NATURE OF AND REASONS FOR JOINT VENTURES

A joint venture may be defined for present purposes as any arrangement whereby two or
more parties co-operate in order to run a business or to achieve a commercial objective. This
co-operation may take various forms and may involve the running of a business on a long-
term basis or on the realisation of a particular project. The business may be entirely new, or it
may be an existing business, which it is believed will benefit from the introduction of a
further participant. A joint venture is, therefore, a highly flexible concept, and the nature of
any particular joint venture will depend to a very large extent on its own facts and on the
resources and wishes of the parties.

The reasons for establishing a joint venture may, for example, include the following:

 The parties may wish to use co-operation as a means of limiting the capital investment
required for a business or project and the exposure to risks; this is particularly the case
in joint venture businesses involving heavy expenditure on research and development
or which are set up to carry out major construction projects.
 Co-operation may be a way of reducing manufacturing costs or other overheads by
achieving economies of scale.
 The parties may have complementary skills or resources to contribute to the joint
venture; or the parties may have experience in different industries which it is hoped
will produce synergistic benefits.
 The involvement of a locally based party may be necessary or desirable in countries
where it is difficult for a foreign company to penetrate the market or where the local
law does not allow enterprises to be wholly owned by foreigners.

Although joint ventures vary greatly, three main types may be distinguished

1. Joint venture companies

A corporate vehicle is very commonly used as the means of setting up a joint venture ("JV")
which will continue for a long or indefinite period. It has the advantage of limited liability
and is backed by a well known structure of company law, which is also highly adaptable. A
foreign entity desirous of establishing a joint venture concern in India may do so in either of
the following ways:

a. Incorporating a separate Joint Venture Company (“JV Co”)

Here the parties to the JV would jointly incorporate a company under the Companies Act,
1956 ("CA") and would subscribe to the shares of such company in the agreed upon
proportions. The documents of incorporation, i.e. the Memorandum of Association (the
"MoA") and Articles of Association (the “AoA”) of the JV Co would be suitably drafted so
as to reflect the rights, intentions and obligations of the parties. This route is preferred since it
allows structural flexibility in terms of creating an entity, which is tailor made to suit the
specifications of both the parties.

b. Investing in the share capital of an existing company

In this scenario, the investor would buy into the share capital of an existing company. Such
company may be a subsidiary of the local JV partner or the JV partner itself. In order to
ensure that the intentions, rights and obligations of the parties are suitably reflected, the MoA
and AoA of the existing company would have to be amended in accordance with the JV
agreement and in the manner specified in the CA.

2. Partnership

A partnership is in many respects simpler and less public than a company, and may perhaps
be regarded as a halfway house between a corporate joint venture and a purely contractual
arrangement. 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. However,
there are practical difficulties in running any substantial business through a partnership,
where there is no corporate vehicle to hold assets and liabilities. A further major disincentive
to using a partnership is the unlimited liability which it involves. As a result, partnerships are
not normally used for major businesses except by professionals such as solicitors and
accountants or where there are specific tax advantages.

3. Unincorporated organizations (contractual arrangements)

A joint venture may be established by purely contractual means, without using any formal
legal structure or vehicle. Such arrangements, known as consortium agreements,
collaboration agreements, etc. are most commonly used where the parties wish to cooperate
for a limited period or for a limited purpose, such as submitting a joint bid for a construction
contract. Some of these come close to being true partnerships, but the parties normally seek
to avoid the joint and several liability for each other’s actions which a partnership would
involve by not formally establishing a joint business.

Characteristics of Joint Venture

1. Create Alliance: The joint venture is created to combine the features of two or more
companies. The company has a unique quality that other businesses usually lack.
2. Shared Risk and Rewards:  In a joint venture, two or more companies of two countries
come together. Companies have different cultures, technology, and ethics. Hence it
provides a chance to acquire each other characteristics and collectively share risks and
rewards.
3. No Separate Laws: No independent governing body governs the activities of the joint
venture. Besides, there are no separate laws for regulating joint ventures.

Advantages of Joint venture

1. Increased Resources and Capacity

By collaborating or teaming up, one can increase capacity and resources, which help joint
venture companies grow and expand more quickly and efficiently. Joint venture results in
the pooling of financial, physical, and human resources of two or more firms. With this,
companies take advantage of new opportunities and face new challenges in the market.
2. Economies of Scale:
In joint venture strength of one organization can be utilized by the other. It helps businesses
to expand despite their limited resources. In a joint venture, the businesses split operating
costs, labour costs, advertising, marketing, and promotion expenses. The organization can
reduce its cost and maximize its profits. This gives a competitive advantage to both
organizations to produce economies of scale. 
The cost of raw materials, labour, and technical workforce (CA, engineers, lawyers, or
scientists) is comparatively low in India. As a result, many foreign firms can get the benefit
of lower costs of production, getting products of the required quality and specifications by
entering into joint ventures with Indian companies. So, India is becoming an important
global source of different products and competitive in the market.
3. Innovation
Today’s market is demanding new and innovative products. Joint venture proves to be
useful in providing new and innovative products. It provides the benefits of updated
technology for goods and services. Advanced technology helps make high-quality goods at
low costs. Moreover, international partners in a joint venture often generate new ideas,
which can help to produce innovative products in our country. 
4. Gaining Access to New Markets and Distribution Networks
When a company forms a joint venture with the other, it unlocks a vast market with the
potential for growth and development. For example, when a firm from the United States of
America forms a joint venture with an Indian company, the joint venture gives the
American company access to a huge Indian market. It is simple for them to sell their
products in new areas after they have attained saturation in their original markets.
It also provides the benefit of an established distribution channel, i.e., retail outlets in the
domestic market. Otherwise, opening their retail shops may prove expensive. On the other
hand, the Indian company can access a diverse American market.
5. Brand Exposure
When two or more parties form a joint venture, the established brand name of one company
can be used by another organization to acquire a competitive gain over the other traders. It
saves a lot of investment in developing a brand name for the products as there is a ready
market waiting for the product to be launched. For example, if an Indian company enters
into a joint venture with a foreign company, the Indian company can get the benefit of
goodwill and the brand name of the foreign company in the market.
6. Access to Technology
Technology is one of the major reasons for most businesses to enter into a joint venture.
With advanced technology, high-quality goods can be produced that save time, energy, and
resources. It also adds to efficiency and effectiveness. When a joint venture is formed, one
can get access to the same technology as other businesses as there is no need to develop
own technology. Thus there is no need for further investment.
 
Disadvantages of Joint venture
The disadvantages of Joint Venture are:
1. Clash of Culture
A joint venture brings in people with different cultures to work together. Although it has
the potential to provide innovative solutions to the workplace, it has some drawbacks. Some
employees are not willing to compromise and resistant to change. As a result, there may be
cultural differences among the organizations.
2. Trade disclosure
In joint ventures, foreign firms agree with local firms and share trade secrets. Thus, there is
always a risk of trade secrets and technology being disclosed to others.
3. Conflict of Control  
In a joint venture, both parties share ownership and management. The dual ownership
arrangement results in conflicts, leading to a battle of control between the businesses.  
4. Lack of Coordination
The functioning of the business can be affected if there is a lack of coordination among the
partners.
In short, a joint venture makes business expansion possible. It is an easy way to approach
foreign markets. On the other hand, since the business is operated remotely, there is no
direct control or freedom in marketing activities, which may lead to losses.

Routes Available:

The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and
Industry has specified two routes for Foreign Direct investment in India i.e. Automatic Route
and Approval/Government Route. There are sectors wherein 100% FDI under automatic
route is not allowed and the Foreign investors cannot form wholly owned subsidiary in India.
Foreign Companies are interested in setting up a Joint venture company as both the parties
contribute equally in terms of their efforts, services and equity participation. It is not
necessary that both the JV partners will be participating in equity equally. It can be in
proportion as may be mutually decided by the parties to Joint Venture.

FDI Norms in relation to Joint Venture

In all sectors where 100% foreign investment is permitted under automatic route, the Foreign
Companies/ Body Corporate incorporated outside India can incorporate/ register Joint
Venture Company in India without any approval. In case of Defence Sector, the Joint Venture
Company can be incorporated and foreign investment permitted under automatic route is 49%
of the paid up capital and more than 49% of the paid up capital, the same is permitted under
Approval route. The Joint venture company in Insurance sector may apply for foreign
investment in Private Banking Sector with RBI in consultation with the IRDAI in order to
ensure that above mentioned limit of investment applicable for the insurance sector is not
breached.

Competition Law Implications

Section 6 of the Competition Act, 2002 makes void any combination which causes or is likely
to cause an appreciable adverse effect on competition within India and requires every
acquirer to notify the Competition Commission of India (“CCI”) of a combination and seek
its approval prior to effectuating the same unless such combination has been specifically
exempted (see Annexure A). The Competition Act requires that any acquisition of control,
shares or voting rights or assets of an enterprise by a person that crosses the financial
thresholds (see Annexure B) prescribed under the said Act needs to be notified to the CCI. In
the event of an existing company being converted into a joint venture either through
acquisition of shares or through subscription of fresh shares a filing will need to be made with
the CCI in the event that the prescribed thresholds are breached.

However, where a new joint venture entity is being set up, it would need to be seen whether
such a new entity would be considered to be an ‘enterprise’ within the meaning of this
provision.

Role of Regulators

Regulatory considerations play a very important role in any sort of joint venture, and
regulatory due diligence is becoming increasingly common in cross border transactions.

Institutional bodies regulating capital flows include the Reserve Bank of India (“RBI”), the
Securities and Exchange Board of India (“SEBI”), the Forward Markets Commission
(“FMC”), the Insurance Regulatory and Development Authority (“IRDA”), and the Pension
Fund Regulatory and Development Authority (“PFRDA”).

Within the Government of India, the Ministry of Finance houses the Department of Revenue,
the Department of Economic Affairs (“DEA”) and the Department of Financial Services. The
Department of Revenue hosts the Central Board of Direct Taxes (“CBDT”). DEA hosts the
Capital Markets Division while the Department of Financial Services deals with banks,
insurance and pension funds and their respective regulators. The Finance Minister heads the
Foreign Investment Promotion Board (“FIPB”) which approves foreign direct investment, on
a case by case basis, into the country. The Ministry of Commerce and Ministry of Finance
hosts the Department of Industrial Policy and Promotion (“DIPP”) which is responsible for
promulgating policy on foreign direct investment into the country. DIPP notifies the FDI
Policy, which sets out all laws and regulations relevant to foreign direct investment in India.

The RBI is given primary authority to regulate capital flows through the Foreign Exchange
Management Act (“FEMA”), 1999. Notably, Section 6 of FEMA authorizes the RBI to
manage foreign exchange transactions and capital flows in consultation with the Ministry of
Finance. The Banking Regulation Act, 1949, and the RBI Act, 1934 also provide the RBI
with supporting authority to regulate capital flows. The RBI articulates policy with regard to
capital account transactions through regulations, which must be placed before Parliament,
notifications, which require publication in the official gazette, circulars and clarifications.
The RBI also periodically publishes master circulars, compendiums of all communication by
the RBI, on a variety of subjects related to capital flows such as foreign investment, ECB
policy and trade credits.

Apart from financial regulators, sector specific regulators also pay an important role
particularly in which in sectors which are regulated (both from a foreign investment
perspective and from an industry regulation perspective). Examples of such regulated sectors
are media and telecommunications. Sometimes joint ventures are mandated because of
regulatory restrictions in foreign companies conducting business in India. For example,
licenses for providing telecom services in India may only be obtained by Indian companies
and foreign investment is such companies is restricted to 74% (with prior approval of the
FIPB). It is often seen that the actual closing of a joint venture transaction (i.e. the point when
investments actually take place) are made conditional on the successful procurement of
various such key regulatory approvals