Contributed By Chadha & Co.
The dynamics of joint ventures can be influenced by various economic, political and social factors. Inflation, high interest rates and the resulting increase in cost of capital, and the risk of recession, have led to some companies deferring their expansion plans. Geopolitical events like the war in Ukraine have created some uncertainties and risks that have influenced investment decisions. These headwinds have been somewhat offset by the fact that global supply chains are being realigned post-COVID-19, with many companies implementing their “China Plus One” strategy.
India has created a policy environment to attract foreign investment in manufacturing by implementing a “Make in India” policy and offering attractive production-linked incentives in many sectors. Offsets are mandatory in some sectors, such as defence, necessitating FDI, often in joint ventures with domestic companies.
As per industry reports, the sector in India that has been most significantly impacted by high commodity prices, rising interest rates and the Russia-Ukraine war is the food sector, which has resulted in businesses adopting a cautious approach when forming joint ventures in the food sector.
One of the trends that emerged in 2022 is the concern raised by Russian companies regarding the direct and indirect impact of the sanctions imposed on Russia by the European Union, the United States, the United Kingdom and other countries, and the significant challenges they may face while engaging in international trade, including setting up wholly owned subsidiaries or forming joint ventures in India.
In the recent past, several industries in India have witnessed significant joint venture activity. With the Indian government's recent emphasis on increasing the indigenisation of complex technical processes and technologies, coupled with the goal of making India self-reliant, a growing number of technical collaborations are taking place between foreign and Indian entities in the form of joint venture companies or through various forms of technology transfer agreements. Sectors that require a high degree of technical skill and knowledge, are capital-intensive, or need strong local expertise, existing infrastructure or distribution networks are generally more active than other sectors; such sectors include automotive, defence manufacturing, renewable energy, infrastructure, oil and gas, information technology and business process outsourcing, and drugs and pharmaceuticals.
In India, joint ventures are typically established either as incorporated joint ventures or as unincorporated joint ventures. An incorporated joint venture, in the form of a private limited company or a public limited company, is the most commonly used structure for setting up a joint venture company in India, especially by companies engaged in manufacturing activities.
A joint venture through a limited liability partnership is not as frequently used in India, but they do find application in fields like professional services and businesses where personal liability protection is desired while maintaining flexibility in operations.
Unincorporated joint ventures are also not extensively prevalent in India, but they do serve specific purposes. These arrangements are well suited for short-term project-based collaborations, and are contractual in nature. The most common forms of unincorporated joint ventures in India are unregistered partnerships, strategic alliances, contractual joint ventures and consortiums. They are used where the parties share mutual business interests and intend to collaborate for a common commercial objective but prefer to remain loosely associated with the other parties.
The main advantages of an incorporated joint venture are that it:
However, some of the disadvantages are that the process of incorporating a company, including a joint venture company, involves compliance with legal and regulatory requirements, which may be complex and time-consuming. Furthermore, company incorporation involves costs such as registration and legal fees, and compliance costs.
Some of the key advantages of an unincorporated joint venture are that the formation costs and compliance requirements are generally lower compared to those of incorporated joint venture entities. In addition, the parties involved may have greater control over the management and operation of the joint venture. However, some of the major disadvantages are that it does not have a distinct legal entity separate from its participants, it accords unlimited personal liability to its shareholders and partners, and it cannot own assets in its name.
The factors or drivers that determine the selection of the appropriate joint venture vehicle are a combination of commercial considerations and regulatory requirements, including:
The primary regulators that play a role in overseeing and regulating joint ventures in India include the following.
Several statutes and regulations govern joint ventures in India, addressing various legal, regulatory and sector-specific aspects. The primary statutes and regulations that regulate joint ventures in India include the following.
As a member of the Financial Action Task Force (FATF), India is mandated to achieve the FATF’s objectives of combating money laundering and terror funding. Thus, India has put several anti-money laundering (AML) regulations in place to combat money laundering and terrorist financing activities, including the following.
In India, the laws and regulations do not typically impose any restrictions on joint venture partners seeking to collaborate. However, national security clearances are required in a few sectors, such as defence, civil aviation and broadcasting. Furthermore, at present, foreign direct investment into India and the formation of a joint venture with an entity from any country that shares a land border with India – China (including Hong Kong), Nepal, Pakistan, Bhutan, etc – require prior permission from the Indian government. This process involves multiple layers of security clearance due to national security concerns.
In India, matters concerning antitrust and competition are governed by the Competition Act and the rules and regulations made thereunder. The Competition Act, read with the Competition Commission of India (procedure in regard to the transaction of business relating to combinations) Regulations, 2011, mandates that all acquisitions of shares, voting rights, assets or control and mergers and amalgamations (combinations) that cross prescribed thresholds must be pre-notified to the Competition Commission of India for its approval prior to completion of the transaction. The applicable thresholds for this mandatory pre-notification are determined based on assets or turnover, both in India and abroad, and are as follows.
Furthermore, there exists a de minimis exemption, or a small target exemption, which excludes certain transactions from being classified as a combination under the Competition Act. Accordingly, enterprises that are parties to a combination where the value of assets being acquired, taken control of, merged or amalgamated is not more than INR3.5 billion in India, or where the turnover is not more than INR10 billion in India, are exempt from the pre-notification requirement under the Competition Act. The de minimis exemption is currently in effect until 28 March 2027. In general, the Competition Act prohibits combinations that cause, or are likely to cause, an appreciable adverse effect on competition within the relevant market in India; any such combination is considered void.
Under the guidelines outlined in the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI Regulations), every listed entity is mandated to make disclosures of any events or information that the board of directors of the listed company believe to be material. Joint venture agreements are deemed to be material events under the regulations. Therefore, if a joint venture partner is a listed entity, it is obliged to disclose the joint venture agreement to the relevant stock exchange where its shares are listed.
A joint venture entity in India is required to disclose and report its ultimate beneficial ownership under various applicable laws and regulations, particularly under the Companies Act and the PMLA, as applicable. Furthermore, as a member of the FATF, India is committed to achieving the FATF’s objectives, which include combating money laundering and terror funding, so joint venture entities in India are required to disclose their ultimate beneficial ownership. Specific rules have been framed under the Companies Act to govern significant beneficial ownership in an Indian company, namely the Companies (Significant Beneficial Owners) Rules, 2018 and its subsequent amendment in 2019. These rules define the concepts of “beneficial interest”, “significant beneficial owner” and “significant influence” in the context of companies.
Furthermore, the PMLA mandates banking companies, financial institutions, intermediaries and persons carrying on a designated business or profession to maintain records evidencing the identity of their clients, including joint venture companies in India, and the beneficial owners thereof. In turn, banks and financial institutions are obliged to report such information to the relevant government authorities upon the triggering of certain prescribed parameters. The joint ventures may need to make relevant disclosures to the reporting entities. SEBI and RBI also have their own respective sets of directives concerning the disclosure and KYC requirements for ultimate beneficial ownership of Indian entities.
The Indian government's continued efforts to liberalise various sectors, combined with the proposed privatisation of certain public sector undertakings, directly impact the possibility of joint venture activities in India. This paves the way for foreign entities to attain a higher level of ownership in Indian companies across various industries, particularly in cases where there is a possibility of accessing new technology. The flagship “Make in India” scheme and an emphasis on making India self-reliant have given a further push to localisation and domestic production.
As a result, there is a growing inclination towards the localisation of industries in India for both the domestic market and the global supply chain, leading to a rising trend in establishing joint ventures within the country.
Furthermore, the Supreme Court of India has recently upheld an arbitral award delivered by an emergency arbitrator under the arbitration rules of Singapore, thereby sanctifying the concept of emergency arbitration in India, giving recognition to such an award under India’s arbitration laws and reaffirming the parties’ autonomy in arbitration proceedings. In the context of joint ventures, particularly those involving an Indian partner, this judgment will greatly benefit foreign parties doing business in India through joint ventures as they will now be able to seek interim relief by way of an emergency arbitration before their selected arbitration forum without needing to approach local courts in India. This will contribute not only to ensuring better enforcement of agreements but also to expediting interim remedies.
However, the possibility of setting up a joint venture by any company or person from a country that shares a land border with India has been subjected to stricter regulations, owing to concerns related to national security.
During the negotiating stage of a joint venture, several key documents and provisions are generally used to facilitate discussions, ensure confidentiality and outline the basic terms and conditions. In the pre-joint venture stage, the parties typically consider the following basic documents and market standard provisions.
Basic Documents
Market Standard Provisions
The parties should:
These documents and provisions can vary depending on the nature and complexity of the joint venture. In addition, at the pre-joint venture stage, most of the terms and conditions are typically non-binding, subject to further negotiation and contingent on the successful completion of the due diligence process and the signing of a formal, definitive joint venture agreement.
The SEBI Regulations require every listed entity to disclose events or information that the board of directors believe to be material. These disclosures must be made within 24 hours of the occurrence of the event or information.
Joint venture agreements are considered material events as per the SEBI Regulations. Therefore, if a joint venture partner is a listed entity, it must disclose the joint venture agreement and the material terms thereof to the relevant stock exchange where its shares are listed.
Furthermore, the Indian competition laws mandate that all forms of domestic and international acquisitions and mergers resulting from joint venture arrangements that exceed jurisdictional prescribed thresholds must receive prior approval from the Competition Commission of India before the transaction is completed.
Joint ventures in India are typically formed as incorporated joint ventures or unincorporated joint ventures. An incorporated joint venture is typically set up by incorporating a company in the form of a private limited company or public limited company under the Companies Act, or a limited liability partnership under the Limited Liability Partnership Act, 2008. It can be established by setting up a new entity or investing in an existing entity as per the modalities agreed upon between the parties. The memorandum and articles of association are essential documents that are required to be filed for the purpose of registering such entities.
Unincorporated joint ventures are contractual in nature; the most common ones include unregistered partnerships, strategic alliances, contractual joint ventures and consortiums.
Documenting the terms of a joint venture is essential for establishing a clear understanding between the parties involved and governing the relationship effectively. The documentation process may vary depending on the form of the joint venture vehicle chosen, such as an incorporated company, a limited liability partnership (LLP), an unincorporated partnership or a contractual joint venture.
In the case of an incorporated company, the terms are generally recorded in a joint venture agreement or a shareholders’ agreement. Said terms are also incorporated into the articles of association of the joint venture company. In the case of an LLP, the terms would be recorded in the LLP agreement. For an unincorporated partnership, the terms would be recorded in a deed of partnership, and in the case of a contractual joint venture, the terms would be typically recorded in a collaboration agreement, alliance agreement or consortium agreement.
However, regardless of the form of the joint venture vehicle, the main terms that a joint venture agreement would typically be expected to cover include:
The parties involved in a joint venture may deal with or exercise their control over the joint venture company’s decision-making at both the board and shareholder levels. Certain decisions are made by the board, while certain other decisions are made only with the approval of the shareholders (ie, the joint venture parties).
The decision-making process and the rights of the board members and shareholders in relation thereto are outlined in the Companies Act. Typically, said statutory rights require decision-making by a majority of the votes at the board level.
At the shareholder level, certain decisions require approval by an ordinary resolution (ie, by simple majority), and certain important matters require approval by a special resolution (ie, by approval of a three-quarters majority of the shareholders present and voting). However, the joint venture agreement between the parties and the constitution documents of the joint venture company may contain more stringent requirements for decision-making at the board level and at the shareholder level than is required under the Companies Act.
In India, joint venture entities are typically funded through capital infusions by the joint venture partners or by taking on debt. The capital in the company is infused by way of equity instruments, or debentures and preference shares that are compulsorily convertible into equity shares. Debt funding involves various sources, including loans from the joint venture partners, loans from banks and financial institutions in the form of term loans, working capital loans or project financing.
Indian joint venture entities can also secure loans from their foreign joint venture partners or foreign banks and financial institutions through external commercial borrowings (ECB), provided they adhere to the prescribed conditions, such as an all-in cost ceiling per annum, a minimum average maturity period, and the end use of the loan proceedings. The Indian authorised dealer bank of the joint venture entity is permitted to allow the creation of a charge on immovable assets, movable assets, financial securities and the issue of corporate or personal guarantees in favour of the overseas lender to secure the ECB to be raised by the Indian joint venture.
The joint venture agreement typically outlines the funding options available to the joint venture entity and establishes the priority for exploring or utilising such options.
It is also important to explicitly spell out the implications of future funding in the joint venture agreement, including provisions for addressing dilution and related matters.
Deadlock resolution provisions in joint venture agreements typically follow an escalation matrix with several successive steps. At first, the deadlock may be referred to the senior officers of the joint venture parties in order to find a commercially reasonable and amicable resolution within a specified timeframe. If the deadlock is not resolved within this timeframe, the parties may have the option to exercise their exit rights, such as put and call options and drag-along and tag-along rights, as may be outlined in their joint venture agreement. The parties are also given the right to resolve their deadlocks through the dispute resolution mechanisms agreed upon in the joint venture agreements. The sequence of exercising these rights for the purpose of resolving deadlocks is contingent on the choice of the joint venture party to achieve a particular commercial objective or their intention to continue their association with the other party involved.
Depending on the nature of the joint venture, the industry, the type of financing arrangements and the relationship between the parties involved, other agreements generally include:
Board structures in India are unitary in nature. Generally, there are two common ways to structure a board in the case of a joint venture entity:
Weighted voting rights for board members are not recognised under Indian law. Accordingly, all board members possess equal voting rights, each carrying a single vote. There is an exception for the chairman of the board, who may hold the right to cast a second vote if there are equal numbers of votes for and against any resolution. However, it is imperative for this provision to be explicitly mentioned in the joint venture agreement and the articles of association of the joint venture company.
Directors hold a fiduciary duty to consistently act in the best interests of the company, which includes joint venture companies. They must act in good faith at all times to promote the company’s objectives, and are obliged by law to avoid situations where they could gain an undue advantage at the company's expense.
In situations where a director is appointed by a specific joint venture participant, an obligation or duty towards that participant may arise due to their nomination. However, this duty must not override their fiduciary duty to the joint venture company itself. If faced with such a conflict, the director is duty-bound to take the decision that would be in the best interest of the company, failing which he or she would be in breach of their fiduciary duties.
Directors can delegate the following powers to a committee of directors, through a resolution:
Directors have a statutory obligation to avoid situations that give rise, or may give rise, to a conflict of interest, which means circumstances in which the directors have, or can have, a direct or indirect interest or duty that conflicts, or possibly may conflict, with the interests of the company. However, in practice, situations of conflict do occasionally arise, especially when a shareholder is involved in business transactions with the joint venture company. To address such conflicts, the Companies Act permits directors to recuse themselves from participating in meetings where such conflicted transactions or matters are proposed to be considered. Moreover, significant decisions may be reserved for approval by the shareholders, thereby eliminating any decision-making powers of the directors and preventing any potential conflict at the board level.
There are several key IP issues that should be considered at the time of entering into a joint venture and before setting up the joint venture entity. If a joint venture involves the transfer of technology or intellectual property, a separate technology transfer agreement may also be signed to detail the terms of the transfer, licensing or usage of technology or IP. The key IP issues to be addressed in a joint venture agreement/technology transfer agreement include the following.
IP rights are usually licensed to the joint venture entity by the joint venture parties, if necessary. In some cases, the IP may also be assigned to the joint venture entity. The terms and conditions of such licensing arrangements and assignments are subject to negotiation among the parties and can be commercially decided by them.
At present, there is no restriction on the payment of royalties by the Indian joint venture company to the foreign joint venture IP owners. The joint venture parties have the option to retain ownership rights to their background IP and license it to the joint venture entity.
Generally, when the joint venture comes to an end, the implications for the IP rights, including transferred IP, developed IP or foreground IP, are dealt with in the joint venture agreement itself. The parties may mutually agree on various options, such as a buyout of the IP from the joint venture entity, obtaining a licence for use, or a sale of the foreground IP to a third party and distribution of the proceeds.
ESG norms essentially require every company to be held accountable for the responsibility it has towards the environment as well as the people who comprise the entire ecosystem, whether as employees, customers or other stakeholders. It helps in identifying and mitigating potential risks related to environmental and social issues, which can have financial implications for companies. Adopting ESG best practices can enhance a company's reputation, attract customers and improve brand value. Therefore, both the joint venture participants and the joint venture entity should consider taking action and implementing measures in connection with ESG principles.
At present, in India, there is no codified and consolidated legal framework that governs ESG-related issues. However, a plethora of laws cover ESG-related matters that apply to the operations of corporate entities in India, including:
In addition, various other initiatives have been introduced by the Indian government in relation to ESG.
The Supreme Court of India has recently held that the statutory duty of a director to act in good faith is not limited to the company and its shareholders but also extends towards the environment.
Contractual or unincorporated joint ventures come to an end by way of termination of the joint venture agreement, followed by the distribution of assets and remaining liabilities of the joint venture company. The terms outlined in the joint venture agreement play a pivotal role in determining the closure of the joint venture.
For incorporated joint ventures, including an LLP, the approach to ending the joint venture generally rests with the parties involved, which have the discretion to decide the method for concluding the joint venture. This may involve either winding up the joint venture entity or transferring ownership of one party to another.
The general matters dealt with on termination of the joint venture include:
Transferring assets between joint venture participants requires careful consideration to ensure fairness, compliance with legal and accounting standards, and the protection of each party's interests. There can be differences between assets originally contributed to the joint venture company (contributed assets) and assets generated or acquired by the joint venture company during its operations (owned assets). The key considerations for the transfer of contributed assets include the following:
For the transfer of joint venture-owned assets, apart from the above-mentioned key considerations, other key considerations include:
The specific considerations and differences between transferring contributed assets and owned assets of the joint venture company will depend on the individual circumstances of the joint venture and the terms set forth in the joint venture agreement.
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