Entry India - Joint Venture by Foreign Company
ESTABLISHMENT OF JOINT VENTURE
In making a decision to enter India, to benefit from the inherent advantages offered by an existing Indian partner in terms of market access, local knowledge or quick ramp-up, foreign investors can create a Joint Ventures with Indian businesses (hereinafter referred to as “JVs”)
MEANING OF JOINT VENTURE
According to the Notification No. FEMA 120/ RB-2004 issued on dated: July 7, 2004, Joint Venture (JVs) means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment;
As per literal terminology, Joint venture may be defined as any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective for the purpose of earning profit. It may be on a long-term basis involving the running of a business in perpetuity or on a limited basis.
BENEFITS OF JOINT VENTURE
Each party in the venture contributes a certain amount of initial capital to the project, depending upon the terms of the partnership arrangement, thus alleviating some of the financial burden placed on each company.
A JV also offers parties an opportunity to jointly manage the risks associated with new ventures. Through a JV they can limit their individual exposure by sharing the liabilities. When the liabilities and risks are shared the pressure on each individual partner is correspondingly reduced. It reduces the risks in a number of ways as the business activities of the JV can be expanded with smaller investment outlays than if financed independently.
Parties in a JV having a complementary skills or capabilities to contribute to the JV as they have experience in different industries which it is hoped will produce synergistic benefits. The basic reason of JV is the sharing of capabilities and expertise of both the partners on mutually agreed terms. Such sharing grants a competitive advantage to the JV partners over other players in the market.
A joint venture may enable foreign player to access the Indian market easily by enter a JV with Indian entity, as all relevant regulations and logistics are taken care of by the local player so With the formation of the joint venture, the companies are able to expand their product portfolio and market size at international level.
It is another factor due to which foreign party prefer JV rather than carry business independently In order to avoid competition and pricing pressure. Through collaboration with Indian companies, businesses can sometimes effectively erect barriers for competitors that make it difficult for them to penetrate the marketplace.
STRUCTURE OF JOINT VENTURE
There are four common structure that usually adopted such as:
The parties to the JV would create a joint venture company under the Companies Act, 2013 and would hold the shares of such company in an agreed proportion. This arrangement can also be termed as Equity/Corporate JV. It is a recognized medium which gives a status of independent legal identity to the JV and it will carry the business irrespective the change in its ownership. Basic documents need to be executed such as:
Note: Additional procedure for incorporation of Company need to be follow as per Companies Act, 2013
STEPS FOR INCORPORATION OF COMPANY
Note: Reserves name is valid for a period of 20 days and after that it will be available for others.
Note: There must be at least one resident director in company. Resident director means a director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.”
FOREIGN DIRECT INVESTMENT COMPLIANCES
Note: If the shares are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account the amount of consideration shall be refunded. However on an application to RBI, it can grant a further time after expiry of 180 days from the date of receipt.
Non Resident to Non-Resident
A person resident outside India (other than NRI and OCB) may transfer by way of sale or gift shares to any person resident outside India excluding oversea corporate body.
Transfer of shares to oversee corporate body would require prior approval of the Reserve Bank of India
NRI to NRI
NRIs may transfer by way of sale or gift the shares held by them to another NRI.
Non Resident to Resident(Sale / Gift)
(i) Gift: A person resident outside India can transfer any security to a person resident in India by way of gift.
(ii) Sale under private arrangement: General permission is also available for transfer of shares by way of sale under private arrangement by a person resident outside India to a person resident in India where the FEMA pricing guidelines are met.
Provided that security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.
It is another way of investment in JV by creating Limited Liability partnership registered under the Limited Liability Partnership Act, 2008 (“LLP Act”) LLP is a beneficial business vehicle as it provides the benefits of limited liability to its partners and allows its members the flexibility of organizing their internal structure as a partnership based on an agreement and simultaneously it has basic features of a corporation including separate legal identity. Basic documents need to be executed such as:
STEPS FOR THE INCORPORATION OF LLP
Note: Reserves name is valid for a period of 90 days and after that it will be available for others.
Note: There must be at least two designated partners.
On obtaining approval of the LLP Agreement, the process of Incorporation of LLP is complete.
FOREIGN DIRECT INVESTMENT NORMS
Note: Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India:
Provided that in case of a limited liability partnership in which all the partners are bodies corporate at least two individuals who are partners of such limited liability partnership shall act as designated partners.
"Resident in India" means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding one year.
It is other form to access the Indian market by making a partnership firm created under the Partnership Act, 1932, it is define as partnership represents a relationship between persons who have agreed to share the profits of business carried on by all or any of them acting for all. Here the registration under the partnership act is purely voluntary but in order to avoid future disputes it is suggested to register it. Moreover the establishment of partnership firm is easier as to simply execute a partnership deed among the parties under JV. However the JV has inherent disadvantages including unlimited liability, limited capital, no separate identity etc. Basic documents need to be executed such as:
COMPLIANCES UNDER FOREIGN DIRECT INVESTMENT
The most basic form of association is to conclude a purely contractual arrangement like a cooperation agreement or a strategic alliance wherein the parties agree to collaborate as independent contractors rather than shareholders in a company or partners in a legal partnership. This type of agreement is ideal where the parties intend not to be bound by the formality and permanence of a corporate vehicle. Such alliances are highly functional constructs that allow companies to acquire products, technology & working capital to increase production capacity and improve productivity and improve productivity. All rights and liability are manage according the cooperation agreement. Basic documents need to be executed such as:
FOREIGN DIRECT INVESTMENT NORMS
ADDITIONAL NORMS UNDER FOREIGN DIRECT INVESTMENT
In addition to basic requirement, parties must follow foreign direct Investment norms in which foreign entities can make an investment subject to approval or non-approval norms
Note: Here the investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances.
List of activities or items containing under Government Route/ Non-Approval mode:
Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not which is engaged or proposes to engage in the following activities4: