Joint venture in India

What is a Joint Venture?

A joint venture is a strategic partnership in which two or more independent companies share their resources (people, machinery, capital and knowledge), expertise, and risks to achieve a specific business goal. Unlike a merger or acquisition, the participating parties retain their own corporate identity and autonomy while jointly establishing a new company or carrying out a specific project.

Joint ventures are often used to enter new markets, develop innovative products, or gain access to local knowledge and networks. This form of collaboration is particularly popular in international expansion, as foreign companies can benefit from their partner’s local market knowledge, while local partners gain access to international expertise, technology, or capital.

In India, local knowledge is essential for business success, which makes entering the market through a joint venture particularly attractive. However, there are also examples of joint ventures in India that have failed due to cultural differences and a lack of leadership, as happened to McDonald’s. To avoid such situations, we outline the steps you can take to prevent this from happening.

Memorandum of Understanding (MOU)

Before you set up a new entity with an Indian partner as a foreign company, it is strongly recommended that you carry out due diligence, as with any other business transaction. In addition, drawing up a memorandum of understanding (MOU) is common practice in India.

An MOU ensures that all parties fully understand and agree on the purpose, responsibilities, and risks of the joint venture. It is a short document without much legal jargon, which sets out the tasks of both parties and establishes a roadmap for the future regarding the parties’ intentions, management structure, and cost allocation. For example:

• Project goals and objectives
  Example: “The joint venture aims to establish a manufacturing facility for automotive components in Chennai with a production capacity of 50,000 units annually.”
• Partner responsibilities and contributions
  Example: “Partner A (foreign company) will provide technology, equipment worth $2 million, and technical expertise and Partner B (Indian company) will contribute local market knowledge, existing distribution network, and regulatory compliance support.”
• Management structure
  Example: “The joint venture will be governed by a 6-member board with equal representation (3 members from each partner). Partner A will appoint the CEO, while Partner B will appoint the CFO and Head of Operations.”
• Cost and investment distribution
  Example: “Initial capital investment of $5 million will be split 60% (Partner A) and 40% (Partner B).”
• Timeline and Milestones
  Example: “Phase 1: Market research and regulatory approvals (months 1-6), phase 2: Facility setup and staff recruitment (months 7-18).”
• Risk Allocation
  Example: “Technology risks will be borne by the foreign partner, while regulatory and local market risks will be managed by the Indian partner.”

Articles of Association

Most joint ventures in India are structured as private limited companies. A private limited company is required to have at least two directors and at least one director who is resident in India, i.e. someone who has resided in India for a period of at least 182 days in the previous calendar year. This does not necessarily have to be an Indian national.

In a private limited company, the Articles of Association (AoA) are a very important document. The AoA are a requirement for setting up a private limited company in India and contain rules for the internal management of the company. The Companies Act 2013 gives companies the freedom to determine the content of the AoA themselves. For example, the AoA contain a clause on the steps to be taken in the event of a conflict or termination of a joint venture in the event of an impasse. It is therefore advisable to devote time and attention to drawing up the AoA and not to rely on a standard off-the-shelf concept.

The Companies Act, 2013 requires every company to have an MOU and AoA. The MOU and AoA are the company’s charter documents. Both must therefore be filed with the Registrar of Companies (the Indian Chamber of Commerce) of the province where the foreign company wishes to establish itself.

Joint Venture Agreement

Once the MOU and AoA have been drawn up, the foundation for the joint venture has been laid and the Joint Venture Agreement (JV Agreement) can be drawn up. This is a working document that focuses explicitly on:

• which decisions the partners can and may take regarding the shares,
• management structure,
• withdrawal rights,
• competition issues,
• dispute resolution,
• intellectual property rights,
• any guarantees.

The JV Agreement is not a binding document and is drafted purely to document the cooperation and responsibilities of the partners. Indian law provides sufficient flexibility for the parties to set out their own arrangements in a definitive agreement.

The agreement relating to the joint venture require skill in drafting the document without any room for ambiguity. Complicated and vague documentation can be fatal for the joint venture and hamper the interests of the parties. The JV Agreement should also include a planned exit strategy, so that all parties are protected once the partnership has achieved its goal. This requires local expertise.

Most joint ventures are dissolved through a partner buy-out. It is recommended to include clear terms for terminating a joint venture in the agreement. Once the parties have determined the key points for the JV Agreement, it is wise to hand the matter over to a lawyer in India. He or she can convert the key points into the official JV Agreement document, taking into account Indian laws and regulations.

Local support for setting up a joint venture

Setting up a joint venture therefore offers you interesting advantages as an international company and newcomer to the Indian market. No long start-up period in which you have to build a network, find the right distributor and acquire customers. You can rely on your Indian partner for all of this. But the responsibility of setting up the joint venture itself naturally rests on your shoulders.

Local knowledge and support are not an unnecessary luxury in that process. Do you want to tackle all the preparatory work for the joint venture in a sound manner and start with peace of mind and the right documents in your pocket? We have a team of local experts for you ready to make your start as smooth as possible. Get in touch with us here.