BATCH : 08
MANAGEMENT 360 TERM PAPER ON
Joint Ventures in Indian Context
Submitted To: Mr. Arvind Gandhi Submitted By: 10143 ± T.Ritu sri 10144 ± Tanu Das 10145 ± T. Uday 10146 ± K. Abhiram
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Contents
Objective: ................................................................................................................................................ 4 INTRODUCTION ....................................................................................................................................... 4 REASONS FOR FORMING A JOINT VENTURE ............................................................................................. 5 FACTORS TO BE CONSIDERED BEFORE A JOINT VENTURE IS FORMED ...................................................... 6 PLANNING THE JOINT VENTURE ............................................................................................................... 6 IDENTIFYING OBJECTIVES ..................................................................................................................... 7 SELECTING A PARTNER......................................................................................................................... 7 CHOOSING THE BUSINESS FORM ......................................................................................................... 7 IDENTIFYING LEGAL PROBLEM ............................................................................................................. 7 IDENTIFYING CONFLICTS BETWEEN PARTNERS ..................................................................................... 7 DRAFTING THE JOINT VENTURE AGREEMENT ....................................................................................... 8 TYPES OF JOINT VENTURES: - ................................................................................................................... 9 BASIC ADVANTAGES AND DISADVANTAGES:- ......................................................................................... 10 ADVANTAGES .................................................................................................................................... 10 DISADVANTAGES ............................................................................................................................... 10 JOINT VENTURES IN INDIA ..................................................................................................................... 11 PRE-FORMATION CONSIDERATIONS................................................................................................... 11 UNDERSTANDING FDI RULES .......................................................................................................... 11 GOVERNMENT APPROVALS FOR JOINT VENTURES: - ...................................................................... 12 JOINT VENTURE OR SHAREHOLDERS AGREEMENT ......................................................................... 13 CONDUCTING DUE DILIGENCE........................................................................................................ 13 CONTROL IN THE JOINT VENTURE COMPANY ................................................................................. 13 INDIAN PARTNER S ABILITY TO INVEST ........................................................................................... 14 CAPITALIZATION ............................................................................................................................ 14 TAX CONSIDERATIONS ................................................................................................................... 14 FORMATION OF A JOINT VENTURE ................................................................................................. 14 REGULATORY LICENSES AND REGISTRATIONS ................................................................................ 16 DIVISION OF POWER ...................................................................................................................... 16 DIVISION OF PROCEEDS.................................................................................................................. 16 TRANSFER OF SHARES .................................................................................................................... 16 REGULATORY RESTRICTIONS/APPROVALS ...................................................................................... 17 2
TAX AND SUBSIDIES ....................................................................................................................... 17 THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT.......................................................... 17 CONFLICTS AND TERMINATION OF A JOINT VENTURE .................................................................... 17 DOUBLE TAXATION AGREEMENTS .................................................................................................. 18 EXAMPLES OF JOINT VENTURES:- ........................................................................................................... 18 THE BHARTI - WAL-MART RETAIL JOINT VENTURE .............................................................................. 18 BAJAJ AUTO PLANS JV IN INDONESIA ................................................................................................. 20 M&S JV WITH RELIANCE RETAIL ......................................................................................................... 20 MOST COMMON REASONS OF FAILURES OF JV ...................................................................................... 21 CONCLUSION: - ...................................................................................................................................... 21
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Objective: To Study the concept of Joint Venture in Indian Context.
INTRODUCTION JOINT VENTURE is a contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise. It is a legal entity formed between two or more parties to undertake an economic activity together. The JV parties agree to create, for a finite time, a new entity and new assets by contributing equity. They then share in the revenues, expenses and assets and "control" of the enterprise. A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits. A joint venture is not to be taken lightly. For a businessperson to embark on a joint venture, he or she needs to be committed and willing to work cooperatively with the other party involved. A person involved in a joint venture can no longer make all of the decisions for the business alone. For it to be truly a ³joint venture,´ there has to be 100% commitment from both sides. When determining whether or not to embark on a joint venture, it is important to ensure both parties are a match with the projected client base. In a joint venture, each party must compliment the other in business. Sometimes, a misunderstanding or a lack of communication can destroy a joint venture. Therefore, it is necessary for both parties to be capable of communicating what they are able to offer to the project and what their expectations are. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.
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REASONS FOR FORMING A JOINT VENTURE There are many motivations that lead to the formation of a JV. They include:
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Risk Sharing ± Risk sharing is a common reason to form a JV, particularly, in highly capital intensive industries and in industries where the high costs of product development equal a high likelihood of failure of any particular product. Economies of Scale ± If an industry has high fixed costs, a JV with a larger company can provide the economies of scale necessary to compete globally and can be an effective way by which two companies can pool resources and achieve critical mass. Market Access ± For companies that lack a basic understanding of customers and the relationship/infrastructure to distribute their products to customers, forming a JV with the right partner can provide instant access to established, efficient and effective distribution channels and receptive customer bases. This is important to a company because creating new distribution channels and identifying new customer bases can be extremely difficult, time consuming and expensive activities. Geographical Constraints ± When there is an attractive business opportunity in a foreign market, partnering with a local company is attractive to a foreign company because penetrating a foreign market can be difficult both because of a lack of experience in such market and local barriers to foreign-owned or foreign-controlled companies. Funding Constraints ± When a company is confronted with high up-front development costs, finding the right JVP can provide necessary financing and credibility with third parties. Acquisition Barriers; Prelude to Acquisition ± When a company wants to acquire another but cannot due to cost, size, or geographical restrictions or legal barriers, teaming up with a JVP is an attractive option. The JV is substantially less costly and thus less risky than complete acquisitions, and is sometimes used as a first step to a complete acquisition with the JVP. Such an arrangement allows the purchaser the flexibility to cut its losses if the investment proves less fruitful than anticipated or to acquire the remainder of the company under certain circumstances.
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OTHER REASONS MAY BE:y y y y y Build on company's strengths. Access to innovative managerial practice Competitive Goals Influencing structural evolution of the industry Defensive response to blurring industry boundaries
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y y y y
Creation of stronger competitive units Synergies Transfer of technology/skills Diversification
FACTORS TO BE CONSIDERED BEFORE A JOINT VENTURE IS FORMED ?screening of prospective partners ?joint development of a detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan ?due diligence - checking the credentials of the other party ("trust and verify" - trust the information you receive from the prospective partner, but it's good business practice to verify the facts through interviews with third parties) ?development of an exit strategy and terms of dissolution of the joint venture ?most appropriate structure (e.g. most joint ventures involving fast growing companies are structured as strategic corporate partnerships) ?Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners. ?special allocations of income, gain, loss or deduction to be made among the partners ?compensation to the members that provide services
PLANNING THE JOINT VENTURE The formation of an international joint venture can be an extremely complex process. The goals of the enterprise must be defined, the structure must be negotiated, numerous legal issues must be recognized and resolved, and potential areas of conflict between the JVPs must be identified and reconciled. Careful planning is required at all stages.
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IDENTIFYING OBJECTIVES
At the outset of every proposed joint venture, it is necessary to have an understanding of the basic objectives of the proposed enterprise. This includes identification of the nature and scope of the proposed undertaking, as well as the company's expectations and goals. For example, if a company is seeking a short-term arrangement to measure the potential market for a product in a foreign country, a licensing or straightforward contractual arrangement might be preferable to a joint venture, which generally contemplates a longer term and more substantial commitment.
SELECTING A PARTNER
If a joint venture is deemed desirable, one of the first considerations is the selection of a compatible partner. A concern may initially seek a co-venturer of equal business stature and with comparable corporate policies, philosophies, and financial resources. Through the process of active negotiation, involving business people as well as lawyers, the JVPs should determine whether their objectives are compatible. This process may be difficult, but it is important, particularly in the context of multinational joint ventures, given the cultural, linguistic, political, and social differences between the parties. Similarly, there may be legal, accounting, and tax differences between the countries of the JVPs. Since all of these differences may give rise to misunderstandings, they must be reconciled.
CHOOSING THE BUSINESS FORM
The next step is to choose the basic structure of the business venture. A variety of complex legal and practical considerations are involved at this stage. It is necessary to identify the respective contributions of the parties and the proposed financing arrangements in order to measure the compatibility of the potential JVPs and to determine the appropriate organizational form. Frequently, one JVP looks to a capital infusion and, in return, shares its technology expertise, and know-how.
IDENTIFYING LEGAL PROBLEM
At the beginning of the process, counsel must identify and resolve major legal issues and potential problem areas, including governmental regulatory matter.
IDENTIFYING CONFLICTS BETWEEN PARTNERS
It is also important to identify potential areas of conflict between the JVPs so that they can be reconciled prior to making an irrevocable commitment. For example, the parties may have to deal with differing tax objectives resulting from fundamentally different business goals or, more commonly, from different constraints of the tax laws and accounting practices of the home country. Early recognition of these issues may allow the parties sufficient flexibility to structure the joint venture to avoid these problems.
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DRAFTING THE JOINT VENTURE AGREEMENT
Finally, after the goals, structure, and legal issues have been identified, it is necessary to draft the joint venture agreement. As will be seen in later chapters of this book, international joint ventures often involve unique features, and careful draftsman ship is required. Before signing a Joint Venture Agreement the following must be properly addressed:
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Dispute resolution agreements Applicable law. Force Majeure (is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term "act of God" (e.g., flooding, earthquake, volcanic eruption), prevents one or both parties from fulfilling their obligations under the contract.) Holding shares Transfer of shares Board of Directors General meeting. CEO/MD Management Committee Important decisions with consent of partners Dividend policy Funding Access. Change of control Non-Compete Confidentiality Indemnity (is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B). Forms of indemnity include cash payments, repairs, replacement, and reinstatement.) Assignment. Break of deadlock Termination. The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.
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TYPES OF JOINT VENTURES: There are two types of joint ventures, the equity joint venture and the non equity joint venture. An equity joint venture is one in which a separate business entity is formed and capital is contributed to all parties involved. A non equity joint venture, on the other hand, does not have contribution of capital to form a new entity. Instead, they make arrangements to share their resources. These are invariable contractual agreements. Under non-equity joint ventures (also known as cooperative agreements), meanwhile, the parties seek technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, or one-time contracts, e.g., for construction projects. Participants do not always furnish capital as part of their joint venture commitments. There are, for example, non-equity arrangements in which some companies are more in need of technical services or technological expertise than they are capital. They may want to modernize operations or start new production operations. Thus, they limit partners' participation to technical assistance. Joint ventures are frequently characterized by a 50/50 participation in which each partner contributes 50 percent of the equity in return for 50 percent participating control. The relative contributions, as well as degree of ownership and control, are largely matters for negotiation. They relate to the value each party places, and the other party accepts, on the contributions, and reflects the objectives of the venturers. Such a valuation frequently can be a difficult and tedious exercise, particularly where contributions involve technology. If the joint venture is to be located in a country with a controlled economy, valuation may be quite problematic, especially if the JVP from that country is contributing land or goods in kind that may not have readily ascertainable free market values. The 50/50 arrangement is common in joint ventures. Such equal participation has a number of advantages. Each JVP is equally at risk, and is not subservient to the other partner, as would be the case where majority control is vested in one party. Such a sharing of interest and control raises the possibility, however, of deadlock and early termination of the joint venture before its objectives have been accomplished. Many corporations nevertheless subscribe to this form to ensure an equal commitment by the other partner, while retaining maximum control over the conduct of the enterprise. It should be noted that joint ventures are characterized by extreme flexibility, so that if one partner is uncomfortable with coequal status in one phase of the business enterprise, the joint venture can be structured to accommodate the particular need. For example, if a JVP is concerned that the joint venture may expand its product line beyond the initial parameters of the joint venture and thereby threaten that JVP's already established product lines, the JVP may insist upon more than a coequal role in that phase of the joint venture's business. Such objectives can be reconciled by careful planning at the inception of the joint venture
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BASIC ADVANTAGES AND DISADVANTAGES:-
ADVANTAGES
Provide companies with the opportunity to gain new capacity and expertise Allow companies to enter related businesses or new geographic markets or gain new technological knowledge access to greater resources, including specialized staff and technology sharing of risks with a venture partner Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure. In the era of divestiture and consolidation, JV¶s offer a creative way for companies to exit from non-core businesses. Companies can gradually separate a business from the rest of the organization, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.
DISADVANTAGES
It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: y y y y y The objectives of the venture are not 100 per cent clear and communicated to everyone involved. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. A major problem is that joint ventures are very difficult to integrate into a global strategy that involves substantial cross-border trading. In such circumstances, there are almost inevitably problems concerning inward and outward transfer pricing and the sourcing of exports, in particular, in favor of wholly owned subsidiaries in other countries. The trend toward an integrated system of global cash management, via a central treasury, may lead to conflict between partners when the corporate headquarters endeavors to impose limits or even guidelines on cash and working capital usage, foreign exchange management, and the amount and means of paying remittable profits. Another serious problem occurs when the objectives of the partners are, or become, incompatible. For example, the multinational enterprise may have a very different attitude to risk than its local partner, and may be prepared to accept short-term losses in order to build market share, to take on higher levels of debt, or to spend more on advertising. Similarly, the objectives of the participants may well change over time,
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especially when wholly owned subsidiary alternatives may occur for the multinational enterprise with access to the joint venture market. Problems occur with regard to management structures and staffing of joint ventures.
Thus, Success in a joint venture depends on thorough research and analysis of the objectives.
JOINT VENTURES IN INDIA Foreign investment for development has become a matter of necessity for most growing economies in the world. India is no different. An emerging market implies a market which is deregulated and has conditions favorable to foreign investment. Although India falls within this category, the term, ³emerging market´ has not been legally defined. In several industrial sectors, the Government of India has felt that the best way forward is to permit foreign investment. In 1991, the Indian Government amended the New Industrial Policy, whereby many industrial sectors, hitherto fore closed, were opened up for investment. Since then, the Government has not looked back, and presently in many areas foreign corporations are allowed to incorporate wholly (100%) owned subsidiaries (³WOS´) in India. Furthermore, the Indian capital markets have also been liberalized. Today, foreign institutional investors (³FIIs´) operate in the Indian stock markets, providing a variety of services. A joint venture is generally understood as technical and financial collaboration either in the form of greenfield projects, take-overs or alliances with existing companies. In India, no legal definition as such has been given to joint ventures. However, the Government of India and its agencies prescribe certain guidelines, which distinguish joint ventures from other entities. Indian joint ventures usually comprise two or more individuals/companies, one of whom may be nonresident, who come together to form an Indian private/public limited company, holding agreed portions of its share capital. A joint venture agreement primarily provides for the manner in which the shareholders of the joint venture company may transfer or dispose of their shares. It is also commonly referred to as shareholders agreement.
PRE-FORMATION CONSIDERATIONS
UNDERSTANDING FDI RULES
Although most sectors of the Indian economy are fully open to FDI, there are certain sectors where FDI is either capped (for example, telecoms, insurance and defence manufacturing) or totally prohibited (such as multi-brand retail, atomic energy and agriculture). (Prior government approval is also required in relation to FDI in defence manufacturing.) Other sectors, such as real
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estate development, are subject to certain investment criteria; if these are not met, FDI is prohibited. As a result, it is important to check the rules on foreign investment at the outset of any joint venture to confirm what is and is not permitted. FDI rules can be found on the Department of Industrial Policy and Promotion website ( http://dipp.nic.in). In certain areas such as telecommunications, drugs & pharmaceuticals, hotel & tourism, or advertising foreign investment up to 50%, 51% and/or 74% in the equity of a joint venture company is permitted without Reserve Bank of India (RBI) approval. However, should the foreign investor seek to subscribe to more than 74% of the total equity in a joint venture company or establish a WOS( Wholly Owned Subsidiary- A subsidiary whose parent company owns 100% of its common stock.) , permission has to be obtained either from the Foreign Investment Promotion Board (³FIPB´) or the Secretariat of Industrial Approvals (³SIA´) depending upon the quantum of investment. Applications for large investments and WOSs are entertained only by the FIPB. Moreover, in case of FIIs, an aggregate portfolio investment in the share capital of Indian companies is permitted to the extent of 24% of the issued and paid-up capital of the company. However, an Indian company may permit a FII to purchase up to 30% of its share capital by passing a special resolution (resolution required to be passed by shareholders having 75% shares with voting rights in the company). It should be highlighted that the aforesaid is applicable to foreign companies and individuals only. Should the investment be made by nonresident Indians (Indian citizens living abroad or persons of Indian origin living abroad and having foreign nationality), the investments laws are more relaxed. Since the focus of this paper is to describe joint ventures in India involving foreign companies and/or foreigners, investment laws relating to NRIs have not been discussed.
GOVERNMENT APPROVALS FOR JOINT VENTURES: -
All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India is required. In other special cases, not covered under the automatic route, a special approval of FIPB is required. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities.
Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of
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high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated.
JOINT VENTURE OR SHAREHOLDERS AGREEMENT
The joint venture agreement establishes the relationship between joint venture partners and the way in which the company will be run. It usually includes clauses on: ? Shares ? Management structure ? Withdrawal rights ? Competition issues ? Dispute resolution ? IPR ? Any warranties or indemnities
CONDUCTING DUE DILIGENCE
As with any joint venture, the foreign (and, for that matter, the Indian) partner should be fully aware of any underlying legal or commercial issues that may affect the other party and the proposed joint venture. While a great deal of information on Indian companies is available publicly, in some cases (for example, in relation to smaller companies) a formal due diligence exercise may be the only way of finding the necessary information.
CONTROL IN THE JOINT VENTURE COMPANY
Under the Companies Act, 1956, (³CosAct´) a company can carry on activities by passing either of two resolutions, special resolutions and ordinary resolutions. Ordinary resolutions can be passed by shareholders having 50.01% (rounded of to 51%) shares with voting rights in the company, whereas special resolutions can be passed only by shareholders having 75% shares
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with voting rights in the company. A special resolution is inter alia required to amend the Memorandum and Articles of Association of a 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. Normally, Indian joint ventures have a 51%- 49% equity break-up between the foreign and Indian partners, respectively.
INDIAN PARTNER S ABILITY TO INVEST
The investments (cash or otherwise) being made by the parties are also relevant. Generally, foreign companies are the main investors in joint ventures. Therefore, they seek higher equity percentages. However, larger Indian companies, who are in a position to make substantial investments, often seek quid pro quos. ³Who brings what to the table,´ decides the equity ratio in many cases.
CAPITALIZATION
A private limited company requires a minimum paid up capital of INR100,000 (about EUR1,706 or US$2,270). If the company uses certain words such as ³India´ or ³Hindustan´ in its name then the minimum paid up capital requirement is INR500,000 (about EUR 8,533 or US$11,351).
TAX CONSIDERATIONS
In many instances, companies route their investments into an Indian joint venture company through an offshore destination. India has double taxation avoidance agreements (³DTAAs´) with many countries. Many US companies route their investments through the Mauritius islands, because the Indo-Mauritius DTAA has reduced withholding tax rates applicable to capital gains, technical service fees earned in India, etc. Cyprus is another offshore destination gaining popularity.
FORMATION OF A JOINT VENTURE
In India, joint ventures can exist in the form of companies, partnerships or joint working agreements. The various companies that may be incorporated in India are as follows:
1. Companies limited by shares 2. Companies limited by guarantee 3. Companies having unlimited liability Companies limited by shares are of two types - public and private. As regards companies limited by shares, members are liable only to the extent of the unpaid amount on their shares, if any. In a company limited by guarantee, the liability is limited to the amount pledged, being the contribution to be paid in case of winding-up of the company. In companies with unlimited liability, the liability of each member is unlimited. The most common forms of joint ventures are Indian public or private companies, wherein share capital is issued to the joint venture partners. In this way, the risk of members is limited to the extent of the unpaid amount on their shares.
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The next step is to decide whether to have a public or a private company. Unless money is sought to be raised from the public, joint venture partners do not incorporate public companies. In India, partnerships are defined under section 4 of the Indian Partnership Act, as agreements to enter into a partnership business so as to share profits and to conduct such business for one or on behalf of all. Partnerships do not have any limitations on liability of the respective partners. Thus, the risk associated with this form of business is very high, and is not advocated for any type of joint venture. Joint working agreements are either customer or market oriented depending upon the needs of the partners. In joint working agreements, the domestic partner manufactures those components which are cost effective while the joint venture partner imports into India those components which are not cost effective to manufacture. The final product is a result of the melange. In case of joint working agreements, there may not be a complete transfer of technology. Technology transfer may proceed gradually in steps. There is no payment of lump sum fee or royalty to the foreign company. There is a gradual sharing of revenue between the parties. In order to make the joint venture agreement valid in law, the requirements prescribed by the Indian Contract Actv and the CosAct need to be met. Some of the important criteria to be fulfilled are: a) Offer and acceptance, b) Consideration, c) The intention to form a company, and d) Signature of the parties Other important provisions in joint venture agreement are: a) Constitution of the board of directors, b) Termination clause, c) The binding nature of the agreement, d) Share transfer provisions, e) Dilution clause, and f) Dispute resolution clause
The process of company formation in India is not straightforward or quick. It can, for example, take up to eight weeks to incorporate a private limited company, typically involving the following main steps: ? Reserving a company name with the Registrar of Companies. ? Drafting constitutional documents (the memorandum and articles of association) and submitting them before the Registrar of Companies for scrutiny. ? Submitting various prescribed forms (for example, the registered address form). ? Liaising with the Registrar of Companies.
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? Obtaining the certificate of incorporation.
REGULATORY LICENSES AND REGISTRATIONS
Once Indco has been established, it needs to obtain various licenses and registrations including: y y y y Shops and establishment license. Value added tax (VAT) and sales tax registration. Permanent account number and tax deduction account number. If the business of the joint venture involves the importation of equipment from abroad, an import and export license is also required.
DIVISION OF POWER
The shareholders agreement prescribes the number of directors on the board, the quorum for board meetings and general meetings, the day to day management of the company, procedure to be followed on the death or bankruptcy of a joint venture partner, etc. In order to prevent deadlocks, the chairman of the board of directors can be given a casting vote in case of equality of votes on the board. Foreign companies usually retain the right to appoint the chairman per meeting of the board. If for some reason this does not work, deadlocks can be solved by resorting to alternate dispute resolution such as conciliation and/or arbitration. In case of bankruptcy of one of the partners, joint venture agreements commonly provide that the agreement may be terminated. On death of a partner, devolution of shares in a particular manner or termination are the two options. In ordinary circumstances, the joint venture is run by the board of directors upon whom powers are delegated by the articles of association.
DIVISION OF PROCEEDS
Except for section 205 of the CosAct, which provides for distribution of dividend, there is no codified law in India, which regulates the division of proceeds. Restrictions on profit sharing or payment of dividends are included in the shareholders agreement. Once Government of India permission is granted to the foreign investor to invest in an Indian joint venture company, the foreign investor can repatriate both, the principal as well as dividend or other income without any restrictions. Currently, dividends in India are not taxable in the hands of the shareholders. The company has to pay tax @ 12.5% (plus surcharge and education cess) on the dividend to be distributed to the shareholders.
TRANSFER OF SHARES
There are no statutory rules to be followed as regards transfer of shares. The transfer conditions depend upon the joint venture agreement. However, to affect a transfer the shareholders must execute a share transfer form and furnish it along with the original share certificate to the company. It should be pointed out that under section 111 of the CosAct, a company has the power to refuse the registration of transfer of shares. Each refusal must be accompanied with specific reasons. Appeal against such refusals lie to the Company Law Board. This provision is
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often used for blocking share transfers. Therefore, care must be taken to contract out of this provision or to provide for detailed restrictions in the shareholders agreement.
REGULATORY RESTRICTIONS/APPROVALS
All joint venture proposals not falling within the Reserve Bank of India¶s automatic route require approval of the Reserve Bank of India, the FIPB or the concerned industry ministry, depending upon the quantum and nature of foreign investment. There is no way in which regulatory restrictions can be avoided. Having acted for several companies from industrialized jurisdictions, it is imperative to make a good written proposal of the project to be followed up with oral presentations. Permissions granted by RBI and FIPB are valid for two years. Every six months, a statement is required to be submitted to the SIA as regards the status of the project and the amount of money invested. If the parties fail to take steps as per the permission letter, the permission may not be renewed on expiry of the two year period.
TAX AND SUBSIDIES
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. Small scale industries, i.e., industries entailing an investment upto Rs. 10,000,000 (US$ 222,222), get direct and indirect tax benefits. As regards subsidies, the Government does offer the same to industries set up in backward or rural areas by way of actual cash disbursements, reduced rates for land, etc.
THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT
It deals with anti-trust matters and unfair trade practices. Normally, it comes into play when exclusive distribution agreements are being entered into or when goods are required to be sold subject to certain conditions. In addition, it prescribes certain practices as unfair trade practices.
CONFLICTS AND TERMINATION OF A JOINT VENTURE
Most joint venture agreements contain clauses prescribing a course of action in case the joint venture fails. Alternate dispute resolution is resorted to on a regular basis. Conciliation/arbitration is common. Arbitration can be conducted outside India under ICC or other rules. However, RBI and FIPB provide that Indian law must govern the shareholders agreement, where prior approval is required. Therefore, litigation, if any, or enforcement of a foreign award are to be conducted under Indian law in Indian courts. If necessary, courts grant stay orders to prevent the opposite party from disposing of assets of the joint venture company, including intellectual property rights.
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In case one partner wants to opt out of the joint venture, it is common to give the other partners the option to buy the stake of the first partner at a price to be fixed after valuation of the shares of the joint venture company.
DOUBLE TAXATION AGREEMENTS
India has entered into Double Taxation Avoidance Agreements (DTAAs) with numerous countries including the UK and the US. The DTAA between the UK and India, for instance, provides for various tax benefits including lower rates of capital gains and withholding tax. In addition, India has entered into a more favorable double taxation agreement with Mauritius. Under normal circumstances, the proceeds of a sale of shares in an Indian company are usually taxed in India, even if the seller is not tax resident in India. However, under the India-Mauritius tax treaty, no capital gains tax in either India or Mauritius is payable on the sale of the shares of an Indian company by a Mauritian company. While there is a lower tax rate on dividends for Mauritius tax residents under the treaty, corporate dividends declared by an Indian company are presently not taxed in the hands of the recipient on payment of a dividend tax by the Indian company declaring the dividend. This dividend tax rate currently stands at 14.02%, although under the recently introduced Finance Bill this would increase to 16.99%.
EXAMPLES OF JOINT VENTURES:-
THE BHARTI - WAL-MART RETAIL JOINT VENTURE
On November 27, 2006, Wal-Mart Stores, Inc (Wal-Mart), the world's largest retailer, and Bharti Enterprises Ltd. (Bharti), a leading business group in India, signed a Memorandum of Understanding (MoU) to explore business opportunities in the Indian retail industry. This joint venture marked the entry of Wal-Mart into the Indian retailing industry. According to Sunil B. Mittal (Mittal), chairman and managing director, Bharti, "The joint venture with equal stakes will operate in areas where the government allows foreign investment in retail like cash-and-carry and logistics. The retail shops will be owned by Bharti Enterprises under the Wal-Mart franchise. The idea is to give Indians the lowest price every day." Many analysts opined that both the parties in the venture had their own strengths and would complement each other. Viswanathan Vasudevan, an equity analyst at the Singapore-based Aquarius Investment Advisors Pte, said, "It's a great fit for Wal-Mart as Bharti knows the rules of the game and will save Wal-Mart a lot of time and energy to overcome the system.
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For Bharti, you can't get a better partner than Wal-Mart in retail." Gajendra Nagpal, director, Unicorn Investments, said, "This joint venture is a winning combination. Wal-Mart's logistics skill and Bharti's execution capability will create a potent force in the Indian market." This franchise strategy with Bharti was a deviation from Wal-Mart's usual way of entering countries. This was because the policy restrictions on foreign direct investment (FDI) in the Indian retail sector. As part of the agreement, Bharti was expected to pay a royalty between 2 percent and 3 percent of sales to Wal-Mart for using the latter's brand name. The Bharti-WalMart joint venture was expected to open its stores in India from August 2007. Though the parties did not disclose the financials of the deal, according to retail industry sources, the Bharti-Wal-Mart venture would make an initial investment of US$ 100 million, which could further increase to US$ 1.46 billion. Wal-Mart had reportedly brought in two veteran executives, Andy Guttery and Lance Rettig, to implement its operations in India under the joint venture. Wal-Mart had also roped in Raj Jain, Emerging markets president & CEO, Wal-Mart, to head the cash-and-carry business in India. The retail industry in India is estimated at about US$ 300 billion and is expected to grow to US$ 427 billion in 2010 and US$ 637 billion in 2015. Moreover, only 3 percent of the Indian retail industry was in the organized sector. Foreign retailers were keen to enter India's rapidly growing retail market. However, the government had permitted retailers of single brand products to own a majority stake in a joint venture with a local partner (with prior government permission). Retailers of multi-brands were only permitted to operate through franchises and licenses, or a cash-and-carry wholesale model. The biggest competitor for Bharti-Wal-Mart was expected to be Reliance Retail, the retail wing of Reliance, which had planned to establish 10,000 stores by 2010. It had already opened 11 pilot stores under the "Reliance Fresh" format in Hyderabad. Even Pantaloon Retail, the retail arm of the Future Group was expected to give stiff competition as it had a first-mover advantage. Kishore Biyani, CEO, Future Group, said, "Our strength is that we understand the Indian consumer better than Wal-Mart and we also have a window of opportunity and the first-mover advantage. For instance, we will have 100 Big Bazaars across India by the time the first store (of Bharati-Wal-Mart) opens its doors here." A few other Indian retailers felt that the entry of foreign retail giants like Wal-Mart, Carrefour SA and Tesco Plc (Tesco) would result in Indian retailers learning some of the best international practices in retailing. However, analysts noted that the success of the joint venture would depend on how successful Wal-Mart is in building a cost efficient supply chain and sourcing network so
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that the cost savings are passed on the end consumer through its trademark "every day low price" strategy.
BAJAJ AUTO PLANS JV IN INDONESIA
Bajaj has set up a joint venture in Indonesia with PT Abdi Raharja to expand its presence in south-east Asia. PT Abdi Raharja, owned by the Gobel group, is the sole distributor of Bajaj¶s two-and three-wheelers in Indonesia. Bajaj Auto, the country¶s second largest two-wheeler maker, has set up a joint venture in Indonesia with local partner Pt Abdi Raharja. The objective is to expand its presence in Southeast Asia. Bajaj auto, which has set up its first overseas plant for two-and three ± wheelers in Indonesia, is keen to team up with a local partner to take on competition from market leader Honda and Yamaha. Bajaj Auto¶s technology partner Kawasaki also operates in Indonesia through subsidiary company Kawasaki Motors Indonesia (KMI). PT Abdi Raharja, owned by the Gobel group, is the sole distributor of Bajaj Auto two-and three-wheelers in Indonesia. The three-member team had discussions with shareholders of the Indonesian company and also met representatives from local industry associations and banks. The team prepared a comprehensive business strategy for the region which was presented to the company¶s board, which planed to increase its exports by 33.7%. Indonesia, which sells around 2m two-wheelers annually, is a very big market for step-through, while motorcycle sales account for just around 3 Lacs units. Honda is a clear leader with over 60% of the market followed by Yamaha, Suzuki and Kawasaki. Chinese and Taiwanese two-wheeler companies have, in recent years, been active in the Indonesian market. Besides, for Bajaj Auto, its proposed manufacturing unit in Indonesia will open up big opportunities in adjoining countries. The plant has also enabled the company escape the high import duties that are levied in Indonesia.
M&S JV WITH RELIANCE RETAIL
Marks and Spencer Reliance India, a joint venture between Mukesh Ambani-run Reliance and UK-retailer Marks and Spencer Plc, intends to open 15 stores in two-years, mainly in the metros, a top company official said. "We are looking to open 10-15 stores in the next two years mainly in the metros. We're aiming to open larger stores which will showcase a fuller range of our product catalogue," Marks and Spencer Reliance India, Head of Marketing, Nandini Sethuraman, told PTI here.
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Marks and Spencer announced plans to open 50 stores in India in the next five years when it formed the joint venture in 2008. The retailer said the target remains. "Our plan is to open larger stores between 15,000 sq ft and 35,000 sq ft. By 2014, our aim is to have 50 stores. It all depends on momentum and right locations," Sethuraman said. The retailer currently operates 18 stores in India in conjunction with Reliance Retail. Presently, the company has 18 stores across India in destinations such as Delhi, Amritsar, Mumbai, Pune, Ahmedabad, Kolkata, Bangalore, Hyderabad and Chennai with an average size of about 5,000 sq ft to over 22,000 sq ft.
MOST COMMON REASONS OF FAILURES OF JV y y y y y lack of trust can be key to failure Conflict over delegation of decision making Disagreement over operating policies, strategies, and tactics Differences in the approach towards management style and system Excessive costs, failure to achieve projected income, or unforeseen capital requirements may make the continuation of a JV unattractive.
CONCLUSION: Finding Joint venture partners has not been easy until now. Everyone knows that joint ventures are the number one, fastest growing, most profitable form of marketing strategy in the world, however building joint venture alliances can be time consuming and unproductive if one doesn't know what to do or where to find them. Therefore it is very important to have a clear understanding of what each joint venture partner will contribute and what they will get back. A successful joint venture will help your business develop faster, without the need to borrow - increase market share, without the need for excessive advertising - and grow profits, while providing a better service.
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doc_219122156.docx
MANAGEMENT 360 TERM PAPER ON
Joint Ventures in Indian Context
Submitted To: Mr. Arvind Gandhi Submitted By: 10143 ± T.Ritu sri 10144 ± Tanu Das 10145 ± T. Uday 10146 ± K. Abhiram
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Contents
Objective: ................................................................................................................................................ 4 INTRODUCTION ....................................................................................................................................... 4 REASONS FOR FORMING A JOINT VENTURE ............................................................................................. 5 FACTORS TO BE CONSIDERED BEFORE A JOINT VENTURE IS FORMED ...................................................... 6 PLANNING THE JOINT VENTURE ............................................................................................................... 6 IDENTIFYING OBJECTIVES ..................................................................................................................... 7 SELECTING A PARTNER......................................................................................................................... 7 CHOOSING THE BUSINESS FORM ......................................................................................................... 7 IDENTIFYING LEGAL PROBLEM ............................................................................................................. 7 IDENTIFYING CONFLICTS BETWEEN PARTNERS ..................................................................................... 7 DRAFTING THE JOINT VENTURE AGREEMENT ....................................................................................... 8 TYPES OF JOINT VENTURES: - ................................................................................................................... 9 BASIC ADVANTAGES AND DISADVANTAGES:- ......................................................................................... 10 ADVANTAGES .................................................................................................................................... 10 DISADVANTAGES ............................................................................................................................... 10 JOINT VENTURES IN INDIA ..................................................................................................................... 11 PRE-FORMATION CONSIDERATIONS................................................................................................... 11 UNDERSTANDING FDI RULES .......................................................................................................... 11 GOVERNMENT APPROVALS FOR JOINT VENTURES: - ...................................................................... 12 JOINT VENTURE OR SHAREHOLDERS AGREEMENT ......................................................................... 13 CONDUCTING DUE DILIGENCE........................................................................................................ 13 CONTROL IN THE JOINT VENTURE COMPANY ................................................................................. 13 INDIAN PARTNER S ABILITY TO INVEST ........................................................................................... 14 CAPITALIZATION ............................................................................................................................ 14 TAX CONSIDERATIONS ................................................................................................................... 14 FORMATION OF A JOINT VENTURE ................................................................................................. 14 REGULATORY LICENSES AND REGISTRATIONS ................................................................................ 16 DIVISION OF POWER ...................................................................................................................... 16 DIVISION OF PROCEEDS.................................................................................................................. 16 TRANSFER OF SHARES .................................................................................................................... 16 REGULATORY RESTRICTIONS/APPROVALS ...................................................................................... 17 2
TAX AND SUBSIDIES ....................................................................................................................... 17 THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT.......................................................... 17 CONFLICTS AND TERMINATION OF A JOINT VENTURE .................................................................... 17 DOUBLE TAXATION AGREEMENTS .................................................................................................. 18 EXAMPLES OF JOINT VENTURES:- ........................................................................................................... 18 THE BHARTI - WAL-MART RETAIL JOINT VENTURE .............................................................................. 18 BAJAJ AUTO PLANS JV IN INDONESIA ................................................................................................. 20 M&S JV WITH RELIANCE RETAIL ......................................................................................................... 20 MOST COMMON REASONS OF FAILURES OF JV ...................................................................................... 21 CONCLUSION: - ...................................................................................................................................... 21
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Objective: To Study the concept of Joint Venture in Indian Context.
INTRODUCTION JOINT VENTURE is a contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise. It is a legal entity formed between two or more parties to undertake an economic activity together. The JV parties agree to create, for a finite time, a new entity and new assets by contributing equity. They then share in the revenues, expenses and assets and "control" of the enterprise. A joint venture takes place when two parties come together to take on one project. In a joint venture, both parties are equally invested in the project in terms of money, time, and effort to build on the original concept. While joint ventures are generally small projects, major corporations also use this method in order to diversify. A joint venture can ensure the success of smaller projects for those that are just starting in the business world or for established corporations. Since the cost of starting new projects is generally high, a joint venture allows both parties to share the burden of the project, as well as the resulting profits. A joint venture is not to be taken lightly. For a businessperson to embark on a joint venture, he or she needs to be committed and willing to work cooperatively with the other party involved. A person involved in a joint venture can no longer make all of the decisions for the business alone. For it to be truly a ³joint venture,´ there has to be 100% commitment from both sides. When determining whether or not to embark on a joint venture, it is important to ensure both parties are a match with the projected client base. In a joint venture, each party must compliment the other in business. Sometimes, a misunderstanding or a lack of communication can destroy a joint venture. Therefore, it is necessary for both parties to be capable of communicating what they are able to offer to the project and what their expectations are. Since money is involved in a joint venture, it is necessary to have a strategic plan in place. In short, both parties must be committed to focusing on the future of the partnership, rather than just the immediate returns. Ultimately, short term and long term successes are both important. In order to achieve this success, honesty, integrity, and communication within the joint venture are necessary.
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REASONS FOR FORMING A JOINT VENTURE There are many motivations that lead to the formation of a JV. They include:
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Risk Sharing ± Risk sharing is a common reason to form a JV, particularly, in highly capital intensive industries and in industries where the high costs of product development equal a high likelihood of failure of any particular product. Economies of Scale ± If an industry has high fixed costs, a JV with a larger company can provide the economies of scale necessary to compete globally and can be an effective way by which two companies can pool resources and achieve critical mass. Market Access ± For companies that lack a basic understanding of customers and the relationship/infrastructure to distribute their products to customers, forming a JV with the right partner can provide instant access to established, efficient and effective distribution channels and receptive customer bases. This is important to a company because creating new distribution channels and identifying new customer bases can be extremely difficult, time consuming and expensive activities. Geographical Constraints ± When there is an attractive business opportunity in a foreign market, partnering with a local company is attractive to a foreign company because penetrating a foreign market can be difficult both because of a lack of experience in such market and local barriers to foreign-owned or foreign-controlled companies. Funding Constraints ± When a company is confronted with high up-front development costs, finding the right JVP can provide necessary financing and credibility with third parties. Acquisition Barriers; Prelude to Acquisition ± When a company wants to acquire another but cannot due to cost, size, or geographical restrictions or legal barriers, teaming up with a JVP is an attractive option. The JV is substantially less costly and thus less risky than complete acquisitions, and is sometimes used as a first step to a complete acquisition with the JVP. Such an arrangement allows the purchaser the flexibility to cut its losses if the investment proves less fruitful than anticipated or to acquire the remainder of the company under certain circumstances.
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OTHER REASONS MAY BE:y y y y y Build on company's strengths. Access to innovative managerial practice Competitive Goals Influencing structural evolution of the industry Defensive response to blurring industry boundaries
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y y y y
Creation of stronger competitive units Synergies Transfer of technology/skills Diversification
FACTORS TO BE CONSIDERED BEFORE A JOINT VENTURE IS FORMED ?screening of prospective partners ?joint development of a detailed business plan and short listing a set of prospective partners based on their contribution to developing a business plan ?due diligence - checking the credentials of the other party ("trust and verify" - trust the information you receive from the prospective partner, but it's good business practice to verify the facts through interviews with third parties) ?development of an exit strategy and terms of dissolution of the joint venture ?most appropriate structure (e.g. most joint ventures involving fast growing companies are structured as strategic corporate partnerships) ?Availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners. ?special allocations of income, gain, loss or deduction to be made among the partners ?compensation to the members that provide services
PLANNING THE JOINT VENTURE The formation of an international joint venture can be an extremely complex process. The goals of the enterprise must be defined, the structure must be negotiated, numerous legal issues must be recognized and resolved, and potential areas of conflict between the JVPs must be identified and reconciled. Careful planning is required at all stages.
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IDENTIFYING OBJECTIVES
At the outset of every proposed joint venture, it is necessary to have an understanding of the basic objectives of the proposed enterprise. This includes identification of the nature and scope of the proposed undertaking, as well as the company's expectations and goals. For example, if a company is seeking a short-term arrangement to measure the potential market for a product in a foreign country, a licensing or straightforward contractual arrangement might be preferable to a joint venture, which generally contemplates a longer term and more substantial commitment.
SELECTING A PARTNER
If a joint venture is deemed desirable, one of the first considerations is the selection of a compatible partner. A concern may initially seek a co-venturer of equal business stature and with comparable corporate policies, philosophies, and financial resources. Through the process of active negotiation, involving business people as well as lawyers, the JVPs should determine whether their objectives are compatible. This process may be difficult, but it is important, particularly in the context of multinational joint ventures, given the cultural, linguistic, political, and social differences between the parties. Similarly, there may be legal, accounting, and tax differences between the countries of the JVPs. Since all of these differences may give rise to misunderstandings, they must be reconciled.
CHOOSING THE BUSINESS FORM
The next step is to choose the basic structure of the business venture. A variety of complex legal and practical considerations are involved at this stage. It is necessary to identify the respective contributions of the parties and the proposed financing arrangements in order to measure the compatibility of the potential JVPs and to determine the appropriate organizational form. Frequently, one JVP looks to a capital infusion and, in return, shares its technology expertise, and know-how.
IDENTIFYING LEGAL PROBLEM
At the beginning of the process, counsel must identify and resolve major legal issues and potential problem areas, including governmental regulatory matter.
IDENTIFYING CONFLICTS BETWEEN PARTNERS
It is also important to identify potential areas of conflict between the JVPs so that they can be reconciled prior to making an irrevocable commitment. For example, the parties may have to deal with differing tax objectives resulting from fundamentally different business goals or, more commonly, from different constraints of the tax laws and accounting practices of the home country. Early recognition of these issues may allow the parties sufficient flexibility to structure the joint venture to avoid these problems.
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DRAFTING THE JOINT VENTURE AGREEMENT
Finally, after the goals, structure, and legal issues have been identified, it is necessary to draft the joint venture agreement. As will be seen in later chapters of this book, international joint ventures often involve unique features, and careful draftsman ship is required. Before signing a Joint Venture Agreement the following must be properly addressed:
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y y y y y y y y y y y y y y
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Dispute resolution agreements Applicable law. Force Majeure (is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term "act of God" (e.g., flooding, earthquake, volcanic eruption), prevents one or both parties from fulfilling their obligations under the contract.) Holding shares Transfer of shares Board of Directors General meeting. CEO/MD Management Committee Important decisions with consent of partners Dividend policy Funding Access. Change of control Non-Compete Confidentiality Indemnity (is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B). Forms of indemnity include cash payments, repairs, replacement, and reinstatement.) Assignment. Break of deadlock Termination. The Joint Venture agreement should be subject to obtaining all necessary governmental approvals and licenses within specified period.
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TYPES OF JOINT VENTURES: There are two types of joint ventures, the equity joint venture and the non equity joint venture. An equity joint venture is one in which a separate business entity is formed and capital is contributed to all parties involved. A non equity joint venture, on the other hand, does not have contribution of capital to form a new entity. Instead, they make arrangements to share their resources. These are invariable contractual agreements. Under non-equity joint ventures (also known as cooperative agreements), meanwhile, the parties seek technical service arrangements, franchise and brand use agreements, management contracts, rental agreements, or one-time contracts, e.g., for construction projects. Participants do not always furnish capital as part of their joint venture commitments. There are, for example, non-equity arrangements in which some companies are more in need of technical services or technological expertise than they are capital. They may want to modernize operations or start new production operations. Thus, they limit partners' participation to technical assistance. Joint ventures are frequently characterized by a 50/50 participation in which each partner contributes 50 percent of the equity in return for 50 percent participating control. The relative contributions, as well as degree of ownership and control, are largely matters for negotiation. They relate to the value each party places, and the other party accepts, on the contributions, and reflects the objectives of the venturers. Such a valuation frequently can be a difficult and tedious exercise, particularly where contributions involve technology. If the joint venture is to be located in a country with a controlled economy, valuation may be quite problematic, especially if the JVP from that country is contributing land or goods in kind that may not have readily ascertainable free market values. The 50/50 arrangement is common in joint ventures. Such equal participation has a number of advantages. Each JVP is equally at risk, and is not subservient to the other partner, as would be the case where majority control is vested in one party. Such a sharing of interest and control raises the possibility, however, of deadlock and early termination of the joint venture before its objectives have been accomplished. Many corporations nevertheless subscribe to this form to ensure an equal commitment by the other partner, while retaining maximum control over the conduct of the enterprise. It should be noted that joint ventures are characterized by extreme flexibility, so that if one partner is uncomfortable with coequal status in one phase of the business enterprise, the joint venture can be structured to accommodate the particular need. For example, if a JVP is concerned that the joint venture may expand its product line beyond the initial parameters of the joint venture and thereby threaten that JVP's already established product lines, the JVP may insist upon more than a coequal role in that phase of the joint venture's business. Such objectives can be reconciled by careful planning at the inception of the joint venture
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BASIC ADVANTAGES AND DISADVANTAGES:-
ADVANTAGES
Provide companies with the opportunity to gain new capacity and expertise Allow companies to enter related businesses or new geographic markets or gain new technological knowledge access to greater resources, including specialized staff and technology sharing of risks with a venture partner Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure. In the era of divestiture and consolidation, JV¶s offer a creative way for companies to exit from non-core businesses. Companies can gradually separate a business from the rest of the organization, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.
DISADVANTAGES
It takes time and effort to build the right relationship and partnering with another business can be challenging. Problems are likely to arise if: y y y y y The objectives of the venture are not 100 per cent clear and communicated to everyone involved. There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. Different cultures and management styles result in poor integration and co-operation. The partners don't provide enough leadership and support in the early stages. A major problem is that joint ventures are very difficult to integrate into a global strategy that involves substantial cross-border trading. In such circumstances, there are almost inevitably problems concerning inward and outward transfer pricing and the sourcing of exports, in particular, in favor of wholly owned subsidiaries in other countries. The trend toward an integrated system of global cash management, via a central treasury, may lead to conflict between partners when the corporate headquarters endeavors to impose limits or even guidelines on cash and working capital usage, foreign exchange management, and the amount and means of paying remittable profits. Another serious problem occurs when the objectives of the partners are, or become, incompatible. For example, the multinational enterprise may have a very different attitude to risk than its local partner, and may be prepared to accept short-term losses in order to build market share, to take on higher levels of debt, or to spend more on advertising. Similarly, the objectives of the participants may well change over time,
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y
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especially when wholly owned subsidiary alternatives may occur for the multinational enterprise with access to the joint venture market. Problems occur with regard to management structures and staffing of joint ventures.
Thus, Success in a joint venture depends on thorough research and analysis of the objectives.
JOINT VENTURES IN INDIA Foreign investment for development has become a matter of necessity for most growing economies in the world. India is no different. An emerging market implies a market which is deregulated and has conditions favorable to foreign investment. Although India falls within this category, the term, ³emerging market´ has not been legally defined. In several industrial sectors, the Government of India has felt that the best way forward is to permit foreign investment. In 1991, the Indian Government amended the New Industrial Policy, whereby many industrial sectors, hitherto fore closed, were opened up for investment. Since then, the Government has not looked back, and presently in many areas foreign corporations are allowed to incorporate wholly (100%) owned subsidiaries (³WOS´) in India. Furthermore, the Indian capital markets have also been liberalized. Today, foreign institutional investors (³FIIs´) operate in the Indian stock markets, providing a variety of services. A joint venture is generally understood as technical and financial collaboration either in the form of greenfield projects, take-overs or alliances with existing companies. In India, no legal definition as such has been given to joint ventures. However, the Government of India and its agencies prescribe certain guidelines, which distinguish joint ventures from other entities. Indian joint ventures usually comprise two or more individuals/companies, one of whom may be nonresident, who come together to form an Indian private/public limited company, holding agreed portions of its share capital. A joint venture agreement primarily provides for the manner in which the shareholders of the joint venture company may transfer or dispose of their shares. It is also commonly referred to as shareholders agreement.
PRE-FORMATION CONSIDERATIONS
UNDERSTANDING FDI RULES
Although most sectors of the Indian economy are fully open to FDI, there are certain sectors where FDI is either capped (for example, telecoms, insurance and defence manufacturing) or totally prohibited (such as multi-brand retail, atomic energy and agriculture). (Prior government approval is also required in relation to FDI in defence manufacturing.) Other sectors, such as real
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estate development, are subject to certain investment criteria; if these are not met, FDI is prohibited. As a result, it is important to check the rules on foreign investment at the outset of any joint venture to confirm what is and is not permitted. FDI rules can be found on the Department of Industrial Policy and Promotion website ( http://dipp.nic.in). In certain areas such as telecommunications, drugs & pharmaceuticals, hotel & tourism, or advertising foreign investment up to 50%, 51% and/or 74% in the equity of a joint venture company is permitted without Reserve Bank of India (RBI) approval. However, should the foreign investor seek to subscribe to more than 74% of the total equity in a joint venture company or establish a WOS( Wholly Owned Subsidiary- A subsidiary whose parent company owns 100% of its common stock.) , permission has to be obtained either from the Foreign Investment Promotion Board (³FIPB´) or the Secretariat of Industrial Approvals (³SIA´) depending upon the quantum of investment. Applications for large investments and WOSs are entertained only by the FIPB. Moreover, in case of FIIs, an aggregate portfolio investment in the share capital of Indian companies is permitted to the extent of 24% of the issued and paid-up capital of the company. However, an Indian company may permit a FII to purchase up to 30% of its share capital by passing a special resolution (resolution required to be passed by shareholders having 75% shares with voting rights in the company). It should be highlighted that the aforesaid is applicable to foreign companies and individuals only. Should the investment be made by nonresident Indians (Indian citizens living abroad or persons of Indian origin living abroad and having foreign nationality), the investments laws are more relaxed. Since the focus of this paper is to describe joint ventures in India involving foreign companies and/or foreigners, investment laws relating to NRIs have not been discussed.
GOVERNMENT APPROVALS FOR JOINT VENTURES: -
All the joint ventures in India require governmental approvals, if a foreign partner or an NRI or PIO partner is involved. The approval can be obtained from either from RBI or FIPB. In case, a joint venture is covered under automatic route, then the approval of Reserve bank of India is required. In other special cases, not covered under the automatic route, a special approval of FIPB is required. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India is required. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities.
Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of
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high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters. Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated.
JOINT VENTURE OR SHAREHOLDERS AGREEMENT
The joint venture agreement establishes the relationship between joint venture partners and the way in which the company will be run. It usually includes clauses on: ? Shares ? Management structure ? Withdrawal rights ? Competition issues ? Dispute resolution ? IPR ? Any warranties or indemnities
CONDUCTING DUE DILIGENCE
As with any joint venture, the foreign (and, for that matter, the Indian) partner should be fully aware of any underlying legal or commercial issues that may affect the other party and the proposed joint venture. While a great deal of information on Indian companies is available publicly, in some cases (for example, in relation to smaller companies) a formal due diligence exercise may be the only way of finding the necessary information.
CONTROL IN THE JOINT VENTURE COMPANY
Under the Companies Act, 1956, (³CosAct´) a company can carry on activities by passing either of two resolutions, special resolutions and ordinary resolutions. Ordinary resolutions can be passed by shareholders having 50.01% (rounded of to 51%) shares with voting rights in the company, whereas special resolutions can be passed only by shareholders having 75% shares
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with voting rights in the company. A special resolution is inter alia required to amend the Memorandum and Articles of Association of a 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. Normally, Indian joint ventures have a 51%- 49% equity break-up between the foreign and Indian partners, respectively.
INDIAN PARTNER S ABILITY TO INVEST
The investments (cash or otherwise) being made by the parties are also relevant. Generally, foreign companies are the main investors in joint ventures. Therefore, they seek higher equity percentages. However, larger Indian companies, who are in a position to make substantial investments, often seek quid pro quos. ³Who brings what to the table,´ decides the equity ratio in many cases.
CAPITALIZATION
A private limited company requires a minimum paid up capital of INR100,000 (about EUR1,706 or US$2,270). If the company uses certain words such as ³India´ or ³Hindustan´ in its name then the minimum paid up capital requirement is INR500,000 (about EUR 8,533 or US$11,351).
TAX CONSIDERATIONS
In many instances, companies route their investments into an Indian joint venture company through an offshore destination. India has double taxation avoidance agreements (³DTAAs´) with many countries. Many US companies route their investments through the Mauritius islands, because the Indo-Mauritius DTAA has reduced withholding tax rates applicable to capital gains, technical service fees earned in India, etc. Cyprus is another offshore destination gaining popularity.
FORMATION OF A JOINT VENTURE
In India, joint ventures can exist in the form of companies, partnerships or joint working agreements. The various companies that may be incorporated in India are as follows:
1. Companies limited by shares 2. Companies limited by guarantee 3. Companies having unlimited liability Companies limited by shares are of two types - public and private. As regards companies limited by shares, members are liable only to the extent of the unpaid amount on their shares, if any. In a company limited by guarantee, the liability is limited to the amount pledged, being the contribution to be paid in case of winding-up of the company. In companies with unlimited liability, the liability of each member is unlimited. The most common forms of joint ventures are Indian public or private companies, wherein share capital is issued to the joint venture partners. In this way, the risk of members is limited to the extent of the unpaid amount on their shares.
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The next step is to decide whether to have a public or a private company. Unless money is sought to be raised from the public, joint venture partners do not incorporate public companies. In India, partnerships are defined under section 4 of the Indian Partnership Act, as agreements to enter into a partnership business so as to share profits and to conduct such business for one or on behalf of all. Partnerships do not have any limitations on liability of the respective partners. Thus, the risk associated with this form of business is very high, and is not advocated for any type of joint venture. Joint working agreements are either customer or market oriented depending upon the needs of the partners. In joint working agreements, the domestic partner manufactures those components which are cost effective while the joint venture partner imports into India those components which are not cost effective to manufacture. The final product is a result of the melange. In case of joint working agreements, there may not be a complete transfer of technology. Technology transfer may proceed gradually in steps. There is no payment of lump sum fee or royalty to the foreign company. There is a gradual sharing of revenue between the parties. In order to make the joint venture agreement valid in law, the requirements prescribed by the Indian Contract Actv and the CosAct need to be met. Some of the important criteria to be fulfilled are: a) Offer and acceptance, b) Consideration, c) The intention to form a company, and d) Signature of the parties Other important provisions in joint venture agreement are: a) Constitution of the board of directors, b) Termination clause, c) The binding nature of the agreement, d) Share transfer provisions, e) Dilution clause, and f) Dispute resolution clause
The process of company formation in India is not straightforward or quick. It can, for example, take up to eight weeks to incorporate a private limited company, typically involving the following main steps: ? Reserving a company name with the Registrar of Companies. ? Drafting constitutional documents (the memorandum and articles of association) and submitting them before the Registrar of Companies for scrutiny. ? Submitting various prescribed forms (for example, the registered address form). ? Liaising with the Registrar of Companies.
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? Obtaining the certificate of incorporation.
REGULATORY LICENSES AND REGISTRATIONS
Once Indco has been established, it needs to obtain various licenses and registrations including: y y y y Shops and establishment license. Value added tax (VAT) and sales tax registration. Permanent account number and tax deduction account number. If the business of the joint venture involves the importation of equipment from abroad, an import and export license is also required.
DIVISION OF POWER
The shareholders agreement prescribes the number of directors on the board, the quorum for board meetings and general meetings, the day to day management of the company, procedure to be followed on the death or bankruptcy of a joint venture partner, etc. In order to prevent deadlocks, the chairman of the board of directors can be given a casting vote in case of equality of votes on the board. Foreign companies usually retain the right to appoint the chairman per meeting of the board. If for some reason this does not work, deadlocks can be solved by resorting to alternate dispute resolution such as conciliation and/or arbitration. In case of bankruptcy of one of the partners, joint venture agreements commonly provide that the agreement may be terminated. On death of a partner, devolution of shares in a particular manner or termination are the two options. In ordinary circumstances, the joint venture is run by the board of directors upon whom powers are delegated by the articles of association.
DIVISION OF PROCEEDS
Except for section 205 of the CosAct, which provides for distribution of dividend, there is no codified law in India, which regulates the division of proceeds. Restrictions on profit sharing or payment of dividends are included in the shareholders agreement. Once Government of India permission is granted to the foreign investor to invest in an Indian joint venture company, the foreign investor can repatriate both, the principal as well as dividend or other income without any restrictions. Currently, dividends in India are not taxable in the hands of the shareholders. The company has to pay tax @ 12.5% (plus surcharge and education cess) on the dividend to be distributed to the shareholders.
TRANSFER OF SHARES
There are no statutory rules to be followed as regards transfer of shares. The transfer conditions depend upon the joint venture agreement. However, to affect a transfer the shareholders must execute a share transfer form and furnish it along with the original share certificate to the company. It should be pointed out that under section 111 of the CosAct, a company has the power to refuse the registration of transfer of shares. Each refusal must be accompanied with specific reasons. Appeal against such refusals lie to the Company Law Board. This provision is
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often used for blocking share transfers. Therefore, care must be taken to contract out of this provision or to provide for detailed restrictions in the shareholders agreement.
REGULATORY RESTRICTIONS/APPROVALS
All joint venture proposals not falling within the Reserve Bank of India¶s automatic route require approval of the Reserve Bank of India, the FIPB or the concerned industry ministry, depending upon the quantum and nature of foreign investment. There is no way in which regulatory restrictions can be avoided. Having acted for several companies from industrialized jurisdictions, it is imperative to make a good written proposal of the project to be followed up with oral presentations. Permissions granted by RBI and FIPB are valid for two years. Every six months, a statement is required to be submitted to the SIA as regards the status of the project and the amount of money invested. If the parties fail to take steps as per the permission letter, the permission may not be renewed on expiry of the two year period.
TAX AND SUBSIDIES
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. Small scale industries, i.e., industries entailing an investment upto Rs. 10,000,000 (US$ 222,222), get direct and indirect tax benefits. As regards subsidies, the Government does offer the same to industries set up in backward or rural areas by way of actual cash disbursements, reduced rates for land, etc.
THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT
It deals with anti-trust matters and unfair trade practices. Normally, it comes into play when exclusive distribution agreements are being entered into or when goods are required to be sold subject to certain conditions. In addition, it prescribes certain practices as unfair trade practices.
CONFLICTS AND TERMINATION OF A JOINT VENTURE
Most joint venture agreements contain clauses prescribing a course of action in case the joint venture fails. Alternate dispute resolution is resorted to on a regular basis. Conciliation/arbitration is common. Arbitration can be conducted outside India under ICC or other rules. However, RBI and FIPB provide that Indian law must govern the shareholders agreement, where prior approval is required. Therefore, litigation, if any, or enforcement of a foreign award are to be conducted under Indian law in Indian courts. If necessary, courts grant stay orders to prevent the opposite party from disposing of assets of the joint venture company, including intellectual property rights.
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In case one partner wants to opt out of the joint venture, it is common to give the other partners the option to buy the stake of the first partner at a price to be fixed after valuation of the shares of the joint venture company.
DOUBLE TAXATION AGREEMENTS
India has entered into Double Taxation Avoidance Agreements (DTAAs) with numerous countries including the UK and the US. The DTAA between the UK and India, for instance, provides for various tax benefits including lower rates of capital gains and withholding tax. In addition, India has entered into a more favorable double taxation agreement with Mauritius. Under normal circumstances, the proceeds of a sale of shares in an Indian company are usually taxed in India, even if the seller is not tax resident in India. However, under the India-Mauritius tax treaty, no capital gains tax in either India or Mauritius is payable on the sale of the shares of an Indian company by a Mauritian company. While there is a lower tax rate on dividends for Mauritius tax residents under the treaty, corporate dividends declared by an Indian company are presently not taxed in the hands of the recipient on payment of a dividend tax by the Indian company declaring the dividend. This dividend tax rate currently stands at 14.02%, although under the recently introduced Finance Bill this would increase to 16.99%.
EXAMPLES OF JOINT VENTURES:-
THE BHARTI - WAL-MART RETAIL JOINT VENTURE
On November 27, 2006, Wal-Mart Stores, Inc (Wal-Mart), the world's largest retailer, and Bharti Enterprises Ltd. (Bharti), a leading business group in India, signed a Memorandum of Understanding (MoU) to explore business opportunities in the Indian retail industry. This joint venture marked the entry of Wal-Mart into the Indian retailing industry. According to Sunil B. Mittal (Mittal), chairman and managing director, Bharti, "The joint venture with equal stakes will operate in areas where the government allows foreign investment in retail like cash-and-carry and logistics. The retail shops will be owned by Bharti Enterprises under the Wal-Mart franchise. The idea is to give Indians the lowest price every day." Many analysts opined that both the parties in the venture had their own strengths and would complement each other. Viswanathan Vasudevan, an equity analyst at the Singapore-based Aquarius Investment Advisors Pte, said, "It's a great fit for Wal-Mart as Bharti knows the rules of the game and will save Wal-Mart a lot of time and energy to overcome the system.
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For Bharti, you can't get a better partner than Wal-Mart in retail." Gajendra Nagpal, director, Unicorn Investments, said, "This joint venture is a winning combination. Wal-Mart's logistics skill and Bharti's execution capability will create a potent force in the Indian market." This franchise strategy with Bharti was a deviation from Wal-Mart's usual way of entering countries. This was because the policy restrictions on foreign direct investment (FDI) in the Indian retail sector. As part of the agreement, Bharti was expected to pay a royalty between 2 percent and 3 percent of sales to Wal-Mart for using the latter's brand name. The Bharti-WalMart joint venture was expected to open its stores in India from August 2007. Though the parties did not disclose the financials of the deal, according to retail industry sources, the Bharti-Wal-Mart venture would make an initial investment of US$ 100 million, which could further increase to US$ 1.46 billion. Wal-Mart had reportedly brought in two veteran executives, Andy Guttery and Lance Rettig, to implement its operations in India under the joint venture. Wal-Mart had also roped in Raj Jain, Emerging markets president & CEO, Wal-Mart, to head the cash-and-carry business in India. The retail industry in India is estimated at about US$ 300 billion and is expected to grow to US$ 427 billion in 2010 and US$ 637 billion in 2015. Moreover, only 3 percent of the Indian retail industry was in the organized sector. Foreign retailers were keen to enter India's rapidly growing retail market. However, the government had permitted retailers of single brand products to own a majority stake in a joint venture with a local partner (with prior government permission). Retailers of multi-brands were only permitted to operate through franchises and licenses, or a cash-and-carry wholesale model. The biggest competitor for Bharti-Wal-Mart was expected to be Reliance Retail, the retail wing of Reliance, which had planned to establish 10,000 stores by 2010. It had already opened 11 pilot stores under the "Reliance Fresh" format in Hyderabad. Even Pantaloon Retail, the retail arm of the Future Group was expected to give stiff competition as it had a first-mover advantage. Kishore Biyani, CEO, Future Group, said, "Our strength is that we understand the Indian consumer better than Wal-Mart and we also have a window of opportunity and the first-mover advantage. For instance, we will have 100 Big Bazaars across India by the time the first store (of Bharati-Wal-Mart) opens its doors here." A few other Indian retailers felt that the entry of foreign retail giants like Wal-Mart, Carrefour SA and Tesco Plc (Tesco) would result in Indian retailers learning some of the best international practices in retailing. However, analysts noted that the success of the joint venture would depend on how successful Wal-Mart is in building a cost efficient supply chain and sourcing network so
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that the cost savings are passed on the end consumer through its trademark "every day low price" strategy.
BAJAJ AUTO PLANS JV IN INDONESIA
Bajaj has set up a joint venture in Indonesia with PT Abdi Raharja to expand its presence in south-east Asia. PT Abdi Raharja, owned by the Gobel group, is the sole distributor of Bajaj¶s two-and three-wheelers in Indonesia. Bajaj Auto, the country¶s second largest two-wheeler maker, has set up a joint venture in Indonesia with local partner Pt Abdi Raharja. The objective is to expand its presence in Southeast Asia. Bajaj auto, which has set up its first overseas plant for two-and three ± wheelers in Indonesia, is keen to team up with a local partner to take on competition from market leader Honda and Yamaha. Bajaj Auto¶s technology partner Kawasaki also operates in Indonesia through subsidiary company Kawasaki Motors Indonesia (KMI). PT Abdi Raharja, owned by the Gobel group, is the sole distributor of Bajaj Auto two-and three-wheelers in Indonesia. The three-member team had discussions with shareholders of the Indonesian company and also met representatives from local industry associations and banks. The team prepared a comprehensive business strategy for the region which was presented to the company¶s board, which planed to increase its exports by 33.7%. Indonesia, which sells around 2m two-wheelers annually, is a very big market for step-through, while motorcycle sales account for just around 3 Lacs units. Honda is a clear leader with over 60% of the market followed by Yamaha, Suzuki and Kawasaki. Chinese and Taiwanese two-wheeler companies have, in recent years, been active in the Indonesian market. Besides, for Bajaj Auto, its proposed manufacturing unit in Indonesia will open up big opportunities in adjoining countries. The plant has also enabled the company escape the high import duties that are levied in Indonesia.
M&S JV WITH RELIANCE RETAIL
Marks and Spencer Reliance India, a joint venture between Mukesh Ambani-run Reliance and UK-retailer Marks and Spencer Plc, intends to open 15 stores in two-years, mainly in the metros, a top company official said. "We are looking to open 10-15 stores in the next two years mainly in the metros. We're aiming to open larger stores which will showcase a fuller range of our product catalogue," Marks and Spencer Reliance India, Head of Marketing, Nandini Sethuraman, told PTI here.
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Marks and Spencer announced plans to open 50 stores in India in the next five years when it formed the joint venture in 2008. The retailer said the target remains. "Our plan is to open larger stores between 15,000 sq ft and 35,000 sq ft. By 2014, our aim is to have 50 stores. It all depends on momentum and right locations," Sethuraman said. The retailer currently operates 18 stores in India in conjunction with Reliance Retail. Presently, the company has 18 stores across India in destinations such as Delhi, Amritsar, Mumbai, Pune, Ahmedabad, Kolkata, Bangalore, Hyderabad and Chennai with an average size of about 5,000 sq ft to over 22,000 sq ft.
MOST COMMON REASONS OF FAILURES OF JV y y y y y lack of trust can be key to failure Conflict over delegation of decision making Disagreement over operating policies, strategies, and tactics Differences in the approach towards management style and system Excessive costs, failure to achieve projected income, or unforeseen capital requirements may make the continuation of a JV unattractive.
CONCLUSION: Finding Joint venture partners has not been easy until now. Everyone knows that joint ventures are the number one, fastest growing, most profitable form of marketing strategy in the world, however building joint venture alliances can be time consuming and unproductive if one doesn't know what to do or where to find them. Therefore it is very important to have a clear understanding of what each joint venture partner will contribute and what they will get back. A successful joint venture will help your business develop faster, without the need to borrow - increase market share, without the need for excessive advertising - and grow profits, while providing a better service.
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