MCA specified the meaning of joint venture as-“joint venture, would mean a joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement. The usage of the term is similar to that under the Accounting Standards.”
A 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. This co-operation may take various forms, such as equity-based or contractual Joint Ventures. It may be on a long-term basis involving the running of a business in perpetuity or on a limited basis involving the realization of a particular project. It may involve an entirely new business, or an existing business that is expected to significantly benefit from the introduction of the new participant. A Joint Venture is, therefore, a highly flexible concept. The nature of any particular Joint Venture will depend to a great extent on its own underlying facts and characteristics and on the resources and wishes of the involved parties. Overall, a Joint Venture may be summarized as a symbiotic business alliance between two or more companies whereby the complimentary resources of the partners are mutually shared and put to use. It is an effective business strategy for enhancing marketing, positioning and client acquisition which has stood the test of time. The alliance can be a formal contractual agreement or an informal understanding between the parties.
Global proliferation of business and commerce has given an international dimension to Joint Ventures. Corporate entities across the globe seek cross-border alliances to share the resources, opportunities and potential to deliver cutting edge performance. Such alliances are designed to suit the commercial requirements of parties and vary from a mere transitory arrangement for one partner to establish its presence in a new market to a calculated step towards a full merger of the technologies and capabilities of the partners.
In sectors where 100% FDI is not allowed in India, a joint venture is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market. All companies registered in India, even those with up to 100% overseas equity, are considered the same as local companies.
Corporate joint ventures are regulated by the Companies Act, 2013 and the Limited Liability Partnership Act, 2008.Corporate Joint Ventures will also be subject to the country’s tax laws, The Foreign Exchange Management Act of 1999, labor laws (such as Code on Wages Act, 2019, Industrial Disputes Act, 1947, and state-specific shops and establishment legislation), The Competition Act of 2002, and various industry-specific laws.
A Joint Venture may be formed with any of the business entities existing in India.
Among the terms that should be clearly defined from the outset are the timespan of the venture, performance norms, and governance processes. A joint venture board should be established and agreement reached as to the scale of investment required from each party. Whether the parties will extract surplus cash or reinvest it into the business, along with a potential exit strategy, are other significant considerations.
Successful JVs are founded on shared objectives. The partners’ risk/reward strategies must be aligned to ensure both derive value from the arrangement.
The strategic partnership, as well as the relationships between parties, are ongoing, rather than static, and need to be developed. Frequent communication is required to foster a feeling of belonging amongst employees on both sides.
Parties should be aware of potential differences in business culture and decision-making processes and deal with any issues that arise in a flexible manner.
Unlike a wholly owned subsidiary, a joint venture company offers a limited degree of control to both the entities. This is due to a very obvious reason that both, the Indian as well as the foreign company, have almost equal stake in a joint venture. Therefore, if a foreign entity is willing to reap the advantages like sharing of risks, easy entry into Indian markets, taking advantage of infrastructure set up, etc., rather than exercising full control of the new company, then setting up of a joint venture with an Indian company is best suited.
Every country has its own way of doing business. In a joint venture, two or more companies from different mindsets, social and cultural backgrounds come together for doing business. Indian company might fear complete acquisition by its foreign collaborator. On the other hand, foreign entity might be apprehensive about Indian entity before investing such a huge amount of capital. Thus, both the collaborators must be sure about their compatibility with each other and willing to sort out their differences for a smooth and profitable business ahead.
investment, or assets brought into the venture by the different parties may lead to problems between the two parties. One party or the other may begin to feel that it is contributing the lion’s share of resources to the project and resent a 50/50 distribution of profits. This can be avoided by frank discussions and clear communication during the formation of the joint venture, so that each party clearly understands – and readily accepts – its role in the JV.
Before entering into a joint venture with any Indian company, the foreign investor must understand what it shall gain from this joint venture. It must suit to the requirements of foreign entity. For example, if a foreign investor is ready to contribute in terms of capital, knowledge and skill and technology but lacks in setting up of infrastructure, manpower, access to Indian markets, then the proposed Indian collaborator must compensate for it
Transactions in a joint venture demand efficient and clear documentation. Depending upon the nature of the structure, definitive agreements would be drafted and executed, which will set out terms and conditions for both the partners. A few examples are, joint venture agreement, shareholder’s agreement, memorandum and articles of association or any other agreement for collaboration.
Joint ventures in India are used across sectors; however, they are more prevalent in high-technology, high-capital or high-technical skills sectors. Foreign investments can be made under the ‘automatic route’ (no prior approval from the government is required before investing) or the ‘approval route’ (prior approval of the government is mandatorily required). In an attempt to simplify the rules and regulations pertaining to the FDI regime in India, the Department of Industrial Policy and Promotion (DIPP) issues a consolidated FDI Policy annually, which subsumes all prior press notes, press releases and clarifications issued by the DIPP and reflects the current policy framework on FDI. Recently, the Foreign Investment Promotion Board, which was an inter-ministerial body responsible for processing FDI approvals and recommending government approvals, was abolished and replaced by the Foreign Investment Facilitation Portal (FIFP), which is administered by the DIPP. The FIFP serves as an online interface between foreign investors and the government of India and facilitates the approval and clearance of applications through a ‘single window’ system.
Joint venture parties working together to increase synergy, some of these joint ventures are governed by the rules prescribed under a particular statute and, generally, as prescribed by exchange-control laws
Investment into the joint venture can be made either in the form of common stock or preferred stock, or debt. Foreign investors are generally allowed to invest in common stock or preferred stock, and debt convertible into common stock. While return on debt by way of interest can be claimed as a tax-deductible expenditure by the Indian entity, any return by way of dividends payable to common or preferred stock holders would not be allowed as a tax-deductible expense. Note that conversion of compulsorily convertible preference shares and compulsorily convertible debentures into equity shares have been specifically exempted from tax. As per the provisions of the IT Act, if shares are received for a consideration lower than their fair market value (computed in accordance with prescribed method), then the difference between the fair market value of the security received by the shareholder
and price paid for the same could be chargeable to tax in the hands of the recipient under the heading ‘income from other sources’.
Further, if the transfer of unlisted securities is made at a value less than their fair market value, then the fair market value (computed in accordance with the prescribed method) of such securities may be deemed to be the full value of sale consideration and the transferor may accordingly be liable to pay capital gains tax as per the provisions of the IT Act.
Further, certain payments to residents and all payments to non-residents that are chargeable to income tax in India are subject to withholding tax obligations. Failure to withhold such tax may result in interest, penalty and fines as prescribed under the IT Act.
Sale or purchase of shares of the joint venture entities or infusion of capital into the joint venture entity would, however, be outside the ambit of goods and services tax (GST) legislation in India, as the same would amount to transfer of securities or money, as the case may be.
Foreign exchange regulations also restrict (or provide detailed procedures for) contribution of assets to the joint venture entity depending on the nature of entity, type of asset and the resident status of the entity or person contributing the asset. The contribution of assets classifiable as supply of goods or the supply of services to a joint venture entity by joint venture partners may be eligible to tax under the GST legislation in India. These restrictions and taxability of such transactions have to be analyzed case by case.
A Joint Venture is different from a company for the reason that a Joint Venture unlike a company is formed for a specific purpose or specific term, depending on the objective of such venture. Once the purpose or the term is complete the entity so formed under the Joint Venture agreement may come to an end. Joint Venture unlike a company is limited to a specific purpose or term, clearly defined by the parties. The following points should be kept in mind pre-incorporation of joint venture capital company-
Transferor | Transferee | Compliance, if any |
India Resident | India Resident | None, record of transfer on share certificate |
India Resident | Non-Resident | Filing of Form FC-TRS with the RBI |
Non-Resident | India Resident | Reporting requirements with the authorized dealer, subject to the restriction that the Indian Resident should not have any previous tie-up or venture in the same field |
Non-Resident | Non-Resident | None, intimation to RBI recommended |
Depending upon the nature of the JV structure, definitive agreements would be drafted.
A venture capital fund is a pooled investment scheme that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships.
The venture capital fund regulations by the Securities and Exchange Board of India are a comprehensive set of laws to be followed by the venture capital funds in India. From the registration of venture capital funds to the action to be taken in case of default, the regulation has been divided in VI chapters. Venture Capital Fund (VCF) is a form of fund established in the form of a trust or a company including a body corporate registered with SEBI that provides capital to early-stage or high-growth companies (start-ups). While VCF offers high level of risk associated with the investments, returns offered are also exponential in nature.
A company or trust (which functioned as a venture capital fund before the commencement of these regulations) shall cease to function as a venture capital fund if it does not apply to SEBI for registration within 3 months from the commencement of the regulations.
There are certain conditions which must be fulfilled before the certificate of registration is granted by SEBI:
The application for registration shall be complete in all respect. If SEBI discovers anything in the application that renders it incomplete, it shall give the applicant a time of thirty days to remove the loophole, failing which the application can be rejected by the board.
The regulation has applied a lot of condition and restriction to the amount of investment to be made in and by the venture capital fund in India.
An investment in the venture capital fund can be made by any person whether Indian, Foreigner or NRI, but no investment which is less than ₹ 5,00,000/- can be allowed in the venture capital fund. This however does not apply to investment made by the employees, directors or the principal officers of the company or by the trustee where the venture capital fund is a trust.
The investment strategy at the time of registration shall be disclosed by the venture capital fund. The venture capital fund shall also disclose the duration of its life cycle. Not more than 25% of the fund shall be invested in a single venture capital undertaking .Investment to be made in the following manner:
No venture capital fund shall get its units listed on any recognized stock exchange till the expiry of three years from the date when they were issued to the investors by the venture capital fund. The venture capital funds shall also not invite any member of the public by way of advertisement to subscribe to its units. The venture capital fund may receive investments only through private placements of its units.
Every venture capital fund shall issue a placement memorandum which contains all the terms and conditions, relating to the scheme, through which money is proposed to be raised from the investors. The venture capital fund may also enter into a subscription agreement with the investors which would specify the terms and conditions of the scheme through which money is proposed to be raised. The venture capital fund shall submit a copy of such placement memorandum or subscription agreement with SEBI along with the report of the money actually raised through such agreement or memorandum.
The placement memorandum or the subscription agreement shall have the following essential:
It shall contain the details of the trustee and the trust as well as the details of the directors and the principal officers of the venture capital fund. It shall also state the minimum amount of money to be raised to start the venture capital fund and the minimum share to be invested in every scheme of the venture capital funds. Tax implications which would be applied to the investors shall also be stated. The manner of subscription to the units of the fund, the period of maturity of the fund if any and the manner in which the fund would be wound up shall also be stated.
Every venture capital fund shall maintain a book of record for a period of eight years which would generate the true picture of the venture capital fund. SEBI at any time can call for information regarding the working of the venture capital fund; the information shall be submitted to SEBI in the specified time period.
SEBI on receiving a complaint from the investors or appoint one or more person as investigating officer, who would undertake investigation in relation to the maintenance of the account books of the venture capital fund, compliance of the regulation and the affairs of venture capital funds. A notice of at least ten days shall be given before the investigation is carried on though if SEBI deems it to be in interest of the investors it may not serve a notice at all. It shall be the duty of every officer of the venture capital fund to cooperate with the investigation officers, they shall be provided with all the documents, books etc. which are in the custody of the officers of the venture capital fund. The investigation officer shall also be furnished with any statement he demands for. After the completion of investigation the investigation officer shall submit his report to SEBI. The board after considering the investigation and giving the venture capital fund to be heard may direct the venture capital fund not to launch new schemes or prohibiting the concerned person from disposing off the property of the venture capital fund or to refund to any investor any amount of money or asset.
Any venture capital fund that fails to act in accordance with the regulations, or fails to furnish reports of the affairs of the venture capital fund to SEBI or furnishes report that is not true, does not cooperate in any enquiry instituted by SEBI or fails to act on the complaints made by the investors or does not give a satisfactory reply in this regard to SEBI, shall be dealt with in manner provided in SEBI (procedures for holding enquiry by enquiry officers and imposing penalty) regulations, 2002
Choosing 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 accountant firm well versed in the Foreign Exchange Management Act; Indian Income-tax Act, 1961; the Companies Act, 2013; 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 all the involved parties. The JV union should obtain all the required governmental approvals and licenses within a specified period.
Foreign companies no longer require a no-objection certificate (NOC) from the Indian associate for investing in the sector where the joint venture operates.
Overseas firms in existing joint ventures can function independently in the same business segment. Previously, they needed prior approval from their Indian partners.
Companies in India are grouped into two categories – companies owned or controlled by foreign investors, and companies owned and controlled by Indian residents.
This is an understanding whereby an independent legal entity is created in accordance with the agreement of two or more parties.
The associated parties undertake to provide money or other resources as their contribution to the capital or assets of the corporate entity.
This structure is ideal for long-term, broad-based joint ventures, and include joint venture companies and joint venture limited liability partnerships (LLPs).
Yes, a 'joint venture' is recognized as a distinct legal concept in India. As per the provisions of the Companies Act 2013, a joint venture is defined as a joint arrangement, whereby the parties that have joint control of the arrangement have the rights to its net assets.
Joint venture is not required to file formal paperwork or documentation of status with state or federal governments. Instead, development of a joint venture is contractual and involves one business entity entering into a contract with another entity.
For registration as Joint Venture Company in India, Foreign Company will have to become shareholder in new Indian company and then such joint venture company will be considered as Indian domestic company.
A joint venture is an operating company owned by a government entity and a private company (or multiple companies including foreign companies if permitted by law), or a consortium of private companies
A private limited company must have at least two shareholders, while a public company should have at least seven shareholders. Under the Companies Act, 2013, it is mandatory that at least one director of every company is a resident of India.
The parties involved in the joint venture are known as co-venturers while the members of the partnership are called partners. A minor cannot become a party to Joint Venture. Conversely, a minor can become a partner to the benefits of the partnership firm.
In general, the members of a joint venture that is set up as a separate corporation or limited liability company (LLC) will only be liable to the extent of their investment in the corporation's stock or their interest in the LLC.
In general, the members of a joint venture that is set up as a separate corporation or limited liability company (LLC) will only be liable to the extent of their investment in the corporation's stock or their interest in the LLC.
Joint venture members can be sued individually and found liable for damages caused by a joint venture and it should be recalled that a joint venture is, above all, a partnership type entity with unlimited liability imposed upon its members.
A joint venture affords each party access to the resources of the other participant(s) without having to spend excessive amounts of capital. Each company is able to maintain its own identity and can easily return to normal business operations once the joint venture is complete.
Partners in a joint venture must separate business funds from personal assets. Before establishing a bank account for a joint venture, the partners should check the rates and fees of at least three financial institutions, comparing monthly minimum requirements, debit- and credit-card policies and miscellaneous fees.
In addition, if the venture has a fictitious business name, it must be registered; present that certificate to the bank as well. Verify the identity of each partner who has the authority to use the joint venture's bank account.
The venture itself does not make a tax filing on any of the funds that flow through it. Like general partnerships, the Internal Revenue Service (IRS) does not consider joint ventures as a business structure and does not require a copy of the joint venture agreement or other proof of the venture's existence.
If you receive income from a joint venture, you must report it to the Internal Revenue Service on your personal return because joint ventures do not file their own returns. Only spouses can elect that the IRS treat their enterprise as a qualified joint venture instead of a partnership.
The Advantages and Disadvantages of Joint Venture:
Advantages of Joint Ventures | Disadvantages of Joint Venture |
Profit at low cost | Flexibility is restricted |
Flexible nature | Assets and claims |
Start-up push | Equal involvement is impossible |
Shared costs, expenses, benefits, and risk | Rapport formation |
A Strategic Alliance is an arrangement between two companies to undertake a mutually beneficial project, with each remaining independent. Joint Venture is a form of Strategic Alliance that is more complex and binding. In a Joint Venture, two businesses pool resources to create a separate business entity.
There are three types of strategic alliances: Joint Venture, Equity Strategic Alliance, and Non-equity Strategic Alliance.
A ‘nominee director’ has been defined under section 149 of the Companies Act to mean a director nominated by any financial institution in pursuance of the provisions of any law or agreement, or appointed by any government or person, to represent its interests. Practically, a nominee director is expected to monitor the operations of the company, but at the same time is burdened with many fiduciary and statutory duties and obligations, the breach of which can attract penal provisions under various pieces of legislation. When facing a situation with a conflict of interests, where the interests of shareholders are in contrast with other stakeholders such as the employees or the joint venture company itself, the Companies Act has, without prioritizing one over the other, provided recognition to both shareholders and stakeholders. In reality, it implies that the directors are liable to make difficult choices in deciding the hierarchy of conflicting interests without necessarily being favorable to the nominator, the underlying principle being that they are to act in the interests of the company at all times
According to Section 166 of the Companies Act, which mandates a director must act in the best interests of the company and in good faith to promote the company’s objectives. A director has to maintain a balance between the interests of the nominator and the wider interests of the joint venture company and other stakeholders, and ensure that all duties are discharged with due diligence and reasonable care following due process and exercising of his or her independent judgment. If the joint venture company is proven to have committed any contravention of law, a nominee director will not be exempted and will be held equally liable as an ‘officer in default’. A director has to be diligent with RPTs and abstain from self-dealing and ensure that he or she complies with the requirements prescribed under section 184 of the Companies Act and LODR Regulations (applicable if the joint venture entity is a listed entity) with respect to the disclosure of interest by the directors, primarily in relation to any contract or arrangement by a company, where any such non-compliance may be penalized, including by imprisonment.
There are no restrictions on contributions of assets to a joint venture entity. However, depending on the type of the joint venture entity, there may be certain compliance requirements under extant laws for contribution of such assets. For example, if assets are contributed by a joint venture partner in a limited liability company in lieu of shares, the Companies Act lays down certain procedures for issue of shares for ‘consideration other than cash’. Further, the Companies Act stipulates rules in relation to valuation and treatment of the non-cash consideration.
Further, extant foreign exchange regulations also restrict (or provide detailed procedures for) contribution of assets to the joint venture entity depending on the nature of entity, type of asset and the resident status of the entity or person contributing the asset. The contribution of assets classifiable as supply of goods or the supply of services to a joint venture entity by joint venture partners may be eligible to tax under the GST legislation in India. These restrictions and taxability of such transactions have to be analyzed case by case.
Unless the joint venture company is party to the contractual arrangement between the joint venture parties, the provisions of such arrangement may not be directly enforceable against it. Therefore, the articles of association (AoA) of the joint venture company must either incorporate the provisions of the joint venture agreement or be silent on the same, thereby not hosting any contradictory or restrictive provision in relation to rights specified in the joint venture agreement in order for the joint venture company to give effect to these provisions. However, in the case of any conflict or inconsistency between the provisions of the AoA and the joint venture agreement (to the extent the joint venture company is affected), the former shall take precedence over the latter. Some understandings, such as pooling arrangements and voting agreements between the joint venture partners may affect the governance of the joint venture company but do not directly involve the joint venture company by itself, owing to privacy of contract. It has also been observed by the courts in India that the consensual agreements between particular shareholders relating to their specific shares can be enforced against the parties like any other agreement. However, in the case of an aggrieved shareholder whose rights in relation to the joint venture company cannot be enforced, he or she can approach the courts to seek liquidated damages, as stipulated under the agreement or liquidated damages for breach of contract as per the Indian Contract Act 1872.
There is no requirement to register a joint venture agreement.
The joint venture agreement and the AoA provide rights to the joint venture parties to nominate directors on the board of the joint venture company, thus creating an important channel for the joint venture parties to interact with the joint venture entity. A critical element to be factored in relation to transactions between the joint venture parties and the joint venture entity is the regulation of specified types of transactions between related parties under the Companies Act and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) for listed companies (the related party transactions (RPTs) regime). ‘Related party’ has been fairly broadly defined under the Companies Act and LODR Regulations and includes any person on whose advice, directions or instructions a director or manager is accustomed to act (except in the case of professional advice).
As per the Companies Act, all transactions by the joint venture company with related parties have to be approved by the board and, under certain circumstances, by the shareholders of the joint venture company, except if transactions are in the ordinary course of business of the company and made at arm’s length. Further, the related shareholder may not vote on such a transaction. However, the aforesaid proviso will not apply to a joint venture company in which 90 per cent or more members are relatives of the promoters or are related parties. Additionally, the requirement for passing a shareholder resolution will be obviated in the case of transactions entered into between the holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at a general meeting for approval. An ‘arm’s-length’ transaction refers to a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest and is compliant with the TP Regulations.
Joint venture partners may exit from the joint venture by transferring the securities held by them in the joint venture company, whereby the proceeds thereof are subject to capital-gains tax, payable by the joint venture partners at the following rates.
Nature of joint venture entity | Nature of gain | Period of holding | Tax rate* non-resident partner | Tax rate* resident partner |
Company: disposal of unlisted securities | Long-term capital gains | > 2 years | 10% | 20% |
Short-term capital gains | < 2 years | 40% | 30% | |
LLP: disposal of interest in joint venture | Long-term capital gains | > 3 years | 20% | 20% |
Short-term capital gains | < 3 years | 40% | 30% |
Exclusive of applicable surcharge and cess. However, for non-resident partners, the tax liability in India is subject to the provisions of the DTAA signed by India with the country of which the joint venture partner is a resident.
The joint venture company may also distribute its assets or surplus cash to the joint venture partners through dividends, and such distribution may be deemed as dividends under the IT Act to the extent that there are accumulated profits attracting DDT. For a joint venture LLP, any capital asset distributed by the LLP to its partners would be deemed to be the sale consideration and capital gains arising thereof will be taxable according to the fair market value of the assets as on the date of the distribution.
In terms of the GST legislation, disposal of business assets, where input tax credit has been availed on such assets, shall be eligible to GST in India, even when such disposal is made without any consideration. Additionally, where a person ceases to be a taxable person and his or her registration is cancelled, such person is liable to reverse the amount of input tax credit availed on inputs held in stock or inputs contained in semi-finished or finished goods lying in stock, capital goods and plant and machinery or pay output tax on such goods, whichever is higher. Accordingly, where the joint venture ceases to be a taxable person and his or her GST registration is cancelled, he or she would either be liable to pay GST on the disposal of his or her business assets or reverse applicable input tax credit, whichever is higher, in terms of the GST legislation.