Current regulatory trends bode well for joint ventures

By Bhumika Batra and Sachita Shetty, Crawford Bayley & Co

The “Make in India” initiative launched by Prime Minister Modi on 25 September 2014 offered several incentives, enabling foreign businesses in various sectors to collaborate with domestic players. It provided an impetus to the growing multinational interest for doing business in India, either in the form of joint ventures or of a wholly owned subsidiary.

Bhumika Batra Crawford Bayley & Co
Bhumika Batra
Crawford Bayley & Co

Policies have been progressively simplified and procedures enacted to create a suitable environment for foreign direct investment (FDI) in India. Except for a small negative or restrictive list, the government has placed all items under the automatic route for FDI and there have been several joint ventures across sectors with insurance, retail and automobiles being the most prevalent.

However, over time, corporate India has seen an increasing incidence of failure of established joint ventures, a conflict stemming from the difference in expectations or approaches of partners. The regulatory framework in India, however, is progressively changing and laws are being formulated to protect exit mechanisms for such overseas entities. Complete repatriation of dividend and capital, including royalty payouts is now permissible and also there are certain sectors that permit foreign minority shareholders to exercise control.

In the last three decades, joint ventures have gained much recognition and yet there is no statute that defines the outline of a joint venture. Perhaps, because it is such a flexible concept and also, because it is only an “arrangement whereby the parties have joint control and rights to the net assets of the arrangement” managed in the form of an incorporated or an unincorporated entity. A joint venture may be set up either as a contractual alliance or as an equity-based collaboration. In the former, the parties agree to collaborate as an unincorporated entity, as independent contractors rather than shareholders or partners in a company or partnership, respectively. There is an agreement to work together but not to give birth to an entity owned by the parties who are working together. A typical example of a contractual joint venture is a franchisee relationship.

Sachita Shetty and Bhumika Batra Crawford Bayley & Co
Sachita Shetty
Crawford Bayley & Co

On the other hand, an equity-based joint venture is one in which a separate business entity, jointly owned by two or more parties (natural or legal entities), is formed in accordance with the agreement of the parties. The form of business entities may vary – company, partnership firm, trust, limited liability partnership firm, venture capital funds and so on. In an equity-based joint venture, the profits and losses of the jointly owned entity are distributed among the parties according to the ratio of the capital contributions made by them.

While conceptually the formation of a joint venture is rooted in the principle of pooling – technologies, skill and finances among others – it largely rests on partnering in a way that one can capitalize on the other’s access to local markets and knowledge and minimize the risks involved in entering into a business in a new area.

The “Make in India” initiative has supplemented the government’s undertaking to further liberalize the economy and has resulted in many joint ventures. While these joint ventures are inked, there’s still time for manufacturing to start. With the recent amendment to the FDI cap in defence being increased to 100% (up to 49% being under automatic route and government route for over 49% FDI), we have witnessed the birth of, inter alia, (a) Kalyani Strategic Systems-Rafael Advanced Defense Systems joint venture for making anti-tank guided missiles; (b) Astra Microwave Products-Rafael Advanced Defense Systems joint venture to make software-defined radios.

Likewise, with the increase in the FDI cap to 100% in the pharma sector (100% automatic route in greenfield projects and in brownfield projects up to 74% being under automatic route and government route for beyond 74%), Omnicare Drugs India, an arm of the UAE-based Neopharma and Japan’s ASKA Pharmaceuticals have executed agreements to establish a joint venture in India.

Joint ventures being structured on the basis of amalgamation of resources and enhancing values of operations have proven an effective resolution to the ease of doing business in a new territory, while minimizing the risks and costs involved. Besides, common areas of specialization, expertise in any specific domain or technological dominance have prompted transnational entities to partner with domestic entities. There are and will always be reasons to start an alliance, but with the progressive and a liberalized economy, the question will remain whether joint ventures will be a subject of “testing waters” only.

Bhumika Batra is an associate partner and Sachita Shetty is a senior associate at Crawford Bayley & Co.

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