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Satish Lele
satish.lele@gmail.com


Joint Venture for Jatropha / Pongamia (Karanj) / Castor

A joint venture is an association of two or more business entities, who combine and pool their respective expertise, financial resources, skills, experience and knowledge in furtherance of a Jatropha / Pongamia (Karanj) / Castor Project. A corporate entity is commonly used as the means of setting up a joint venture, which will continue for a long or defined period. A foreign entity desirous of establishing a joint venture concern in India may do it by incorporating a separate joint venture company. In this case, the parties to the joint venture may jointly incorporate a company under the Companies Act 1956, and subscribe to the shares of such company in an agreed proportion. This route is preferred since it allows structural flexibility in terms of creating an entity, which is tailor made to suit the specifications of both the parties.
There is no separate law or set of principles governing the formation, conduct and termination of joint ventures in India. It is the purpose, rather than the choice of the parties, that determine the type or mode of the proposed joint venture. Life span of joint venture may range from a short period to several years. A joint venture can often serve as a passport to enter into a foreign jurisdiction, thereby opening potential business opportunities.

In India, a joint venture commonly referred to as JV can be formed either by individuals, or business entities, corporations and partnerships. The contributions to the joint venture can be in the form of capital contribution (Finance), physical assets (machinery, land, building etc), services (labor), intellectual property or a combination thereof. An entity may be lacking sufficient resources, financial or otherwise, to undertake a plantation project, while another entity may be endowed with surplus resources but might lack the experience required for the execution of the project, can come together by means of a joint venture to execute the plantation project in hand.
The biggest advantage of a joint venture is that it facilitates capital formation. The risk associated with long gestation periods of plantation, is spread over. A joint venture enables the partners to explore hitherto unexplored markets thereby expanding the reach of the co-ventures.
The rate of income tax for domestic Indian companies and partnership firms is 33.66%, incorporated companies are further liable to pay tax of 14.03% on distributed profits as dividend distribution tax.
Reasons for Forming a Joint Venture : When the parties to the joint venture decide to assign a separate identity and an independent legal existence to the joint venture, distinct and separate from the parties constituting it, the opt for the incorporated form of joint venture.
Characteristics of Incorporated Joint Venture : a. Liability of the participants : The liability of the participants in the case of an incorporated joint venture is limited to the amount of share capital investment made by them in the joint venture.
b. Legal Entity : A joint venture, subsequent to incorporation is capable of owning property.
c. Stability of existence : An incorporated company has a separate legal entity under law and its existence is thus unaffected by the death, or change of membership.
d. Ability to raise funds : Incorporated joint venture is also better placed to raise funds from banks, financial institutions and capital markets.
e. Statutory formalities for formation : The law prescribes registration of the Memorandum and Articles of Association of the proposed joint venture upon incorporation. Formation of an incorporated joint venture entails a host of legal formalities.
A joint venture between a domestic and a foreign entity is an international joint venture. An international joint venture is also termed as foreign collaboration. The domestic partner can contribute its knowledge of the domestic market conditions, familiarity with government regulations, bureaucracy, local labor behavior, supply sources and existing manufacturing conditions. The foreign partner can contribute the foreign investment. International joint ventures are equity based, and can be constituted by way of subsidiaries, which is a special purpose vehicle for the execution of joint venture. It can also be formed by acquisitions and mergers.
Foreign direct investment is not automatically allowed in plantation projects. It can be done with prior permission of Foreign Investment Promotion Board (FIPB) under SIA.
Company Law Issues : All incorporated joint ventures in India, are domestic companies and are governed by the provisions of the Companies Act 1956.
Incorporation and Setting up a Joint Venture Company : An incorporated company can either be a private limited company or a public limited company.
A company incorporated in India can become a subsidiary of the company incorporated outside India. Indian company shall be a subsidiary of a foreign company if the Indian company's board of directors are controlled by the foreign company and more than half of the equity share capital of Indian company is held by the foreign company. At least one independent director on the board of directors of the holding company shall be director on the board of directors of subsidiary company.
Incorporation Process
a. Obtaining the desired name
b. Drafting and finalization of charter documents
c. Filing of documents for registration
d. Payment of registration fee
e. Collecting the certificate of incorporation
f. Approval from foreign investment promotion board
g. Exchange control compliance
h. Compliance under companies act
i. Compliance under tax laws
j. Importer Exporter Code Number
Contractual Issues : Memorandum of Understanding (MoU) is a document, which specifies the broad understanding of the parties, especially the fact that the parties intend to enter into a legally binding agreement to set up a joint venture.
Contents of a Joint Venture Agreement
Condition Precedent : These include necessary approvals, licenses, registrations from concerned government authorities, documentation, satisfaction of contractual obligations or any other condition that may have a direct bearing on the commencement of the joint venture.
Purpose, Objectives, Scope and Business of a Joint Venture : The joint venture agreement should contain, in clear and unambiguous terms, the basic purpose of the joint venture.
Capital Structure / Equity Participation : The capital structure is an essential element for any business venture. Therefore, issues relating to capital structure should be clearly defined in the joint venture agreement. It should specifically provide the sources of funding and allocate responsibility of the same.
Management Control and Administration : Devising an appropriate governance structure for the joint venture company is very important for the growth and success of any joint venture company.
Non-Competition / Conflict of Interest : The non-compete clause in a joint venture agreement is incorporated with an intent to restrain the joint venture partners from carrying out any independent activity in competition to that of the joint venture.
Articles of Association : Articles of Association is a document that lays down the internal regulations of the company. Articles of Association of a company are subordinate to and are controlled by the Memorandum of Association, which is the principle document and contains details about the general constitution of the company.