by teamrecIt will be a golden run for the Indian industry. The Growth rate of the Indian economy is projected to be near 8.5% for this coming year and it should remain the same way for at least next ten years to come. My belief is based on the simple theory of demand and supply which is growing everyday due to the up coming new economic and development plans of India Inc.
The Challenges… on the road ahead…
It’s the readiness of the Government which should decide not only the options given to investors, it will also decide the pace at which the market shall grow. There has been a delay in the implementation of GST and the import duties have also not been at par with the global economies. These factors delay the decision making of the investors in due course. The registration formalities and clearances have been an area of pain due to the many window clearances required. Some states like Gujarat, Himachal, and Haryana have successfully implemented single window clearances to set up industries and many benefits are given by the local government to lure the investors.
There will be many challenges for the investors in fulfilling their dreams to come to India due to political scenario where the Indian government has not had a single party coming to power and the coalition government running the game for last twenty years. Hence, the decision making has been more of a compromise than a focused plan. The disinvestment programme has also been questioned time and time again and hence a certain doubts in the mind of investors as to what their fate would be in times to come. It’s a wait and watch game but the fact is that the door bell is ringing more than often and its just a matter of opening the doors to the world. India is witnessing a revolution in the context of liberalization as well as in globalization of the Indian economy and transacting business through Joint ventures set up with foreign partners across various industry sectors.
About Joint Ventures
Joint Venture companies are the most preferred form of corporate entities for doing Business in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. A Joint Venture may be any of the business entities available in India. To start a new joint venture in India, a joint venture company has to be formed. In case, one of the partners of the joint venture company is a non resident, approval of Reserve bank of India {RBI} will be required for acquiring shares of the company. The Joint Venture agreement must be conditional upon obtaining all necessary approvals/ consents/ licenses /permissions of appropriate agencies of Government of India like RBI/SIA etc within specified period. The company size, the holdings of the two parties, the role of the companies coming together the business model etc. has to be frozen.
It’s just an understanding of the needs of the market, and the individual strength which forces the joint ventures to come along and click. It works out fine when the two parties involved, work with the strengths of an individual entity. One has to be reasonable in the negotiations and should be clear up front of their prime objectives. Nothing comes for free and every thing has a price and value. The correct evaluation of the deal helps us in cutting down long negotiations which ends up nowhere. The basis should be that it should be a win – win situation for both. The discussion has to be placed above knowledge and understanding .The understanding of cultures and sensitivity of companies comes a long way in resolving the matter when a situation of a dead locks.
Selection of a good local partner is the key to the success of any joint venture. Once a partner is selected generally a Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. A Memorandum of Understanding and a Joint Venture Agreement must be signed after consulting lawyers well versed in international laws and multi-jurisdictional laws and procedures.
A joint venture is a contractual business undertaking between two or more parties. It is similar to a business partnership, with one key difference: a partnership generally involves an ongoing, long-term business relationship, whereas a joint venture is based on a single business transaction. Individuals or companies choose to enter joint ventures in order to share strengths, minimize risks, and increase competitive advantages in the marketplace. Joint ventures can be distinct business units (a new business entity may be created for the joint venture) or collaborations between businesses. In a collaboration, for example, a high-technology firm may contract with a manufacturer to bring its idea for a product to market; the former provides the know-how, the latter the means.
Two parties, (individuals or companies), incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash. The above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business. Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash. Some practical aspects of formation of joint venture companies in India and the prerequisites which the parties should take into account are enumerated herein after. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office.
Government Approvals for Joint Ventures …
All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India is required. In other special cases, not covered under the automatic route, a special approval of FIPB is required.
Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country’s improved balance of payments position, this requirement may be eliminated.
The Checklist….
Before signing the joint venture agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties.
When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevention of any misunderstandings once the joint venture is up and running. A written agreement should cover the following points meticulously to implement it successfully:
- Structure of the company/ Board of Directors / CEO/MD / objective
- Financial contributions
- Intellectual property
- Applicable law
- Dispute resolution agreements
- Holding shares
- Transfer of shares
- Funding & Profit Sharing
- Dividend policy
- Force Majeure
- Important decisions with consent of partners
- Access
- Change of control
- Non-Compete
- Confidentiality
- Indemnity
- Assignment
- Break of deadlock
- Termination
The Benefits….
The benefits of a successful joint venture can offer are:
- Access to new markets and distribution networks
- Increased capacity
- Sharing of risks and costs with a partner
- Access to greater resources, that is, Specialized staff, technology and finance
I have been involved with a couple of joint venture discussions and negotiations myself and have come to a conclusion that it’s the need of the time and the requirement of the two parties involved to come together. Hence, my take for a successful JV: “None of the parties should believe that they are more superior or powerful in the venture.”
ABOUT THE AUTHOR
Mr. Mohit Agarwal is currently working as Head – Sales & Marketing with Dantal Hydraulics Pvt. Ltd. He has over 14+ years of Sales and Marketing experience in Hydraulic Industry.
An Engineering Graduate, he has played a key role in the rapid growth of Dantal Hydraulics and in achieving a very good market share.
He is a rare combination of Dynamic Leadership, Result Orientation, Hardcore Selling Skills, Client Servicing, CRM, with a Good Knowledge of Hydraulics Industry and a Rich Experience in Product Development & New Product Launch.
Mohit understands the market and is involved in International joint ventures to bring the latest technologies in India . He has been instrumental in negotiations with multinational corporations for distribution of products in India. He has been instrumental in all product launches of the company over the last thirteen years. He has exposure to international marketing & sales strategies and is adept at implementing them as per the Indian scenario.
