Setting Up a Joint Venture in India

Joint venture companies are mainly the chosen form of corporate houses for doing business in India. There are no separate laws for joint ventures in India. The companies registered in India, even with up to 100 percent overseas equity, are considered the same as local companies. A JV may be with any of the business entities existing in India.

Entering into a JV in India

Choosing of a good home partner is the most important tool to the success of any joint venture. Once an associate is selected, normally a memorandum of understanding (MoU) or a letter of intent is signed by the parties stressing the foundation of the future joint venture agreement.

An MoU and a joint venture agreement must be marked after consulting a chartered accountants firm well versed in the Foreign Exchange Management Act, Indian Income Tax Act, Indian Companies Act, international laws and applicable Indian rules, regulations and procedures.

Terms and conditions should be properly assessed before signing the contract. Negotiations need an understanding of the cultural and legal background of the parties. The JV union should be a subject matter to obtaining all required governmental approvals and licenses within specified period.

Methods of joint ventures in India

With effect from August 05, 2013, this Scheme can be used by Resident individuals to set up Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) outside India for bonafide business activities within the limit of USD 125,000 subject to the terms & conditions stipulated in FEMA Notification No.263.

Pre-incorporation due diligence

• Overseas firms should conduct a formal due diligence process to evaluate the expectations and limitations of the Indian associate, to check the validity of the partners’ business operations, to review the validity of the documents produced by the prospective partners, and to evaluate any risk factors associated with the potential partners.

Management

• It is important to have the same opinion over the proposed management structure and to categorize which party has to organize early in the joint venture procedure. Superlatively, management constitution, control and safeguards should be agreed upon when preparing the memorandum of understanding.
• The structure of the board of directors of the company can be resolute by the joint venture agreement (JVA) and corresponding necessities can be made in the Articles of Association of the Company. Members to the JV can choose on the matters such as total number of directors, number of directors to signify parties to the JVA, appointment of managing director, chairman.
• Therefore necessities can be made in the Articles of Association of the Company. It is universal to provide in the JVA, that every resolution of the board linking to particular matters shall involve confirmatory vote of a mainstream comprising of at least one director each representing the partners in the JV.

Tax consideration

• Foreign firms should reach out to tax advice at the beginning of an Indian investment. India has a very low entry for creating a taxable presence. The sale of shares in an Indian company is usually taxed in India as capital gains, even if the seller is not a resident of India. India taxes such capital gains at high, variable rates of taxation ranging from zero to around 30 percent. Therefore, overseas entities are generally advised to invest through offshore jurisdiction. India has tax treaties with Mauritius, Cypress, the UAE, Singapore, and the Netherlands.

Intellectual property rights

• India functions with a system of listing for IPR and is a participant to various international IPR treaties. The perception remains, however, that India is a high-risk area for IPR shoplifting. A foreign investor should carry out an inspection to recognize what, if any, of its IPR will be uncovered to the Indian market, and then consider whether it is worth shielding.
• Processes that can be taken by an overseas investor to protect its IPR include registration and the making of detailed provision in the joint venture agreement. Independent documentation to the joint venture contract may also be executed, such as a name and logo license agreement (also known as a registered user agreement) with Indian organizations.

Royalty payments

• For the automatic route, RBI permits lump sum payments not exceeding US$2 million.
• Royalty payable is restricted to 5 percent for local sales and 8 percent for exports, without any constraint on the period of the royalty payments. The royalty limits are net of taxes and are calculated according to standard conditions. Imbursements are made through RBI.
• The royalty is measured on the source of the total ex-factory sale price of the product, except of excise duties, minus the cost of the average bought-out constituents and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.
• Issues of equity shares against lump sum fees and royalty fees is allowed. For over and above this norm, the firm has to go to FPBI.

Profit repatriation

• India allows free of charge repatriation of profits once the entire domestic and central (tax) liabilities are met. Historically, there has never been an occurrence that India has failed to provide foreign exchange for repatriation. Investment exit processes are also fairly simple, and profits can be repatriated once all the tax debt and other compulsions are fulfilled. Troubles only arise when people escape or dodge the already simple rules, or do so out of ignorance.

Removal of the condition of prior approval in case of existing joint ventures/technical collaborations in the same field

• The government of India, in an updated foreign direct investment policy, stated it would simplify joint venture norms and open up of new areas for overseas funds.
• In a milestone decision, the government of India has eased regulations for investment by foreign companies that are present in India through JV or technical collaboration.
• Now, overseas companies will not have to seek a no-objection certificate from the Indian associate for investing in the sector where the joint ventures operate. These changes are part of the consolidated FDI policy (3rd revision). The restructured policy permits overseas firms in existing joint ventures to function independently in the same business segment. Previously, they needed prior approval from their Indian partners.
• According to the updated policy the commerce and industry ministry released, companies have now been grouped into only two categories — companies owned or controlled by foreign investors and companies owned and controlled by Indian residents. Elimination of this condition would give more confidence to investors who were strangulated by their partners.

Human resource

• Agreement of employment for employees is generally governed by the Indian Contracts Act, which is fundamentally a codification of English contract law. The hiring and firing of staff is therefore normally subject to the terms of the contract rather than any inflexible employment act.
• Many overseas investors have their customary service contracts amended to the degree that it is needed to obey the rules with Indian law or cultural norms, such as the provision of “casual leave” or more reimbursement in kind rather than cash. A parallel way can be adopted when drafting employee handbooks for Indian company.
• In order to generate a win-win scenario for both Indians and foreign investors, the JV is a good tool to venture into a business opportunity. It is also important to say that lot depends on the communal trust and confidence. Complying with the suitable measures and avoiding communication gap are quite vital to the accomplishment of any JV.

Exit strategy

• Joint ventures in India are normally planned for a particular period, and overseas companies should take the length of such a lifespan acutely. Indian JVs often fall short because the domestic associates are not capable to fund enough resources to expand the business as rapidly as the foreign company had hoped for or because the local partners have a data advantage in terms of the local conditions of doing business and have different interests from the foreign firms. Though it might be contradictory to instincts, it is absolutely mandatory to determine the planned timing of the exit from the joint venture at the beginning. The general exit options are: buy-sell agreements, unilateral sale rights, and, put/call rights. On the other hand, the Indian joint venture agreement may also provide for the termination of operations and the liquidation and closure of the venture. Any of those options can be used independently or in combination with each other.

FDI up to 100 per cent is permitted for venture capital activities subject to capitalization norms. Registered Foreign Venture Capital Investors are allowed to invest in domestic venture capital undertaking or in a venture capital fund through the automatic route, subject only to SEBI regulations and sector specific caps on FDI.

Foreign Direct Investment (FDI) is permitted under the following forms of investments:

• Through financial collaborations
• Through joint ventures and technical collaborations
• Through capital markets via Euro issues
• Through private placements or preferential allotments.

• Where the law of the host country does not mandatorily require auditing of the books of accounts of JV / WOS, the Annual Performance Report (APR) may be submitted by the Indian party based on the un-audited annual accounts of the JV / WOS provided:
• The Statutory Auditors of the Indian party certifies that ‘The un-audited annual accounts of the JV / WOS reflect the true and fair picture of the affairs of the JV / WOS’ and
• That the un-audited annual accounts of the JV / WOS has been adopted and ratified by the Board of the Indian party.

Delayed submission/ non-submission of APRs entail penal measures, as prescribed under FEMA 1999, against the defaulting Indian Party:

• An annual return on Foreign Liabilities and Assets (FLA) is also required to be submitted directly by all the Indian companies which have received FDI (foreign direct investment) and/or made FDI abroad (i.e. overseas investment) in the previous year(s) including the current year i.e. who holds foreign Assets or Liabilities in their Balance Sheets.
• FLA return is mandatory under FEMA 1999 and companies are required to submit the same based on audited/ unaudited account by July 15 every year.
• If the Partnership firms, Branches or Trustees have any outward FDI outstanding as of end-March of the reporting year, then they are required to send a request mailto: surveyfla@rbi.org.in to get a dummy CIN number which will enable them to file the Excel based FLA Return. If any entity has already got the dummy CIN number from the previous survey, they should use the same CIN number in the current survey also. (Therefore Return of Foreign Assets and Liabilities is also mandatory for Registered Partnership Firms and trustees etc. also).

Following are recent joint ventures in India

• Nissan Motors signed a JV deal to make commercial vehicles, engine and components in India. Ashok Leyland Nissan vehicles, the 50:50 JV between ALL and Nissan Motors, has unveiled its first light commercial product, Ashok Leyland Dost. The 1.25 ton payload capacity vehicle is to hit the market in the second quarter of 2011-12.
• Volvo is investing US$375 million for a joint venture with Eicher Motors, the third-largest commercial vehicle manufacturer in India.
• The world’s largest retailer, Wal-Mart, entered into a 50:50 joint venture with Bharti Enterprises for the wholesale cash-and-carry business in India that will roll out 10-15 such outlets over seven years. This also covers a supply chain and back-end logistics.