A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. Partnerships and joint ventures can be similar but in fact, can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project. Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product or intellectual property rather than joint or collective profits, as is the case with a general or limited partnership. A joint venture, like a general partnership, is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants, since the joint venture itself has no legal status. Once the Joint venture has met its goals the entity ceases to exist.
There are no separate laws governing Joint Venture, however, agreement regulating a Joint Venture must be as per Indian legal guidelines and principals. A joint venture agreement sets out the terms, conditions, rights and duties/responsibilities of each party to the venture. The agreement might also describe what the venture is about and how long it will last.
FORMS OF JOINT VENTURE
Joint Venture can be classified either as Incorporated or Unincorporated based on their constitution. In the case of Incorporated Joint Venture, A new entity is incorporated which can be a company or a Limited Liability Partnership? The entities formed are separate and ventures occupy equity in the newly formed entity as per agreement. While unincorporated, joint venture may include formation unincorporated entity as a partnership or mere agreements for a specific purpose.
The advantages of using a corporate entity are:
The documents of incorporation, i.e. the Memorandum of Association (the “MoA”) and Articles of Association (the “AoA”) of the JV Co. should be suitably drafted to reflect the rights, intentions, and obligations of the parties.
The government has permitted FDI in LLPs, through the Government approval route, only for LLPs operating in sectors/activities where 100% FDI is allowed.
As a result, partnerships are not normally used for major businesses except by professionals such as solicitors and accountants or where there are specific tax advantages.
Here rights, duties, and obligations of the parties as between themselves and third parties and the duration of their legal relationship are mutually agreed by the parties under the contract.
Additionally, unincorporated joint ventures may have significant tax issues if not structured properly because if a contractual arrangement qualifies as an “association of persons”, then the Indian tax authorities could tax such association of persons at the maximum marginal rate, which could be as high as 40% if any member of such “association of persons” is a non-resident.
APPROVAL OF GOVERNMENT
Based on the route of Investment, proper approval is required. Currently, only atomic energy, gambling, lottery business and retail trading sectors are prohibited from receiving foreign investment.
Apart from the prohibited sectors, Investment in India would typically fall under two categories, the ‘Automatic Route’ or the ‘Approval Route’.
1. The Automatic Route refers to an investment that does not require any prior government approval (and only requires certain filings with the Reserve Bank of India, the central regulatory bank). The Automatic Route is available for a range of sectors and applies if the level of foreign investment does not exceed the specified percentage (if less than 100 per cent is permitted) and the foreign investor does not have a previous venture or tie-up in India in the same field.
Apart from above other approvals are also required depending upon the Industry Joint venture intends to enter.
ESSENTIALS TO REMEMBER WHILE DRAFTING YOUR JOINT VENTURE AGREEMENT: