Embarking Joint Ventures – an Indian perspective

CS Makarand LeleChairman – WIRC

Partner – MRM Associatesmakarand.lele@mrmcs.com

What is joint venture• Definition of JV – FDI regulations• Two or more people coming together• For common cause• Pooling of resources• Combination of strength • “Venture “– risk undertaking, commercial

speculation, exposure to risk• Human element • Unlocking values• Creation of assets

Ingredient of JV• Business as objective • Commercial terms • Technology• Sharing of benefits & risks• Responsibilities sharing• Relationship between parties • Entry and Exit options• Disputes • Settlements

Advantage to foreign partner

• Mitigation of risk in open venture• Use of local partner’s infrastructure• Plug & play • Understanding local business environment/

market/ legal structure/ compliances • Goodwill & contacts of local partner• Raw material source • Skilled manpower • Limiting competition• Regulatory requirements to have local partner• Investment – tax benefits in their country

Expectations of Indian Partner

• Funds• Technology • Skills• Trade mark , brands, IPR • Export markets• Value addition in Indian market – Goodwill

Expectations of Foreign Partner

• Entry to Indian market • Availability of Skilled resources• Low cost of production• Outsourcing hub• Transparency• Compliances• Reasonability

Types of Ventures• In Existing Entities – Acquisition of stake– Change of ownership of holding company– Technology collaboration

• In New Entity– Acquiring demerged entity– New JV company equity participation– Loan funding – Technology collaboration– Tendering/ quoting for BOT/ PPP/ Greenfield

projects - SPV

Applicable Laws• Industrial Policy & FDI regulations • FEMA • Company law• SEBI laws & Listing agreement• Contract Act: Section 27 agreement to restrain

trade or profession is void. Non compete • Stamp Act: duty payable as per state act• IPR 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 JV• Market Analysis & viability study• SW analysis • Negotiations • MOU – defining principal terms & conditions• Due diligence & representations • Legal documentation• Approvals & permissions • Launching

Due Diligence Financial & Legal covering :

• Company background & history• Status & compliances for group companies• Finance, tax, accounting• Borrowings, loans, investments • Manufacturing, marketing, distribution• Contracts, licenses, approvals• Corporate compliances• Properties • Litigations & disputes• Pollution & potential threats • Employees & HR• Ownership • IPR rights

Important points for JV• Form of Organization • Permissions & approvals• Financial projections • Capital requirements • Infrastructure set up• Human resources • Technical analysis• Costing for products/ services • Analysis of competition & Market• Environmental impacts • CSR & other social aspects

Options available to foreign JV partner

• Equity participation• Technology Transfer: Royalty/ Know how fees • Control the composition of Board & Management • Debt Funding

Moving ahead…. • Plan

– Recognize war areas – Understand strength & weakness– Be realistic about demands – Team has only one leader

• Negotiate – Listen & Understand your partner– Don’t argue– Don’t hurt the ego of other professional– Affirmative & polite approach– Don’t loose the temper – Keep difficult issues pending for next meeting

• Drafting– What 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 & managed• Rights relating to shares• Protection of minority interest• Valuation of IPR• Pay out policy – Dividend/ Buy back • Representation & warranties • Compensation policy for senior management team• Non compete • Compliances • Taxation • Penalties • Arbitration & settlement of disputes• Exit Route • Winding up/ Termination/ Closure

Important terms of JV agreement -1

• Equity 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 & duties

• Contribution by partners – financial, bank guarantees technical, R&D support, manufacturing, marketing, day to day management

Important terms of JV agreement -2

• Minority Protection – Affirmative vote, right to buy out, proper exit route

• Veto/ Affirmative Vote : items requiring Board approvals, items requiring shareholders approval

• Quorum – 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 method

• Arbitration – 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, compensation

• Exit Route – no ambiguity, fair for each party

Important terms of JV agreement- 4

• General Terms & conditions• Jurisdiction • Severability• Representation & Warranties by the parties• Conditions precedent to closing • Closing events & procedures• Deed of adherence • exchange of documents• Copies of the agreement• Annexure

Articles of Association • Copy JV terms to articles • Validity of obligations on parties • Conflict between articles & JV agreement• Enforcement • 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 & Stamping

• Payment of stamp duty • Execution outside India & copies brought into the

state• Affixing of Stamps• Registration under State Registration Act• Payment of cess

Governing FDI/ FEMA regulations• Investment by foreign incorporated entity – Automatic/

Approval route• Sectoral caps• Capital Account transactions • External Commercial Borrowing regulations• Payment of royalty & technical know how fees • Acquisition of property in India• Current Account transactions • Establishment of place of business in India – LO/ BO• Pricing guidelines for issue of securities• Press 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 2010

• In 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 – Deadlock– Disputes – Boredom– Failure in achieving objectives– Changes in regulations– Incapacity of parties - insolvency/ bankruptcy/ closure – Impossibility to achieve objectives

• Consequence• Achieving termination• Simplified separation • Role of CS

Few issues in JV

• Post implementation issues• Enforceability of Transfer Restrictions • Non compete • Provisions of the Competition act

to conclude ……

“I know what I have given you. I do not know what you have received”

- Antonio Porschia

any questions please ……

Vision Statement

To share my knowledge and experience toas many learners and after each interaction

learn to un-learn and re-learn which initself is a continuous process.

Thank you

Nice talking to you

You can write to me makarand.lele@mrmcs.com

You can speak to me +919822394381