By CA Manish Kaushik. 18 September 2020
Joint venture with foreign companies

Joint Venture refers to a type of joint alliance in which two or more firms collaborate together to create a new business enterprise for greater competitiveness and economic benefit. It reflects the optimism of two businesses who have come together to accomplish marketplace targets who, in their own individual capacities could be uneconomical and demanding.

India Joint Venture
Given the rapid growth of foreign economies, Multinational Joint Ventures have been fundamental to commercial goals. Joint ventures in India are becoming a conventional business model, as most foreign investment is made into joint venture agreements.

Under Indian law, a joint venture is regulated mainly by Indian Contract Act, Foreign Exchange Management Act, 1999 (FEMA), Foreign Direct Investment ( FDI), which also includes many areas of corporate law.

Joint venture organization options   Joint venture solutions are as follows:

  • Share-limited companies (public and private)
  • Guarantee-limited businesses (limited to the pledged sum)
  • Corporations have infinite liability (member's liability is infinite)

Joint Length and Intention
A joint venture duration depends on the parties' contractual terms. The Enterprise persists until a contract stipulates. But if an arrangement needs a specific duration, each side will cancel it at will.
If there is no express contractual term setting the length of the deal, there would have to be some proof of the parties' attempt over the period.

If there is nothing to indicate the parties' purpose about joint venture duration, the goal of the joint venture will be considered. The aim of a joint venture might be to complete a workpiece or produce a particular goal. The parties are assumed to maintain the arrangement until the purpose is done. 

 Joint Venture agreement can also continue in force until the object of the joint venture agreement is ascertained as not practicable. When a joint venture purchases land, builds, and sells a house in the property, the venture will not be over until the parties earn the benefit. It would only be done until the Partnership is properly wrapped up by paying all fees kept by the Joint Venture and issuing proper accounting to each participant in a joint venture. Thus, a venture is concluded at the expiry of the stated period, except for liquidation, accounting, and asset and liability settlement.  

Advantages of Joint Venture partner  

Finding a foreign party as a joint venture partner in India can be of great advantages as it offers a fast way to engage in complementary capital with the other side, share each other's strengths, enter new markets and diversify new companies.

Flexibility and adaptability
JV lets you enter into equity or contractual agreement. It may be initiated by adding a new company or beginning an entirely new company with an existing enterprise. Since JV is a temporary agreement that means you are not committed to long-term business, it offers an innovative route for companies to reach non-core business while retaining a simple escape choice.

The JV with a foreign partner allows foreign investors to access others' strengths in terms of developed market geographic expertise, infrastructure, product efficiency, technology, sales networks, availability of cheap services, labor costs, risk factors, etc.

Improved technology
As they are fitted with state-of-the-art technology that is already being tried and developed on the global market, an international party partner serves as a driving force for the Indian industry. It results in more economically produced and established goods without compromising quality levels to fulfill the increasing needs of modern enterprises.

Sharing liability
When both partners have offered to divide their obligations, each partner's burden/pressure of failure, expense, or benefit would be smaller. It allows them to gamble pursuing new alternatives even though higher returns are not comparable.

Increased capability
Development and revenues both grow due to the proliferation of new technologies and cheap labor. Tools are still available at cost-effective rates and can be used to improve returns. All required machinery and capital for your project can be easily made available. JV is a perfect way to reduce testing and development costs without reducing production efficiency.

Soaring high-performance rate  
It helps Indian companies to enter new foreign markets and distribution networks without regional barriers, gain insights and use each other's knowledge to achieve outstanding results.

Criteria of eligibility  
In some fields like telecommunications, medicines & pharmaceuticals, hotel & tourism or foreign investment ads up to 50%, 51% and/or 74% in the Joint Venture without RBI clearance.   Permission must be issued from either the International Investment Promotion Board ("FIPB") or the Secretariat for Industrial Permits ("SIA") for more than 74% of the overall shares in a joint venture corporation or a wholly-owned subsidiary (WOS). International companies not wishing to join an Indian partner can create liaison offices, branches, project offices, or WOS.

Due diligence
International firms pursuing business in India should perform due diligence checks and vice versa.       During due diligence analysis, the economic, legal, and regulatory aspects of the company are checked and reported. Identify whether the company faces any threats or issues.       Usually, due diligence is conducted on mergers and acquisitions, alliances, joint ventures, and IPO events. It should also be remembered that businesses in India must follow diverse legal and regulatory criteria, and the tax system can be difficult to manage. Therefore, due diligence is needed to ensure that the local company complies with all relevant laws and regulations and provides the international company with correct business details.

Through this due diligence process, Indian and foreign businesses gain access to all information, including the liabilities, assets, and the finances of the company. After the threats, obstacles, and future opportunities are established, both Indian and foreign companies will determine whether to enter the company.

Not only are private-sector joint ventures happening, but the government is still initiating to make the industry reliable. Joint projects are used across Indian markets but are more common in high-tech, high-capital, or high-tech skills industries. Any foreign party wishing to invest in a joint venture in India must comply with the Foreign Direct Investment (FDI), including the Foreign Exchange Management Act 1999 (FEMA).