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Joint Venture: Creation and Legal Liabilities

India opened its doors to the global economy in 1993 and the era of economic liberalization began. It draws all the world's big business houses to come to India and explore the Indian market.

But they were unaware of the Indian market environment and Indian laws. So they look toward the Indian companies to set up a Joint Venture with them and invest money through Foreign Direct Investment (FDI).

FDI policies have been very liberal since 1993 and 100% of FDI is permitted in some sectors such as Medical Equipment, Print Media, Etc. And thus Joint Ventures becomes very popular among foreign investors.

What is Foreign Direct Investment (FDI)?

Generally, FDI means an investment made by an investor into a business located in another country to acquire assets in a foreign company.

In Legal Terms, FDI means investment through capital instruments by a person resident outside India in an unlisted Indian company; or ten percent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company

What is Joint Venture?

Generally, Joint Venture means a contractual arrangement between two parties for the joint control of the company assets and collectively they try to achieve their economic goal.

In Legal Terms, Joint Venture means:
A joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement.

Types of Joint Ventures:

  1. Contractual Joint Venture:
    In India, it is the most common type of Joint Venture practice. Parties involved collaborate in this Joint Venture to create a successful venture without claiming any ownership or establishing a new legal entity, i.e. corporation or company

    Collaboration for research and technologies, Joint Tenders for bidding, Strategic alliances, are some of the types of Contractual Joint Ventures.

    Brahmos Aerospace, Mahindra- Renault LTD, PNB Metlife, ICICI Lombard are some of the successful Contractual Joint Ventures of India.
  2. Equity-based Joint Venture:
    In this Joint Venture, the parties come together in an agreement to form a new legal entity owned by each party. They are in charge of management and share benefits and losses as well.

    Vistara, Air Asia India, Dhirubhai Ambani Aerospace Park are some of the examples of Equity-Based Joint Ventures in India.

Forms of legal entities:

  1. Company:
    Under the Companies Act 2013, parties can create a new company and subscribe to the share under the agreement or make an agreement with an existing company and acquire their share and become shareholders.
  2. Partnership Firm:
    The Partnership Act 1932, provides for this form of Joint Venture. The parties decided to share the benefits of the undertaking they had agreed on. But this body is limited to Indians only, and in certain cases, NRI is also permitted.
  3. Limited Liability Partnership (LLP) Firm:
    Under the Limited Liability Partnership Act 2008, this entity is formed. Previously foreign investors were not permitted to invest in LLP but it was permitted by the government in 2015.

    Minimum capital investment is not necessary for this entity and it is mandatory to have at least two partners and one of them should be an Indian.
  4. Venture Capital Fund:
    It is an investment fund pool that manages the money of investors involved in investing in start-ups and small and medium-sized industries.
  5. Trusts:
    According to India Trusts Act 1882, Trusts is defined as an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

    Foreign companies are not allowed to use Trusts as a form of the joint venture.
  6. Investment Vehicle:
    These are the legal entities that are registered and regulated by the SEBI. Real Estate Investments Trusts, Infrastructure Investment Funds are some examples.

    In 2015 the RBI amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, and allowed the FDI in Investment Vehicles.

Law governing the Joint Ventures in India:

There are no separate laws for Joint ventures in India.

Contractual Joint Venture is governed by the Partnership Act, 1932 because it is like a partnership that is binding by the legal agreement no separate Legal Entity is formed.

Equity-based Joint Ventures are regulated by the Companies Act 2013 because a new legal entity is formed which are either Public or Private Sector companies.

Some other laws by which Joint Ventures in India are regulated:
  • Competition Act, 2002.
  • Foreign Trade (Development and Regulation) Act, 1992.
  • Industrial Policy and Procedure Policy for Foreign Investment Contract Act. Foreign Exchange Management Act.
  • 1999 SEBI Guidelines, Regulations, Notifications & Circulars.
  • Reserve Bank of India (RBI) Guidelines, Regulations, Notifications & Circulars.

Who can set up a Joint Venture:

A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.

A company, trust, and partnership firm incorporated outside India and owned and controlled by NRIs can invest in India with the special dispensation as available to NRIs under the FDI Policy

Foreign Portfolio Investors (FPI) may make investments in the manner and subject to the terms and conditions specified in Schedule II of Foreign Exchange Management (Non-Debt Instruments) Rules, 2019.

Foreign Investment is permitted under the automatic route in Limited Liability Partnership (LLPs) operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.

How to set up a Joint Venture:

As an Indian company:
For registration and incorporation, an application has to be filed with the Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.

Limited Liability Partnership:
To register an Indian LLP, you need to first apply for a Designated Partner Identification Number (DPIN), which can be done by filing eForm for acquiring the DIN or DPIN.

Then you would then need to acquire your Digital Signature Certificate and register the same on the portal. Thereafter, you need to get the LLP name approved by the Ministry. Once the LLP name is approved, you can register the LLP by filing the incorporation form.

As a foreign company:
Foreign Companies can set up their operations in India through
  • Liaison Office/Representative Office
  • Project Office
  • Branch Office
Such offices can undertake any permitted activities. Companies have to register themselves with the Registrar of Companies (ROC) within 30 days of setting up a place of business in India.

Liaison Office/Representative Office:
The liaison office acts as a channel of communication between the principal place of business or head office and entities in India.

Approval for establishing a liaison office in India is granted by the Reserve Bank of India (RBI).

Project Office:
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions.

Branch Office:
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for Exporting and Importing goods, carrying out research work, representing a parent company, Etc.

A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer.

Limited Liability Partnership:
A foreign LLP can establish in India by filling Form 27 (Registration of particulars by Foreign Limited Liability Partnership (FLLP)). The eForm has to be digitally signed by an authorized representative of the FLLP.

There is no mandatory requirement to apply and obtain DPIN or DIN for Designated Partners of FLLP but the DSC of the authorized representative is mandatory.

Foreign Direct Investment (FDI) Policy:
FDI under the automatic route (means no prior approval of RBI or Government of India is needed) is now allowed in all sectors, including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling.

Automatic Route:
No prior approval is required for FDI under the Automatic Route. The only information to the RBI within thirty days of inward remittances or issue of shares to Non Residents is required.

Government Approval:
Foreign Investment proposed not covered under the Automatic Route are considered for Governmental Approval on the recommendations of the Foreign Investment Promotion Board (FIPB).

According to the FDI Policy Circular of 2016, proposals for FDI would be filed online on FIPB Portal.

Liabilities in Joint Ventures:
Under Partnership Act, 1932:
Each partner is liable for all acts of the business committed when he is a partner together with all the other partners and even separately.

A retiring partner may discharge his liability to any third party before his retirement by arranging for him and that third party.

The partner will be held liable for every act done by the firm before his retirement notice becomes public.

The firm is not dissolved by the death of a partner, the estate of a deceased partner is not liable for any act of the firm done after his death.

All the parties are liable for every act done by the firm before the dissolution notice becomes public.

Except for the partner who dies, or who is bankrupt, or of a partner who, not having been known to the person dealing with the firm to be a partner, or retires from the firm.

The partner after the dissolution of a partnership may carry the unfinished business to finish it.

Provided that the firm is in no case bound by the acts of a partner:
  • who had been bankrupt.
  • Who has after the verdict represented himself or knowingly permitted himself to be represented as a partner of the bankrupt.

Under the Limited Liability Partnership Act, 2008:

Every partner of LLP is for the business of the LLP, the agent of LLP, but not of another partner.

A partner is not personally liable, directly or indirectly for an organization solely because of being a partner of a limited liability partnership

Whenever a partner acts for an LLP in the course of business, an obligation whether arising in contract or otherwise is solely the obligation of the LLP which is to be met out of its property

Section 28(2) provides that the provisions of 27(3) and 28(1):
  • shall not affect the personal liability of a partner for his wrongful act or omission,
  • but a partner shall not be personally liable for the wrongful act or omission of any other partner of the limited liability partnership.

Liability of a Foreign Partner:

A foreign partner will have liability as per the domestic laws on the liability of partners in Joint Ventures.

The foreign partner may also have liability under Reserve Bank of India & Foreign Direct Investment laws and regulations.

Joint Ventures helps the company to grow exponentially but their structure can be complex. There should be excellent communication between the partners to make the venture successful.

FDA is a great way to bring money to one's country. It helps the economy to thrive and also provides employment. But it should be kept in check so that the sovereignty of the nation remains intact.

Currently, India is hosting many successful Joint Ventures which are giving valuable thrust to the Indian economy.

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