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Joint Venture Agreement – Who, Why, How, And What Are The Requirements

Joint Venture Agreement – Who, Why, How, And What Are The Requirements

For an Indian company can partner with a Foreign Company, Joint Venture is the solution. This article will talk on the lines of eligibility criteria, power distribution, and taxations involved.

Indian joint ventures usually comprise two or more individuals or companies, one of whom may be nonresident, who come together to form an Indian private or public limited company, holding agreed portions of its share capital. A joint venture agreement primarily provides rules by which the shareholders of the joint venture company may transfer or dispose of their shares. It is also commonly referred to as a shareholder’s agreement.

Remember, In order to protect sensitive business information from being divulged to others, confidentiality and non-disclosure agreements are entered into, prior to commencing negotiations of Joint Venture. Which we Wazzeerians think is the best practices of negotiation.

Key Eligibility Criteria:

  1. In certain areas such as telecommunications, drugs & pharmaceuticals, hotel & tourism, or advertising foreign investment up to 50%, 51% and/or 74% in the Joint venture without RBI approval.
  2. For more than 74% of the total equity in a joint venture company or to establish a Wholly Owned Subsidiary (WOS), permission must be obtained either from the Foreign Investment Promotion Board (“FIPB”) or the Secretariat of Industrial Approvals (“SIA”). Foreign companies not wanting to tie up with an Indian partner may establish liaison, branch or project offices, or WOS.

Entity options to form a Joint Venture as:

  1. Companies limited by shares (public and private)
  2. Companies limited by guarantee (limited to the amount pledged)
  3. Companies having unlimited liability (liability of each member is unlimited)

Control in the joint venture company:

After passing the either of the following resolutions, the control and roles are decided. Note, your Joint Venture Agreement will state which one to be followed.

  1. Special Resolutions: Passed only by shareholders having 75% shares with voting rights in the company. Or,
  2. Ordinary Resolutions: Passed by shareholders having 50.01% shares with voting rights in the company.

A special resolution is inter alia required to amend the MOA and AOA of the company, to issue further shares through a rights issue, to give loans or guarantees to other companies, etc. 51% majority ensures control of the day to day working of the company. Therefore, much depends on the level of control the foreign investor seeks.

The articles of association, incorporating the key provisions in shareholders agreement, provide for control of the joint venture company. The exercise of control is done at two levels: 1. Board of directors 2. Shareholders

Tax considerations and subsidies:

India has double taxation avoidance agreements (“DTAAs”) with many countries. In many instances, companies route their investments into an Indian joint venture company through an offshore destination.

Joint venture companies do not per se get advantageous tax treatment. However, the Indian Income Tax Act gives certain benefits to industries set up as 100% export oriented units, or in export processing zones. In addition, infrastructure industries in the areas of power, telecommunications, ports, etc., get tax breaks and rebates. Persons investing in the bonds of such companies do not pay tax on the interest received.

To make the joint venture agreement valid in law:

The requirements prescribed by the Indian Contract Act and the Cos Act needs to be met. Some of the important criteria to be fulfilled are:

  1. Offer and acceptance,
  2. Consideration,
  3. The intention to form a company,
  4. Signature of the parties
  5. Constitution of the board of directors,
  6. Termination clause,
  7. The binding nature of the agreement,
  8. Share transfer provisions,
  9. Dilution clause,
  10. Dispute resolution clause

Parties have to pay stamp duty on the joint venture agreement and have to register either with the RBI or the SIA, depending on which authority gives clearance for the project. No registration is required under the Indian Registration Act unless the joint venture agreement deals with the transfer of immovable property rights.

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