Issues Korean, Indian firms face in setting up JVs

By Rajat Prakash and Siddharth Mahajan, Athena Legal
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India’s rapid economic growth and expanding markets make it an attractive destination for foreign investments. Launched in 2014, India’s Act East Policy has actively fostered economic ties with Southeast Asian nations, resulting in robust economic relations between India and the Republic of Korea.

Korea is the 13th largest source of foreign direct investment (FDI) into India, with inflows of USD289.97 million in 2023. The Ministry of Commerce and Industry launched the Korea Plus initiative in 2016, promoting and facilitating Korean investments, making India a prime destination.

Rajat Prakash, Athena Legal
Rajat Prakash
Managing Partner
Athena Legal

Among various prevalent methods of setting up in India, one of the most significant is a joint venture (JV) arrangement. In a JV, a foreign entity combines resources with an Indian entity to gain strategic market advantage. JVs are usually incorporated as private limited companies under the Companies Act, 2013. JVs between Korean and Indian companies have become popular vehicles for Korean investors to establish businesses in India. According to the Korea Trade Investment Promotion Agency, about 11.3% of Korean subsidiaries in India are JVs.

Foreign investment in India is governed by the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, read with the consolidated Foreign Direct Investment Policy, 2020 (FDI policy), issued by the Department for Promotion of Industry and Internal Trade. Under the FDI policy, foreign investors can invest through either the automatic or government approved routes. Most sectors fall under the automatic route requiring no prior government approval. The FDI policy prescribes sectoral caps limiting the shareholding of foreign investors in certain specific sectors.

Documenting the terms of the JV is essential to ensure effective governance of the joint business. Usually, they are in either a JV or a shareholders’ agreement. Korean businesses need to understand what should be in the JV agreement.

Siddharth Mahajan
Siddharth Mahajan
Partner
Athena Legal

Capital contribution clauses specify the amounts and nature of each party’s contributions. An additional investment clause sets out the manner in which additional investments can be made by parties and their procedures, rights and obligations. Clauses relating to corporate governance establish each party’s decision-making framework, roles and responsibilities. They set out such matters as the composition and voting rights of the board of directors, the frequency and conduct of meetings and the delegation of authority. Term and termination clauses deal with the duration of the JV, the options for renewal and how the JV may be ended, such as by an agreement breach or insolvency. Exit clauses detail how parties can leave the JV. Exit strategies can be initial public offerings, liquidations or third-party sales.

The rights of shareholders must be safeguarded. Pre-emptive clauses give existing shareholders the right to acquire newly issued shares. They encourage early investors to retain their shareholding on a pro-rata basis. Rights of first refusal give shareholders the opportunity to buy the shares of a selling shareholder at the same price and on the same terms offered by a third-party buyer. Tag-along rights allow minority shareholders to sell their shares on the same terms and conditions as the majority shareholder, and drag-along rights enable majority shareholders to compel the minority to join in the sale of a company.

Reserved matters are specific decisions needing the approval of all parties holding minimum reserved shareholdings. They are strategic, financial, or operational decisions that significantly impact the JV. Dispute resolution clauses detail how disputes will be resolved, such as by negotiation, mediation, arbitration, or litigation. This is the most significant clause, and it is imperative that it be discussed and negotiated properly.

Intellectual property clauses define the ownership, usage and protection of proprietary assets. They establish frameworks safeguarding IP rights, mitigating infringement risks, minimising conflicts, fostering innovation and safeguarding the interests of the parties. India’s favourable investment environment, robust economic growth and large consumer base hold out opportunities for Korean companies. By leveraging local partners’ expertise and navigating regulatory requirements, Korean investors can exploit dynamic market conditions as their JVs generate prosperity through growth for both sides. However, they must ensure that JV agreements protect their interests.

Rajat Prakash is the managing partner of Athena Legal and Siddharth Mahajan is a partner at the firm.

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