Everything About Joint Venture Agreements In India

This article was written by Bhavana Chandak, a student 0f Rajiv Gandhi National University of Law.

In the growing economy of India there are large scale investments being made. The ease of doing business has lured big investors to fund large scale profitable business projects in the country. The growth rate of the country is 7.3% in 2016.[1]

In the growing sector of business, everyday new opportunities are coming up. It is not possible for any single individual or company or partnership to harness them completely, hence comes in the concept of joint ventures.

1. What is a Joint Venture?

In layman’s terms a joint venture could be defined as an agreement wherein two or more parties come together for the sole aim of performing a particular project. It is generally opted for when a foreign company invests in a project along with an Indian company.

In India there is no consolidated law as such which governs the working of joint ventures. It is guided by multiple laws like the Companies Act 2013, Indian Partnership Act 1932, Limited Liability Partnership Act 2008, etc. Not only that, but there is also no definition of Joint Venture in any currently enforceable statute. The dictionary meaning of the term, a Joint Venture is an association of two or more persons to carry out a single business enterprise for profit.[2]

The Hon’ble Supreme Court of India held that “joint venture” connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks.[3]

The Institute of Chartered Accountants of India created the Indian Accounting Standards which every business operating in India has to follow. IAS 27 covers Consolidated and Separate Financial Statements in case of Joint Ventures. As per this statement there are three types of joint ventures i.e. jointly controlled operations, jointly controlled entities and jointly controlled assets.[4]

It can be reasonably concluded that the global nature of business has given the opportunity to the corporate bodies to come together, pool their resources, share the technological knowhow, and deliver the pest possible outcome. It is best suited for commercial transactions where neither party wants to indulge in a merger or a collaboration.

2. Types of Joint Venture

A JV can be equity based or based on Contractual agreement. In a Contractual JV no separate legal entity is created. There is merely an agreement to come and work together. They share resources, technology but do not invest in the equity of the business. If the parties wish then in a future date it may be converted into a Equity based JV. On the other hand in Equity based JV is where a separate legal entity is created like a company or a LLP. Here both the parties jointly control the operations of the JV in accordance with their investment.

3. Forms of Joint Ventures

A Joint Venture in India can be incorporated or unincorporated. Among the two types of JVs, the former one is proffered over the latter one since it allows the formation of a separate legal entity responsible for its actions and neither party has to compromise on their working style because of the other. But on the other hand an incorporated JV is also a costly affair. Hence it is important for the companies to look at the pros and cons before finalising the type of V to be formed.

• Partnership

A partnership is one of the simplest forms of forming a JV. It is an agreement where the partners decide to share the profits of the business carries on by all or any of the acting for all with prior permission.  It limits the scope of a JV because it has unlimited liability of partners, no separate legal entity for the newly formed JV, limited source of capital among others. Hence they are not preferred when a big project is undertaken.

• Strategic Alliance

In this type of a Joint Venture the parties do not contract as the shareholders of a company or partners in a partnership but rather they come together and collaborate as independent and separate contactors. This form of JV is best suited for purchasing or distributing agreements, technology agreements, marketing alliance.

• Company

The Companies Act 2013 governs a JV in a form of a company. Even though the formation and incorporation of the company involves the drafting of a multitude of documents like the MoA, AoA, but at the same time it is the most preferred type of JV since it allows the parties to make a tailor made agreement as per their requirements. There is only one condition which should be kept in mind i.e. the Joint Venture Agreement will not be binding on the JV company if the terms and conditions of the JVA are not included in the latter.[5]

• Limited Liability Partnership

In contrast to the unlimited liability partnership firms LLPs as their name suggests limits the liability of the partners. This further on allows the partners to liberty to organise their working as per an agreement. It also possesses the basic features of a separate legal entity corporation. It is in plain words a modification of a general partnership to suit the modern times.

4. Joint Venture different from other forms of Association

• Joint Venture and Partnership

The Court in its power of judicial interpretation differentiated between a partnership and a Joint Venture. It said, The Courts do not treat a joint adventure as identical with a partnership though it is so similar in nature, and in the contractual relationship created by such adventurerers that the rights as between them are governed practically by the same rules that govern the partnership. This relationship has been defined to be a special combination of persons undertaking jointly some specific adventure for profit without any actual partnership. Generally speaking the distinction between a joint adventure and a partnership is that former relates to a single transaction ‘though it may comprehend a business to be to be continued over several years’ while the later relates to a joint business of a particular kind.[6]

• Joint Venture and Collaboration

IAS 31 deals with Joint Venture whereas Collaboration on the other hand is not defined in or dealt with in any accounting standard. It simply means the coming together of two or more parties for working towards a shared objective. A JV is a particular collaboration i.e. it is formed when two or more parties come together for doing business.

• Joint Venture and Merger

A merger is type of contract where two separate companies come together, and eventually only one survives. The merged or acquired company ceases to exist, and leaves all its assets and liabilities with the acquiring company. Usually it is seen that if the two companies involved in the merger are of different sizes then the smaller one merges into the larger one.

5. The JVA or Shareholders Agreement

Adequate time and effort should be set aside for the drafting of the shareholders agreement, because in case of any dispute it is the final document binding the contracts. It should also be kept in mind that the same terms of the JVA are included in the documents of the new incorporated entity or the new entity is not bound by it.

First and foremost it should include any and all restrictions on changing the nature of the business which is being delt in. It should lay down the rules regarding the appointment and removal of directors. The rights and duties of the directors should also be carved out. Further it should protect the rights of the shareholders, i.e. both majority and minority shareholders by incorporating the concept of drag along and tag along rights respectively. If the parties want they can also restrict the transfer of shares and involve the provision of right of first refusal and pre-emption rights. A clearly laid out dividend policy so that there is no mismanagement in regard to the tax payments as well.

The only path to ensure success in a Joint Venture is to select a prudent local associate. After which both parties come together to make the Memorandum of Understanding which specifies all the terms and conditions of the business. It has to be drafted with utmost care and precaution by the concerned legal professionals. Another document termed as the Deed of Adherence is also attached to the Shareholders Agreement. A Deed of Adherence specifies the procedure to be followed when the shares are transferred by way of sale or gift to someone who is not an existing shareholder.

[1] India- GDP annual growth, Trading Economics, http://www.tradingeconomics.com/india/gdp-growth-annual

[2] Black’s Law Dictionary, 6th Edn., p. 839 (p. 117, Vol. 23).

[3] Faqir Chand Gulati v. Uppal Agencies Pvt. Ltd. and Anr. [(2008) 10 SCC 345].

[4] Ind AS 27, Ministry of Corporate Affairs, https://www.mca.gov.in/Ministry/pdf/Ind_AS27.pdf

[5] VB Rangaraj v. VB Gopalkrishnan and Ors 73 Comp Cas 201 (SC) (1992).

[6] Asia Foundations & Constructions Ltd. v. State of Gujarat: AIR 1986 Guj 185.