When two parties share the capital contributions and work towards a mutual goal, they form a Joint Venture. It is a written agreement between parties where they share profits and assets, as they also have privileges and control over the company.
India began economic liberalization in 1993 by permitting foreign direct investment (FDI) and its policies. It helped build the market and economy as many foreign companies wanted to invest and discover the Indian market and its laws.
It was a big step towards benefitting the global economy as the type of agreementwas all the rage as foreign companies started investing with utmost cooperation and involvement. In this blog, we will know what a Joint Venture is.
What is FDI?
Generally speaking, FDI or foreign direct investment is an investment that is made by a company that is not situated in India but wants to form an agreement or work with the vibrant Indian e-commerce market and its unlisted companies to attain gains and assets by capital contribution.
What is a Joint Venture?
When two or more parties or companies come together to work towards a mutual economic goal of maximizing profit and creating synergy, they agree on Joint ventures and act accordingly as mutual merit for each other. They contribute capital mutually and share profits/losses in an agreed percentage.
After knowing what a Joint Venture is, let know all the characteristics of a Joint Venture.
- It can be of a similar industry or a different one depending on the need and agreement. They widen a competitive frame for other industries.
- The parties who enter into a Joint Venture type of business are known as co-venturers who contribute capital and share profits/losses while having limited liability.
- It can be a private, public or foreign company. Several companies in India have started usingJoint ventures since its introduction in 1993. They enter into Joint Ventures with a variety of foreign industries that have the upper hand on the global market as they are widespread.
- It helps create attractive business opportunities and recognition, and parties should seek legal advice before commencing business outside their country to stay alert about any risks involved.
Some of the major Joint Venture companies in India belong mostly to the banking, commercial transport, and insurance sectors. An example of a Joint Venture company is ICICI Prudential Life Insurance company, HDFC life, Max Life Insurance, etc.
Types of Joint Venture Companies
There are two types of Joint ventures. They are:
- Equity-based Joint Venture company: When the parties establish a new legal entity with the mutual consent agreement, it is known as an equity-based Joint Venture where they share the profit/loss and take part in the management. Example: Vistara, Air Asia, India, etc.
- Contractual Joint Venture: In this type of Joint Venture, the parties do not establish a new entity or company but rather work individually without claiming ownership. This practice is most common in India. Examples are Brahmos aerospace, PNB Metlife, and ICICI Lombard.
The Characteristics of a Joint Venture Company
- To form a Joint Venture, the contribution of two or more parties/companies is required.
- The parties sign an agreement to accomplish a particular project or venture as they contribute capital mutually.
- There is no particular name for a Joint Venture business as they are shared by two or more companies.
- The type of Joint Venture agreement is temporary and ends when the project is completed, and the desired goal is reached.
- There is a predetermined ratio for sharing profits and losses in Joint Venture companies, and it is shared equally if no such ratio is present or decided upon.
- The parties or the co-venturers can work for the shared company and continue working for their own company, too, unless it is specifically mentioned in an agreement that the parties will have to act only for the Joint Venture for a specified period.
- The parties can hire a business lawyer to help mitigate any issues regarding the process and commencement of a Joint Venture form of business.
Some Essential Clauses Mentioned in a Joint Venture
The key to success in a Joint Venture business is the selection of a proper partner is very necessary, and personal interviews should be applied with appropriate diligence. An MOU is formed and can be reviewed by a business lawyer for correct drafting, which forms the base fundamental of the agreement where the parties mutually decide the terms and conditions. The important clauses which are mentioned are:
- Shareholding proportion.
- Transferability and nature of shares involved.
- Formation of BOD, chairman, the management team, and choosing the CEO/BD.
- The policy regarding dividends and funding.
- Confidentiality and indemnity clause.
- Termination clause.
- Anti-compete and dispute resolution.
- Assignment and applicable laws.
The laws governing a Joint Venture Company
There are no separate laws governing Joint Venture companies. The Partnership Act, 1932 governs the contract type of Joint Venture as it works similarly to a partnership where it is bound by a legal agreement.
Companies Act 2013 regulates the equity-based Joint Venture because of the formation of a nascent legal entity that is public or private according to the requirement of the companies.
Some other laws which are regulating the Joint Venture business are:
- Competition Act, 2002
- Foreign Trade Act, 1992
- Industrial Procedure Policy for Foreign Investment Contract Act
- Foreign Exchange Management Act
- SEBI Guidelines and Regulations, 1999
- Reserve Bank of India (RBI) Guidelines & Circulars
What joint venture has been discussed in the blog? The Joint Venture can help businesses expand and grow, but it has complex structures which can be solved with prompt and excellent communication and strategies between partners. The partners are recommended to take legal advice in case of any disputes or before the drafting procedure.