Entry India - Joint Venture by Foreign Company

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

  1. Reduce the burden of investment:

 

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.

 

  1. Sharing Liabilities:

 

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.

 

  1. Technical expertise and know-how

 

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.

 

 

 

 

 

 

 

  1. New market penetration:

 

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.

 

  1. Barriers to competition

 

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:

Incorporated form

  1. Body Corporate
  2. Limited liability partnership

 

Unincorporated form

  1. Partnership
  2. Cooperation/Agreement/strategic Alliances

 

  1. BODY CORPORATE

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:

  1. JVA / shareholders’ agreement.
  2. Other agreements such as trade mark, licenses etc.
  3. Memorandum of association and Article of Association.

Note: Additional procedure for incorporation of Company need to be follow as per Companies Act, 2013

 

 

 

 

 

 

STEPS FOR INCORPORATION OF COMPANY

  1. Acquire DSC for Directors and Subscribers of Company
  2. Obtain Director Identification Number (DIN) for Directors.
  3. Reserve the name of the Proposed Company. Applicant files through RUN to ascertain the availability and register the name of the Company (two names are allowed to file in order preference)

     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.”

  1. Application for Certificate of Incorporation with following attachments as:
  • Memorandum of Association
  • Article of Association
  • Consent of Directors
  • Declaration of Directors/ Subscribers.
  • Resident and Identity proof Directors/ Subscribers.

 

                  FOREIGN DIRECT INVESTMENT COMPLIANCES

  1. All foreign investments are freely reparable except for the cases where NRIs choose to invest specifically under non-repatriable schemes.
  2.  Fresh issue of shares: Price of fresh shares issued to persons resident outside India under the FDI Scheme, shall be :
  • On the basis of SEBI guidelines in case of listed companies.
  • Not less than fair value of shares determined by a SEBI registered Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF) in case of unlisted companies.
  1.  However, where non-residents (including NRIs) are making investments in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to its Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme.
  2. Mode of Payment: An Indian company issuing shares to a person resident outside India shall receive the amount of consideration required to be paid for such shares by:
  • Inward remittance through normal banking channels.
  •  Debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.
  • conversion of royalty / lump sum / technical knowhow fee due for payment /import of capital goods by units in SEZ or company, shall be treated as consideration for issue of shares.
  • Conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of govt.
  • debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

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.

  1. The capital instrument has to be issued by the Indian company within sixty days from the date of receipt of the consideration

 

  1.  Transfer of shares by a Person resident outside India

                       

1

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

2

NRI to NRI

NRIs may transfer by way of sale or gift the shares held by them to another NRI.

 

3

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.

 

  1. Bank can allow the remittance of sale proceeds of a security to the seller of shares resident outside India.

 

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.

 

  1. AD banks have been given general permission to open and maintain non-interest bearing Escrow account in Indian Rupees in India on behalf of residents and non-residents, towards payment of share purchase consideration to facilitate FDI transactions relating to transfer of shares.

 

  1. LIMITED LIABILITY PARTNERSHIP

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:

  1. Limited Liability Partnership Agreement
  2. Other agreements such as trade mark, licenses etc.

 

          STEPS FOR THE INCORPORATION OF LLP

  1. Acquire DSC for Designated Partners.
  2. Obtain Designated Partner Identification Number (DPIN) of Designated Partners.
  3. Reserve the name of the LLP. Applicant files through RUN to ascertain the availability and register the name of the LLP. Once the Ministry approves the name,

     Note: Reserves name is valid for a period of 90 days and after that it will be available for others.

  1. Incorporation of a new LLP. Applicant files LLP E-form- Fillip which contains the details of the proposed LLP along with details of the partners and designated partners.

             Note: There must be at least two designated partners.

  1. Consent of the partners and designated partners to act in the said role.
  2. File the LLP Agreement with the Registrar within 30 days of incorporation of the LLP. Applicant files e-Form 3.

 

On obtaining approval of the LLP Agreement, the process of Incorporation of LLP is complete.

              FOREIGN DIRECT INVESTMENT NORMS

  1. A person resident outside India or an entity incorporated outside India (other than a citizen of Pakistan or Bangladesh) not being a Foreign Portfolio Investor (FPI) or a Foreign Venture Capital Investor (FVCI), is permitted to contribute to the capital of an LLP operating in activities where foreign investment up to 100 percent is permitted under automatic route and there are no FDI linked performance conditions.
  2. A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm in India on non-repatriation basis.
  3. Investments with repatriation option: For availing repatriation option, NRIs/PIO may seek prior permission of Reserve Bank for investment in partnership firms. The application will be decided in consultation with the Government of India
  4. Investment by way of ‘profit share’ will fall under the category of reinvestment of earnings.
  5. Investment in an LLP is subject to the conditions prescribed in the Limited Liability Partnership Act, 2008.
  6. A company having foreign investment, engaged in a sector where foreign investment up to 100 percent is permitted under the automatic route and there are no FDI linked performance conditions, can be converted into an LLP under the automatic route.
  7. Mode of payment:-  Payment by an investor towards capital contribution of an LLP should be made by way of an inward remittance through banking channels or out of funds held in NRE or FCNR(B) account maintained in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016.
  8. Remittance of disinvestment proceeds:- The disinvestment proceeds can be remitted outside India or may be credited to NRE or FCNR(B) account of the person concerned.
  9. Requirement of resident director need to fulfill as per Section 7(1) of the LLP Act, 2008.

 

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.

 

  1. PARTNERSHIP FIRM

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:

  1. Partnership Agreement
  2. Other agreements such as trade mark, licenses etc.

          COMPLIANCES UNDER FOREIGN DIRECT INVESTMENT

  1. A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm in India on non-repatriation basis
  2. Investments with repatriation option: For availing repatriation option, NRIs/PIO may seek prior permission of Reserve Bank for investment in partnership firms. The application will be decided in consultation with the Government of India          
  3. Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks.
  4.  Amount invested shall not be eligible for repatriation outside India.
  5. Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of Reserve Bank for making investment in the capital of a firm. The application will be decided in consultation with the Government of India.

 

  1. CO-OPERATION AGREEMENTS/STRATEGIC ALLIANCES

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:

  1. Cooperation Agreement.
  2. Other agreements such as trade mark, licenses etc.

 

 

 

FOREIGN DIRECT INVESTMENT NORMS

  1. A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm in India on non-repatriation basis
  2. Investments with repatriation option: For availing repatriation option, NRIs/PIO may seek prior permission of Reserve Bank for investment in partnership firms. The application will be decided in consultation with the Government of India.
  3. Other Requirements as per agreement and FEMA guidelines in respect of specific sector.

 

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

  1. Automatic Route/ Approval mode: Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or

 

Note: Here the investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances.

 

  1. Government Route/ Non-Approval mode: Under the Government Route, the foreign investor or the Indian company should obtain prior approval of Reserve bank of India.

 

List of activities or items containing under Government Route/ Non-Approval mode:

  • Banking
  • NBFC's Activities in Financial Services Sector
  • Civil Aviation
  • Petroleum Including Exploration/Refinery/Marketing
  • Venture Capital Fund and Venture Capital Company
  • Investing Companies in Infrastructure & Service Sector
  • Print Media
  • Broadcasting
  • Postal Services

 

 

 

 

 

 

 

 

 

 

  PROHIBITED ACTIVITIES

  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:

  1. Business of chit fund
  2. Nidhi company
  3. Agricultural or plantation activities
  4. Real estate business, or construction of farm houses
  5. Trading in Transferable Development Rights (TDRs).
  6. Lottery Business including Government/ private lottery, online lotteries, etc
  7. Gambling and Betting including casinos etc.
  8. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
  9.  (I) Atomic energy and (II) Railway operations