.

AGENCY RESPONSE:
The FTC order required that in providing its services:
1. The JV not to provide preferential terms to Boeing and Lockheed Martin and
Northrop Grumman.
2. Limit information exchange of price, cost and proprietary information between
Boeing and Lockheed Martin and between each of these parties and the JV, unless
strictly necessary for JV success.
3. Information exchange limited to Boeing and Lockheed Martin personnel who were
not involved in competing with these suppliers for government programs.
4. JV must maintain separate information systems, appropriate firewalls and a separate
office location.
5. The JV also was required to design a compliance program and provide training to
ensure restrictions on information exchanges were observed.
The European Union

According to European Union

 A "fully functional" JV meeting requires financial thresholds and a trade union

dimension must be notified to EURMR6.
 "FULL FUNCTION JV" - a joint venture with a management dedicated to its daily
activities and access to sufficient resources, including finance, personnel and
resources (tangible and intangible) in order to conduct its activity on a lasting basis
activity, which is, operating independently on a market.
 After notification the joint venture would be inspected according to the SIEC test
(significant impediment to effective competition). This is a mere check for any anti-
competitive practices.

CHAPTER IV

CONCLUSION

Joint ventures are unequivocally capable of creating pro-competitive business

environments and competitive efficiencies in the economy, allowing participants to improve
production, distribution, marketing, purchasing, or Research & Development thereby
resulting in benefits to consumers. However it is significant that the authority should be alert
in curbing anti-competitive risks. Here are some of my suggestions while dealing with anti-
competitive issues in joint venture arrangements.

 Identification of any restraints on competition and test the business justifications

offered for them and thereby looking into the business reasons, whether such restraint
can be aided by less restrictive provisions.
 Ensuring that the legality and genuine nature of such joint venture is factual and such
one is intended to achieve one or more pro-competitive business objectives, and not
just a desperate attempt to dodge competition.

6
EC Merger Regulation, OJ L 24, 29.1.2004
 The industry or economy in which such joint venture is situated taken into note. The
antitrust regulators should have closer analysis or inspection to joint ventures that had
anti-competitive issues in the past.
 Avoid the appearance of concerted conduct against joint venture members’
competitors, particularly where the conduct protects joint venture members from
competition in their own markets without delivering a benefit to the joint venture’s
business.
 Appropriate antitrust compliance policies ought to be adopted for the joint venture,
such as including safeguards against members’ use of the joint venture for actions or
communications outside the joint venture’s scope.