Fundamentals of Joint Ventures – An Indian Perspective

A joint venture (‘JV’) is when two or more parties come together, pool their resources and enter into a contractual arrangement with a common purpose to achieve a particular commercial objective. In a rapidly evolving business landscape, a JV offers parties a practical and efficient way to grow, diversify, and tap into new markets. By working together, parties can combine their strengths and resources while simultaneously reducing the risks and costs that often come with such expansion. JVs also allow businesses to benefit from each other’s market presence and reputation, helping build trust with customers, investors, and other stakeholders. At the same time, a JV collaboration promotes knowledge-sharing, innovation, and stronger negotiating power, creating long-term value for all parties involved. Furthermore, a JV offers significant flexibility since it is an agreement which can be moulded as per the pre-determined contours by the parties. A JV does not necessarily require incorporation of a new company and allows the parties to maintain independence in their respective entities and their operations, which parties can always fall back on once the objective of a JV is achieved.

Based on variables such as nature of business, investment objective, JV purpose and regulatory factors, JVs are typically structured in two categories in India – Incorporated and Unincorporated.

An incorporated JV leads to creation and setting up of a separate legal entity such as a company, partnership, limited liability partnership etc. It may also include investment in an existing corporate entity. In terms of governance, these types of JVs involve shareholders agreements, JV agreements etc. wherein ownership, management and decision-making rights are outlined.

On the other hand, an unincorporated JV can be best described as a pure contractual arrangement wherein no separate legal entity is created. Such arrangements witness very specific project based or time bound collaborations, governed by Indian Contract Act, 1872 and offer high flexibility in terms of profit sharing, liability allocation and exit.

Undermentioned below is a list of few relevant factors one needs to assess while negotiating a JV deal.  Early consideration of these factors helps align commercial expectations, mitigate risks and avoid potential deadlocks and litigious situations at later stages: –

1. Regulatory Compliance – A JV must remain compliant with sector specific laws and regulatory frameworks. This includes evaluating whether the proposed JV deals trigger any sector-specific compliance requirements, such as obtaining requisite approvals from Competition Commission of India in case the proposed JV surpasses the prescribed thresholds or ensuring compliance under the FEMA framework in cases involving foreign investment.

2. Due Diligence – Conducting a thorough due diligence exercise is critical to assess the commercial and legal viability of the proposed JV. Where the proposed JV is in an existing corporate entity, detailed corporate, financial and legal due diligence should be undertaken to identify existing liabilities, compliance gaps and risks that may have an impact on the JV.

3. Tax Planning – A well thought-out tax strategy has a significant impact in determining the aggregate efficiency of the potential JV. The parties must undertake a detailed assessment of applicable tax implications, including corporate tax, withholding tax, goods and services tax, capital gains etc. to decide a tax-efficient and commercially viable JV structure.

4. Drafting of JV framework – Needless to emphasize that careful structuring and documentation of the JV arrangements are pivotal for a successful JV collaboration. The JV documentation should clearly set out detailed provisions on liability allocation, ownership, management, permitted use of technology and intellectual property, exit and termination rights etc., thereby reducing ambiguity and minimizing scope of potential disputes.

It is safe to conclude that a JV, when structured with due consideration, followed by careful execution, is a powerful tool for strategic collaborations and sustainable growth. However, when we factor in the moving pieces i.e., commercial, legal and regulatory considerations, it is critical that early planning and informed decisions are undertaken for a JV to operate successfully.

EVA Law’s extensive experience in advising JVs across various sectors and jurisdictions make us suitably positioned to assist entities and individuals through entire JV lifecycle i.e., from structuring/ negotiations to documentation and execution. As JV specialists from India, we would be pleased to assist and support parties in navigating their JV requirements and help them achieve desired commercial objectives.