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Joint Venture Agreement – an overview

With a rapid rise in entrepreneurial ventures in India, investors are looking forward to contributing to businesses that guarantee them maximum profits throughout financial years, with minimum risks of accumulating hefty losses, debts and liabilities. Based on such essential needs of investors, joint venture models of businesses  have been introduced in India. These businesses enable investors to pool in their financial and technological resources together, and set up projects that otherwise would have been impossible to establish with the resources of a single investor. Moreover, such investors receive a number of benefits from joint ventures, few of which include shared risks, shared expenses, technology transfer, expansion of consumer base, higher scale of operations, addition of intellectual properties, enhanced credibility, and improved business management.
How To Draft A Joint Venture Agreement
To start a joint Venture business, its parties must first enter into a mutually agreed joint venture agreement. The agreement should be signed by all parties and should contain elaborate details about the business, its members, their contributions, their liabilities, their rights, and their responsibilities. The agreement should be drafted in the manner prescribed for it under law, so that it becomes legally binding on the signatories, and legally enforceable in a court of law. Moreover, drafting an improper joint venture agreement can have a number of adverse consequences that joint ventures must avoid in order to excel their businesses in India

Table of Contents

What is the need to enter into a Joint Venture Project?

The Joint Venture model is preferred by small and large businesses alike, as it offers a number of benefits like shared risks, shared losses, shared liabilities, and a wide range of financial and technological capabilities. Besides enhancing the quality of day-to-today business operations, joint venture projects accelerate the growth, development and expansion of a business with utmost ease and effortlessness. However, the most significant need of starting a joint venture project is its contribution towards nudging innovation and research in India.
Joint-Veneture

Resources are limited for everyone

One of the primary reasons for setting up Joint Venture projects is the resource constraint that most businesses in India face, irrespective of their size and scale of operations. This often prevents capitalists from setting up stand-alone businesses and single-handedly handle all its expenses and liabilities. Also, when businesses decide to shift into a different industry altogether, or expand on their business activities, the amount of capital resources needed by it increases exponentially. In order to achieve success in the new industry or in the expansion of business activities, it becomes essential for businesses to consider and prefer the idea of entering into a Joint Venture, to fulfill the of additional resources.

The entire risk cannot be borne by one single player in the initial stages

Businesses often face a number of risks with respect to their operations, fluctuations in foreign exchange values, and fluctuations in market prices of products and services. Such risks have the potential to bring down the growth rates of the business unprecedentedly and rapidly. Hence, to share the adverse impacts caused by these risks, businesses often look forward to entering into joint ventures and with other individual and non-individual investors. Moreover, the resource-pooling strategy of joint ventures increases the amount of funding for businesses to witness smoother growth and expansion.

Leveraging resources and existing capabilities

The financial strengths and weaknesses vary immensely for different business organizations established in India. These include the availability of capital resources, capital investment, industry-specific business technology, and the technical and financial knowledge to operate the business successfully. An added advantage of joint venture projects over stand alone projects, is that the strengths of different business entities can be pooled together, to enhance the efficiency of the business and the quality of the end products and services delivered to customers. It is thus recommended that startups must enter into joint venture projects with investors who compliment their strengths and overcome their weaknesses.

What Protections does a Joint Venture Agreement provide to its signatories?

To enter into a joint venture project, it is necessary that all the parties formulate and sign a Joint Venture Agreement. The agreement puts forth a number of mutually agreed rights for its signatories, to protect them against future disputes, misuse, and misunderstandings. For your comprehensive understanding, we have elaborated a detailed list of all such protections that must be provided to all the signatories in an ideal joint venture agreement.
S.No. Protections offered by a Joint Venture Agreement
1.
Protection against breach of agreed capital contribution
2.
Protection against breach of non-compete clause
3.
Protection against breach of confidentiality and non-disclosure clause
4.
Protection against non-payment of Royalty
5.
Protection against infringement of rights and breach of duties by parties

Protection against breach of agreed capital contribution

The smooth functioning of Joint Venture projects basically depends upon the capital invested into it, in accordance with the mutually agreed capital sharing ratio by all its parties. If either of the parties do not contribute to their agreed share in the capital, according to the Joint Venture agreement, they can be sued by the other parties, if the provisions of the agreement are binding upon them.

Protection against violation of the non-compete clause

One of the most important protection clauses that joint venture agreements often contain, is the non-compete clause. This clause is invoked when any of the investors of a joint venture enters into a business agreement, similar to that of the joint venture, with other investors in order to start a similar or identical business. The non-competent clause in a Joint Venture agreement is binding to all signatories and provides legal protection against the investors who violate the clause.

Protection against breach of confidentiality and non-disclosure clause

An ideal Joint Venture agreement should be containing the confidentiality and non-disclosure clause to protect signatories against defaulting parties to the agreement. Such parties act in violation of the clause by publicizing or disclosing sensitive information regarding the Joint Venture project, that otherwise should not have been disclosed till the expiry of the agreement or the existence of the business.

Protection against non-payment of royalty payment

Another aspect that a legally enforceable Joint Venture agreement protects its signatories against, is the non-payment of the agreed royalty. The party to the Joint Venture agreement that brings in the needed technology for the business is entitled to receive a certain amount of royalty payment as agreed by all other parties of the joint venture agreement.

Protection against infringement of rights and breach of duties by parties

Also, whenever either of the party to the Joint Venture agreement commits any default, or acts in violation of the terms and conditions enshrined and stipulated in the relevant Joint Venture agreement, comprehensive protection is provided to the aggrieved party to always draw reference from the registered Joint Venture agreement to find the solution for any dispute that may have arisen between the parties of the Joint Venture agreement.

What details should an ideal Joint Venture Agreement contain?

A joint venture agreement is a legally binding document that must be formulated and duly signed by all the parties that decide to start a joint venture project. Since the agreement is legally binding on the signatories, a breach or violation of its clauses at any point of time may lead to the defaulting parties being sued by other parties to the agreement. By comprehensively elaborating the rights and obligations of the parties, the relevance of the agreement lies in providing legal protection to them, against a potential breach or misuse of the agreement. Owing to its significant for the business and its members, it is pertinent that a joint venture agreement must be as detailed as possible.
S.No. Details contained in a Joint Venture Agreement
1.
Parties to the Joint Venture Agreement
2.
Capital, Profit, and loss sharing ratios of the parties to the Joint Venture Agreement
3.
Persons appointed in the key managerial positions
4.
Procedure of appointment of key managerial designations
5.
Status with which the Joint Venture has been established (Company/ LLP /Partnership Firm)
6.
Provisions regarding technology transfer and the subsequent Payment of Royalty
7.
Non-compete clause
8.
Confidentiality and Non-disclosure clause
9.
Duration of the Joint Venture Agreement (if any)
10.
Conditions and procedure for terminating the Joint Venture Agreement
11.
Appropriation of Assets in the event of termination or expiry of Joint Venture Agreement
12.
Procedure for admitting, expelling, and exiting of investors in the Joint Venture Agreement

What are the consequences of not drafting a proper Joint Venture Agreement?

Not having a proper and detailed Joint Venture agreement raises questions on the viability of the Joint Venture project undertaken by the parties. Moreover, an incomplete and inadequate coverage of significant details, informations., and protective clauses reduce the enforceability of the agreement, thereby increasing the chances of frequent unresolvable disputes arising between the parties. Such frequent disputes can potentially cause friction between them and undermine the overall conduct of the business operations. Since, the joint venture model of business demands trustworthiness between parties, we strongly recommend that businesses operating under this model, do so only after drafting a detailed, comprehensive, and appropriate Joint Venture Agreement. We have listed below a slew of adverse consequences of an inappropriate Joint Venture Agreement for your better understanding.
S.No. Adverse Consequences of not drafting a proper Joint Venture Agreement
1.
The existence of a joint venture business depends on the formulation of a valid agreement between parties. Therefore, without drafting a proper agreement and getting it signed by all parties, no joint venture business can be established in India.
2.
Joint Venture Agreements contain provisions related to the manner in which disputes shall be resolved with parties within and outside the venture. In the absence of such provisions, resolving disputes and deadlocks becomes extremely difficult.
3.
A lack of details, especially regarding the rights and obligations of the parties, reduces the relevance of the agreement for investors contributing to the capital of the business. As a result, the venture potentially becomes less attractive for investors and creditors.
4.
A valid joint venture agreement is a piece of document that is legally binding on its signatories, and that is legally enforceable in a court of law. In the absence of a valid agreement, suing third parties or co-owners of the joint venture becomes almost impossible, in case any dispute arises between them.
5.
The Joint Venture Agreement contains relevant procedures for appointments and expulsions of key managerial staff, and the admission and removal of new investors in the venture. In the absence of such procedural details, carrying out the day to operations of the business becomes problematic.

FAQs on setting up a Joint Venture

Only a Private Limited Company, an LLP, and a Partnership Firm can be established as joint venture businesses in India.
The following laws shall be applicable for companies established as Joint Venture businesses in India: 
  • Companies Act
  • Foreign Exchange Management Act, if any of the investors are foreign to India
  • Shops and Establishment Act, for companies involved in activities other than manufacturing
  • Factories Act, for companies engaged in manufacturing activities
  • Labor Laws like EPF and ESI Acts.
  • Tax Laws like GST, Income Tax Acts
Joint ventures can be established in India without seeking the prior approval of the Government, unless explicitly mandatory under any law. For instance, setting up joint ventures in the space sector requires an approval from the Central Government under
A joint venture can be terminated before the expiry of its duration, according to the provisions mentioned in the Joint Venture Agreement. However, a premature termination can lead to litigations regarding issues related to the disposal of assets, indemnification of the aggrieved JV participant, etc.
Only a Private Limited Company, a Partnership Firm, and an LLP can be set up as a Joint venture business in India and none of them have any prescribed minimum capital requirement for their establishment
Yes, foreign investors can enter into joint venture projects in India, only after notifying the Reserve Bank of India of it, using form FC-GPR, within 30 days of the receipt of such foreign investments or the dates of issuance of shares to such foreign investors.
There are two types of joint ventures established in India, namely equity-based Joint Ventures and Contractual-based Joint Ventures. While equity-based joint ventures are incorporated entities having a distinct legal identity, contractual-based joint ventures are unincorporated entities that do not have a distinct legal identity. This means that while in an equity-based venture the joint venture is actually established as a distinct entity, in a contractual based joint venture, only a contract to the effect of a mutually agreed collaboration is signed, after which the business eventually begins its operations.
Special Purpose Vehicles are set up with a particular purpose and carry out particular types of transactions only. Partnership Firms established as a Joint Venture cannot form an SPV. Both companies and LLPs set up as joint ventures can form SPVs. However, since such companies are difficult to wind up, LLPs established as Joint Ventures are a clear choice for investors to set up SPVs. You can set up only such LLPs as SPVs where 100% FDI is allowed under the automatic route.
Yes, there are transparent rules and norms in place pertaining to the repatriation of profits back to the foreign country by the foreign JV participant according to the Foreign Exchange Management Act, 1999.
Setting up a Joint Venture is prohibited in the following industries:
  •  JVs planned in the case of sectors related to betting, and gambling.
  • Joint Ventures are also restricted to be set up in case of Lottery and Chit fund business.
  • JVs are not allowed in case of businesses engaged in tobacco production and its substitutes.
  • Joint Ventures are prohibited to be set up in the segment of Atomic Energy establishments. 
  • No Joint Venture can be set up in case the business is intended to be related to the trading Transferable Development Rights.

About Setindiabiz

Setindiabiz is an organized team of experienced CA, CS, & Lawyers, duly supported by a pool of trained accountants & paralegal staff that provides quality & affordable compliance services to startups & small businesses in India. The views, statements and recommendations expressed in this article or post are only for the sole objective of providing information, and it does not constitute professional advice or recommendation of the company. Neither the author nor the company or its affiliates accepts any liability for any loss or damage arising from any information in this article or any actions taken in reliance thereon.
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