Joint venture in India: Everything you need to know
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Setting up in India with a joint venture partner has many advantages. You can rely on the market knowledge and the extensive network of your Indian partner and you share the risks. But not all joint ventures in India become a success. In this article we outline how you can make your joint venture in India a success.
Joint Venture (JV)
A joint venture almost always involves the creation of a new company owned by two or more partners. A joint venture is often set up for a specific project and is generally not intended for a long-term business relationship. The partners contribute their assets (people, machinery, capital and knowledge) for a specific purpose and for a limited period of time, but remain completely separate companies. The joint venture forms a new company.
Before setting up a new entity with an Indian partner, it is highly recommended to conduct thorough due diligence, as with any other business transaction. In addition, drawing up a memorandum of understanding (MOU) is very common in India. Such 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, stating the roles of both parties and establishing a roadmap for the future regarding the intentions of the parties, management structure and cost allocation.
Articles of Association
Most joint ventures in India are structured as Private Limited companies. It is mandatory for a Private Limited to have at least two directors and at least one director who is resident in India. That means someone who has resided in India for a period of at least 182 days in the preceding calendar year. This does not necessarily have to be an Indian. In a Private Limited, the Articles of Association (AoA) are a very important document. The AoA are a requirement when setting up a Private Limited in India and contain provisions 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 contains a clause on the steps to be taken in the event of a conflict or termination of a JV in the event of a deadlock. It is therefore advisable to spend time and attention when drafting the AoA. Do not use a standard, off-the-shelf, MoA. The Companies Act, 2013 requires every company to have an MOU and AoA. The MOU and AoA are the charter documents of the company. Both must be filed with the Registrar of Companies (the Indian Chamber of Commerce) of the province where the company wants to set up.
Joint Venture Agreement
Once the MOU and AoA are in place, the foundation for the joint venture is laid and the (JV Agreement) can be drafted. This is a working document that explicitly focuses on what decisions the partners can and may take regarding the shareholding, management structure, withdrawal rights, competition issues, dispute resolution, intellectual property rights and any warranties. 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 JV Agreement or other agreements relating to the joint venture necessarily require skill in drafting the documents without any room for ambiguity. Complicated and vague documentation can be fatal for the joint venture and hamper the interests of the parties. One of the things that requires expertise is the exit strategy. The JV Agreement establishing a joint venture should also include a planned exit strategy, so that all parties are protected once the partnership has achieved its goal.
Most joint ventures are dissolved through a partner buy-out. It is advisable to include clear terms for terminating a JV in the agreement. Once the parties have determined the key points for the JV Agreement, it is wise to hand over the matter 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.
