LAB - Joint Ventures in India


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LAB - Joint Ventures in India

  2. 2. Joint VentureA joint venture is a business agreement in which parties agrees to develop,for a finite time, a new entity and new assets by contributing equity. Theyexercise control over the enterprise and consequently share revenues,expenses and assets.Basic traits of a Joint Venture: Specific Purpose Limited Time
  3. 3. Joint VentureLegal Definition of Joint VentureNo definition as per Indian LawsAs per Indian Govt :A joint venture is a new enterprise owned by two or more participants. Itrepresents a combination of subsets of assets contributed by two (or more)business entities for a specific business purpose and a limited duration Is a newbusiness enterprise owned by two or more participants.Characteristics :• Contribution by partners of money, property, effort, knowledge, skill or other assets to the common undertaking.• Joint property interest in the subject matter of the venture.• Right of mutual control or management of the enterprise.• Right to share in the property.
  4. 4. Laws governing Joint VenturesLaws Governing Joint Ventures No separate law for joint ventures in India Any Law that is applicable to an Indian Company is also applicable to Joint VentureCompany.Regulatory Bodies Governing Joint Ventures Reserve Bank of India (RBI) Foreign Investment Promotion Board (FIPB) Secretariat of Industrial Approvals (SIA) Department of Industrial Policy and Promotion (DIPP) Department of Economic Affairs (DEA)
  5. 5. Why Joint VentureWhy Joint Venture? Marketing & Strategic reasons : Globalisation, Expansion, First Mover Advantage Foreign companies : sectors where 100 percent FDI is not allowed in India, a joint venture is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market.
  6. 6. Joint Venture vs. Partnership Involves two or more companies  Individuals who join together for ajoining together in business combined venture Contractual arrangement between two  Agreement between two partiescompanies that aims to undertake a wherein they agree to share the profitsspecific task as well as incurred loss Can be formed for specific purposes  Iinvolved are co-owners of a businesslike R & D which will be expensive to venture and their aim is to make a profittake individually Lasts for only a limited period until  Last for many years until partiestheir goal is achieved involved have no differencesMembers can retain the identity of Members do not have any individualhis/her firm or property identity The joint venture is held liable for any  Members of the partnership are heldwrongful act liable.
  7. 7. JV Pre-formation considerations1. The industry in which investment is being made 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 in industries like telecom, drugs & pharmaceuticals, hotel & tourism, or advertising If foreign investor seek to subscribe to more than 74% of the total equity in a joint venture company or establish a Wholly Owned Subsidiary (WOS), permission has to be obtained either from the Foreign Investment Promotion Board (FIPB) or the Secretariat of Industrial Approvals (SIA) depending upon the quantum of investment In case of FIIs, aggregate portfolio investments in the share capital of Indian companies are 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)
  8. 8. JV Pre-formation considerations2. Control in the joint venture companyUnder the Companies Act, 1956, (“CosAct”) a company can carry on activities bypassing either of two resolutions, special resolutions and ordinary resolutions.Ordinary resolutions can be passed by shareholders having 50.01% (rounded of to51%) shares with voting rights in the company, whereas special resolutions can bepassed only by shareholders having 75% shares with voting rights in the company.A special resolution is required to amend the Memorandum and Articles ofAssociation of a company, to issue further shares through a rights issue, to give loansor guarantees to other companies, etc. 51% majority ensures control of the day today working of the company. Therefore, much depends on the level of control theforeign investor seeks. Normally, Indian joint ventures have a 51%-49% equity break-up between the foreign and Indian partners, respectively.
  9. 9. JV Pre-formation considerations3. Indian partner’s ability to investThe investments (cash or otherwise) being made by the parties are also relevant.Generally, foreign companies are the main investors in joint ventures. Therefore theyseek higher equity percentages. However, larger Indian companies, who are in aposition to make substantial investments, often seek quid pro quos. “Who bringswhat to the table,” decides the equity ratio in many cases.
  10. 10. JV Pre-formation considerations4. Tax considerationsForeign firms should reach out to tax advice at the beginning of an Indian investment.India has a very low entry for creating a taxable presence. The sale of shares in anIndian company is usually taxed in India as capital gains, even if the seller is not aresident of India. India taxes such capital gains at high, variable rates of taxationranging from zero to around 30 percent. Therefore, overseas entities are generallyadvised to invest through offshore jurisdiction. India has double taxation avoidanceagreements (DTAAs) with Mauritius, Cypress, the UAE, Singapore, and theNetherlands
  11. 11. JV Pre-formation considerations5. How do you protect confidential information at the negotiation stageIn order to protect sensitive business information from being divulged to others,confidentiality and non-disclosure agreements are entered into, prior to commencingnegotiations. Indian courts enforce these agreements and grant injunctions onadequate proof of breach or proposed breach being adduced.However, due to systemic delays, suits for damages take a fairly long time to reachhearing. Therefore, although an injunction may be granted urgently, a decreeawarding damages to the injured party may take some time.
  12. 12. Steps in formation of a JV1. Incorporation 2. Inter-corporate investment u/s 372A of Companies Act 3. Approvals 4. Important clauses of a joint venture agreement
  13. 13. Steps in formation of a JV1. Incorporation[A] Formalities Public or a Private Limited Company The place of Registered Office of the Joint venture Company Name of the JV Subscribers to the MOA which will include the partners to the JV and their nominees Memorandum and Articles of Association in consultation with the JV partners Submission of the same with required documents like statutory declaration u/s 33 of the Companies Act 1956 and Form no.18 u/s 146 of the Act regarding address of the registered office, to ROC along with fees payable Starting of business, {i} in case of private company, immediately. {ii} in case of public company ,after obtaining certificate of Commencement of Business for which the company has to file with the ROC prospectus/statement in lieu of prospectus, and the statutory declaration u/s 149 of the Companies Act 1956, duly stamped.
  14. 14. Steps in formation of a JV1. Incorporation[B] Articles Shareholders’ Agreement and Articles of Association Shareholders’ Agreement prescribes Share Transfer Restrictions, if any, which are then incorporated in the Articles of Association of the Company. The AOA should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners.
  15. 15. Steps in formation of a JV1. Incorporation[C] Non-resident PartnerApproval of RBI required for acquiring shares of the company and establishingplace of business in India u/s 19 and 29 of Foreign Exchange Regulation Act 1973{FERA}.However RBI has granted general permission vide its notification dated 26-4-1993,as amended, u/s 19{1}{d} and u/s 29{1}{b} of FERA to a non resident Indiancitizen / person of Indian origin to subscribe to the memorandum and articles ofassociation of a company for the purpose of incorporation in India.And such company is also permitted to issue shares to the non residents subject tothe condition that the total face value of shares is not to exceed Rs 10,000/-, thecompany will not engage in the activity of agriculture / plantation/dealing in realestate other than its development and the company files a declaration with RBIwithin 90 days of its incorporation
  16. 16. Steps in formation of a JV2. Inter-corporate investment u/s 372A of Companies ActWhere an Indian company [partner] acquires shares of the joint venture companywhich is exceeding 60% of its *Indian company’s+ paid-up capital and free reservesor 100% of its free reserves, whichever is more, Section 372A will apply requiringprior Board decision of the Indian company as well as special resolution of itsshareholders.If a foreign company acquires the shares, this section will not be invoked as itapplies only to a "company" defined under section 3 {1} [i] of the Act which doesnot take into account a foreign company.
  17. 17. Steps in formation of a JV Approval Automatic Approval FIPB Approval Route Route If FDI is upto the extent If FDI not covered under Automatic permitted approval route No approval from RBI or Govt Requires prior Govt. Approval of India Considered by FIPB RBI regional office to be notified No further approval from RBI after within 30 days FIPB approval
  18. 18. Steps in formation of a JV4. Important clauses of a joint venture agreement The proportion of shareholding in the joint venture company Specify nature of shares, indicate their transferability conditions Composition of the Board of Directors, Appointment of Chairman, Quorum of Board meetings ,Casting vote provisions Annual General Meeting Appointment of CEO/MD, Management Committee Important decisions with mutual consent of partners Dividend policy Funding provisions, Access conditions Change of control/exit clauses Anti-compete clauses Maintaining Confidentiality Indemnity clauses, Break of deadlock & Dispute Resolution Assignment Applicable law Termination provisions
  19. 19. Case – I : HERO HONDA JV a Successful Joint VentureHonda Group Honda started its operations in 1948 in Japan Main Products Motor Cycles, Auto Mobiles, Power Products Total 390 Subsidiaries till dateHero Group Hero Cycles Started its operations in 1956 Main Products Bicycle, Motor Cycles, Automobile Parts etc Comprises 18 companies till date
  20. 20. Case – I : HERO HONDA JV a Successful Joint VentureHonda came to India as a part of its Globalization strategy in the environment ofliberalization.While looking for Prospective partners in India, Its intention was to build plants inlocal areas to meet local demand.Before forming JV with Hero, Honda had 50/50 joint venture with Kinetic EngineeringLtd. forming Kinetic Honda Motors Ltd.In 1984, Honda formed Joint Venture with Hero Group (Munjal Group) to enter inmotorcycle business in India and formed Hero Honda Motors Limited (HHML). Thecompany was incorporated on 19th January 1984, at New Delhi.Both companies entered into a technical cum financial collaboration. As per this JVAgreement, Honda was to furnish complete technical information, know-how andtrade secrets and other relevant data.
  21. 21. Case – I : HERO HONDA JV a Successful Joint Venture Economic Results and other achievements Between 1995-2001 economic spread expand from 16.5% to 65.4% was among the highest in country 1997-2000 Hero Hondas quarterly sales grew 303.28% and its net profit jump from 16.28Cr to 98.3Cr While the industry grew at an average 21.74% annum between 1997-2001 and Hero Honda average growth rate of 35.46% year Hero Honda maintained its grip in the motorcycle segment with a lead of more than one million motorcycles over its competitor During the fiscal year 2008-09, the company sold 3.7 million bikes, a growth of 12% over last year The company had a market share of 57% in the Indian market in 2008-09 The 2006 Forbes 200 Most Respected companies list has Hero Honda Motors ranked at 108 The Brand Trust Report published by Trust Research Advisory in 2011 has ranked Hero Honda in the 13th position among the brands in India
  22. 22. Case – I : HERO HONDA JV a Successful Joint Venture After overwhelming 26 years of success Hero Motors and Honda Motor Co of Japan in July 2010 announced that they will part ways. They inking an agreement to dissolve its holding by March 2011. Honda decided to move away from the joint venture, Hero Honda, which has grown to become the worlds largest two wheeler manufacturer for the ninth consecutive year in 2010. Honda decided to focus on its wholly owned subsidiary Honda Motor Cycle and Scooters India Ltd. (HMSIL) The Hero Group bought the 26% stake of the Honda in JV Hero Honda. Under the joint venture Hero Group could not export to international markets (except Sri Lanka) and the termination would mean that Hero Group can now export. Hero Honda Motors is now Hero MotoCorp with new brand identity and logo.
  23. 23. Case – II : TVS Suzuki JV a Failed Joint VentureTVS Group Started its operations in 1911 Main areas of business is two-wheelers, automotive components, spares, computer peripherals and financial services At present TVS group has 33 Group CompaniesSuzuki Group Michio Suzuki founded Suzuki Loom Works in 1903 Suzuki started manufacturing cars in 1937 Suzuki designed first motorized power free bicycle in 1952 Suzuki Motor Company Ltd was formed in 1954 Its main products are Motor Cycles/ATV, Automobile, Marine & Motorsport etc.
  24. 24. Case – II : TVS Suzuki JV a Failed Joint VentureTVS-Suzuki Relationship 1982: Suzuki entered India through TVS-SUZUKI joint venture 1982: The JV was incorporated as Indian Motorcycles Pvt Ltd. 1984: Announced the name TVS Suzuki and a public issue. Indian Suzuki motorcycles was received well by the market but resulted in loss due to high import content of the vehicle. 1987: TVS-Champ, the moped for urban customers was launced. 1989 – 1991: company posted losses 1990 – 1991: Company declared lockout due to labour problems 1991-92: With strengthened R&D the Company decided to become Product Focused through a Turnaround Strategy
  25. 25. Case – II : TVS Suzuki JV a Failed Joint VentureSteps in Turnaround Strategy Changes in Leadership Strategic focus redefined Production was Scaled Up Unnecessary Assets were Sold or Divested
  26. 26. Case – II : TVS Suzuki JV a Failed Joint VentureReefs between TVS & Suzuki1. 1992: Competition intensifying in the motorcycle segement. TVS approached Suzuki for more funds and technology for new models to make new models. Suzuki not only refused but also created road blocks for the management.2. Mid 1990s: Suzuki having 26% stake in the company’s equity, wanted to increase its share. Suzuki wanted to play a pivotal role and gain management control in TVS Suzuki, akin to its role in MUL. Suzuki proposed :  Adoption of Veto Rights for all management decisions.  Restriction on the use of local components. Import of Dyes and Capital Equipment  Constraints on Indigenisation of components for future models  Royalty Payment to Suzuki for an indefinite period3. Suzuki also launched Shogun & Samurai independently in India
  27. 27. Case – II : TVS Suzuki JV a Failed Joint VentureCollapse of the Joint Venture Early 2001: Suzuki and TVS individually were bidding for the public sector firm Scooters India Limited ( SIL ). August 2001: Suzuki entered into an agreement with Japanese automobile major Kawasaki for collaborating on Product development, Design engineering and Manufacturing. TVS saw this as a direct conflict of interest, since Kawasaki already had a successful joint venture with Bajaj in India. September 2001: Suzuki’s representatives were not present at the company’s annual general meeting. This was a definite proof of the fact that “all was not well” between the JV Partners. November 2001: Dissolution of Joint Venture was announced.
  28. 28. Case – II : TVS Suzuki JV a Failed Joint VentureTVS: After the Split November 2001  The name was changed from TVS Suzuki TVS Motor Company Limited  R&D wing was strengthened to help sustain in the two-wheeler market  Sales & Service Program at the Dealer End was consolidated Year 2005  TVS mastered the four stroke technology  New Motorcycle, Scooter & Moped models launched by 2005  Product development time reduced from 24 to 12 months  Expansion to Malaysia, Vietnam, Thailand, Indonesia and Philippines.
  29. 29. Thank You !!!