Embarking Joint Ventures – an Indian perspective
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Embarking Joint Ventures an Indian perspective CS Makarand LeleChairman WIRC Partner MRM Associatesmakarand.firstname.lastname@example.org
What is joint ventureDefinition of JV FDI regulationsTwo or more people coming togetherFor common causePooling of resourcesCombination of strength Venture risk undertaking, commercial speculation, exposure to riskHuman element Unlocking valuesCreation of assets
Ingredient of JVBusiness as objective Commercial terms TechnologySharing of benefits & risksResponsibilities sharingRelationship between parties Entry and Exit optionsDisputes Settlements
Advantage to foreign partnerMitigation of risk in open ventureUse of local partners infrastructurePlug & play Understanding local business environment/ market/ legal structure/ compliances Goodwill & contacts of local partnerRaw material source Skilled manpower Limiting competitionRegulatory requirements to have local partnerInvestment tax benefits in their country
Expectations of Indian PartnerFundsTechnology SkillsTrade mark , brands, IPR Export marketsValue addition in Indian market Goodwill
Expectations of Foreign PartnerEntry to Indian market Availability of Skilled resourcesLow cost of productionOutsourcing hubTransparencyCompliancesReasonability
In Existing Entities Acquisition of stakeChange of ownership of holding companyTechnology collaboration In New EntityAcquiring demerged entityNew JV company equity participationLoan funding Technology collaborationTendering/ quoting for BOT/ PPP/ Greenfield projects - SPV
Applicable LawsIndustrial Policy & FDI regulations FEMA Company lawSEBI laws & Listing agreementContract Act: Section 27 agreement to restrain trade or profession is void. Non compete Stamp Act: duty payable as per state actIPR laws Competition law : Big JV needs to check this for combination & comply with section 6 of the act i.e. prior intimation & approvals
Steps to form a JVMarket Analysis & viability studySW analysis Negotiations MOU defining principal terms & conditionsDue diligence & representations Legal documentationApprovals & permissions Launching
Important points for JV
Options available to foreign JV partnerEquity participationTechnology Transfer: Royalty/ Know how fees Control the composition of Board & Management Debt Funding
Moving ahead. PlanRecognize war areas Understand strength & weaknessBe realistic about demands Team has only one leaderNegotiate Listen & Understand your partnerDont argueDont hurt the ego of other professionalAffirmative & polite approachDont loose the temper Keep difficult issues pending for next meeting DraftingWhat is a good draft?Document should create a confidence Clear, clean & simple Avoid vague terms Control on versions
Good Document can never be a substitute to a bad partner ``
CS is the master of documentation``
Structuring JV Agreement How much share each party will have?How is the composition of the Board?Who and how the JV will be operated & managedRights relating to sharesProtection of minority interestValuation of IPRPay out policy Dividend/ Buy back Representation & warranties Compensation policy for senior management teamNon compete Compliances Taxation Penalties Arbitration & settlement of disputesExit Route Winding up/ Termination/ Closure
Important terms of JV agreement -1Equity participation 11%, 26%, 51%, 76%Board structure Equal numbers or % based representation? Who will be a chairman? casting vote?Management right to appoint MD & other KMP, Committees, powers & dutiesContribution by partners financial, bank guarantees technical, R&D support, manufacturing, marketing, day to day management
Important terms of JV agreement -2Minority Protection Affirmative vote, right to buy out, proper exit routeVeto/ Affirmative Vote : items requiring Board approvals, items requiring shareholders approvalQuorum different from requirement of affirmative vote, quorum at adjourned meeting, practical approach, consent by circular resolutions, video conferencing meetings Restriction on Transfer of Shares Transfer includes all actions relating to shares & voting rights, lock in period, general restrictions, inter se transfer, affiliate, pledge & hypothecation in ordinary course of business Special Rights relating to shares Tag along, Drag along, Right of first refusal, pre-emption right.
Important terms of JV agreement-3 Dead lock resolution one party should have clear right to decide, third party reconciliation, out right purchase, distribution of assets by demerger, Put call option, Seal Bid methodArbitration dispute, appointment of arbitrators, jurisdiction, award, decree, enforcement Force Majeure natural calamities beyond the control of the parties Termination sun set clause, events, procedure, right of the parties after terminations, compensationExit Route no ambiguity, fair for each party
Important terms of JV agreement- 4General Terms & conditionsJurisdiction SeverabilityRepresentation & Warranties by the partiesConditions precedent to closing Closing events & proceduresDeed of adherence exchange of documentsCopies of the agreementAnnexure
Articles of Association Copy JV terms to articles Validity of obligations on parties Conflict between articles & JV agreementEnforcement Information in public domain
BINDING NATURE OF SHAREHOLDERS AGREEMENT The Company shall abide by the Shareholders agreement made between the Company and its shareholders and carry the same into effect so far as it concerns the company. The Articles of Association of the Company shall be amended in conformity with the Shareholders Agreement. In the event of inconsistency between the provisions of Shareholders Agreement and the Articles of Association, the provisions of the Shareholders Agreement shall, to the extent permitted by law, prevail. The members shall exercise, their voting rights attached to their Shares to alter the Memorandum of Association and the Articles of Association in a manner consistent with Shareholders Agreement.
Registration & StampingPayment of stamp duty Execution outside India & copies brought into the stateAffixing of StampsRegistration under State Registration ActPayment of cess
Governing FDI/ FEMA regulationsInvestment by foreign incorporated entity Automatic/ Approval routeSectoral capsCapital Account transactions External Commercial Borrowing regulationsPayment of royalty & technical know how fees Acquisition of property in IndiaCurrent Account transactions Establishment of place of business in India LO/ BOPricing guidelines for issue of securitiesPress Note 1 of 2005 conditions removed w.e.f. 1.4.2011 KYC norms & guidelines for money laundering
Important aspects of FDI regulations The term Capital is defined in FDI policy and includes fully, compulsory & mandatory Convertible Preference Shares and Debentures (FCCB), Any other instrument, partly paid share and warrants is not capital & can be issued to resident outside India only after approval through the Government route.Payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/ brand name caps were removed and were put under automatic route vide RBI circular dated 13/05/2010, with effect from 16.12.09.
Important aspects of FDI regulations RBI revised the method of valuation of shares for issue & transfer effective from May 2010In case of Listed Companies the price should be worked out in accordance with the SEBI guidelines, as applicable.For unlisted Companies valuation to be done by SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method.The new method is expected to yield a higher valuation as it would take into account the potential of the business as opposed to the accounting approach of the earlier methods.
Break _____out Golden hand shake goals achieved, efflux of time DeadlockDisputes BoredomFailure in achieving objectivesChanges in regulationsIncapacity of parties - insolvency/ bankruptcy/ closure Impossibility to achieve objectives ConsequenceAchieving terminationSimplified separation Role of CS
Few issues in JVPost implementation issuesEnforceability of Transfer Restrictions Non compete Provisions of the Competition act
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