Joint Venture is regarded as collaboration between two or more entities working together for a common goal. Joint Venture commonly called as JV is the most effective and efficient way for foreign companies to setup business in India. Setting up Joint Venture in India can be done by entering into a JV agreement between Foreign Company and an Indian counterpart. Setting up of a Joint Venture comes under the ambit of Companies Act 2013 and other statutory laws applicable.
Setting up of Joint Venture demands necessary approval from the Reserve Bank of India or Foreign Investment Promotion Board if it includes Foreign Person (individual or non- individual).
Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required.
Types of JV’s in India
The most common types of joint venture companies are:-[a] Two parties (individuals or companies), one of them non-resident or both residents , 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.[B] Alternately, the above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.[C] 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.
Approvals for Setting Joint Venture In India
Joint ventures in India require government approvals either from RBI or FIPB.
- Reserve Bank of India (RBI) – If JV is covered under the Automatic Approval Route.
Foreign Investment Promotion Board (FIPB) – If JV is not covered under the Automatic Approval Route. The FIPB works under the Ministry of Finance and approves foreign investments as well as provides appropriate institutional arrangements, transparent procedures and guidelines for FDI promotion.
Procedure to setup a JV in India
Joint Ventures are domestic companies and are regulated under Companies Act, 2013. A JV can be a private or a public company having separate legal entity. The success of the Joint venture majorly depends upon the goodwill of the partner and their experience.
After selection of the partner a MOU is signed between the parties to the transaction highlighting the terms and conditions of the future agreement. The Joint Venture Agreement is subjected to obtain all necessary approvals like RBI or FIPB or SEBI (If listed), or any sectoral regulators and licenses within specified period of time.
Joint venture agreement shall specifically mention the time period of the validity of the JV or the purpose of the collaboration of the JV.
Agreements shall clearly mention following key items for successful implementation of the JV:-
- Name of the JV Company
- Nature of the Company
- Board of Directors of the JV
- Place of Business in India
- Authorized person in India
- Capital outlay of the company
- Person responsible for taking necessary approvals from regulatory authorities in India
- Pre and Post Incorporation Compliances
- Authorized Person for handling the above compliances
Advantages of a Joint Venture
- The risk of forming a new venture is shared by all parties. For setting up a new business risk is always there in terms of long term existence. The risk is reduced as the activities can be expanded with smaller investments as compared to if financed independently.
- A small firm with a new product idea that involves high risk and requires large capital can form a joint venture with a large firm. The existence of the smaller firm is secured
- The parties can avail many tax benefits.
- A participating party’s expansion into foreign countries is facilitated by the local partner’s contribution in the form of specialized knowledge about local conditions which is a key for a successful joint venture.
Joint Venture is the most reliable and productive way to start a new business. For an entity that is seeking growth in a new country is the best possible way to enter in the market. It assures a reliable and effective way for the growth of the business and economy as a whole.
Scratch help our clients to achieve to provide complete solutions taking care
of the following aspects:
- Conduct a thorough partner search evaluating their strengths and weaknesses.
- Understand and establish collaboration between the partners.
- Walking through negotiations and valuations.
- Agreement Drafting.
- Structure the proposed entity through all statutory and legal compliances.
- Advisory Services.
- Exit Strategy.
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