FormTypes of joint venture
What are the key types of joint venture in your jurisdiction? Is the ‘joint venture’ recognised as a distinct legal concept?
A joint venture is recognised as a distinct legal concept in India. As per the provisions of the Companies Act 2013 (Companies Act), a joint venture is defined as a joint arrangement, whereby the parties that have joint control of the arrangement have the rights to its net assets. Joint ventures can be classified under the following categories.Constitution
Joint ventures are either incorporated or unincorporated.
An incorporated joint venture acquires a separate legal entity, perpetual succession and its own rights and obligations, whereby it can sue and be sued. A joint venture can be incorporated as a limited liability company under the Companies Act or a limited liability partnership (LLP) under the Limited Liability Partnership Act 2008.
To avoid being a permanent and formal corporate vehicle, an unincorporated joint venture can be established in the nature of a simple partnership firm or a strategic alliance, governed by the joint venture agreement, which stipulates all nuances of the relationship, including the rights and obligations among the parties and with third parties. As per the Indian Partnership Act 1932 (Partnership Act), it is not compulsory to register a partnership firm. However, registration of a partnership firm is recommended as registration carries certain distinct advantages. For example, registration of a partnership firm is conclusive proof of a partner being a member of a partnership. Further, a suit to enforce a right arising on account of a contract under the Partnership Act can be instituted by or against a partnership firm only if such a partnership firm is registered. However, registration of a partnership firm under the Partnership Act does not confer upon it a separate legal entity status (except for the purposes of taxation).Ownership
Joint ventures are either equity-based or contractual, and are either under equal ownership or majority-minority ownership.
An equity-based joint venture is one in which all the joint venture parties hold joint ownership by establishing a separate business entity, which can be in the form of, among others, a company, an LLP or a trust.
In a contractual joint venture, there is an arrangement to collaborate without creating a jointly owned separate entity. Such contractual joint ventures may revolve around a particular issue (such as entry into a new market, technology collaboration and revenue-sharing) and can be most commonly found in the form of franchise arrangements, licensing agreements, and purchasing and distribution agreements.Accounting
Joint ventures may comprise jointly controlled entities, jointly controlled assets or jointly controlled operations. The jointly controlled entity may be an incorporated entity. On the other hand, jointly controlled assets and jointly controlled operations are unincorporated, and are governed by the agreement signed between the partners.Formation
Joint ventures are either ‘brownfield’ or ‘greenfield’. When a joint venture entity is established by the virtue of contribution or transfer of existing assets, or an existing business by the parent entity, it is called a brownfield entity. A greenfield entity is a new entity that acquires assets and establishes a business from scratch.Public-private partnerships
Under the public-private partnership (PPP) model, special joint ventures are established, wherein the central or state government collaborates with private entities (domestic or international) and offers concessions to construct, develop and operate the projects. Such PPPs acquire the status of a public-sector undertaking and enjoy lucrative benefits, such as the ease of obtaining regulatory and sectoral approvals, assistance in funding and, depending on the model of PPP, they may even own the national assets.Common sectors
In what sectors are joint ventures most commonly used in your jurisdiction?
Joint ventures in India are used across sectors; however, they are more prevalent in high-technology, high-capital or high-technical skills sectors. For example, joint ventures are very prevalent in the insurance, asset management, oil and gas, and infrastructure sectors, and following the liberalisation of the defence sector, we are also seeing an increased movement in defence sector joint ventures. In addition to joint venture parties working together to increase synergy, some of these joint ventures are governed by the rules prescribed under a particular statute and, generally, as prescribed by exchange-control laws. A very recent example of this is the investment-driven joint venture partnership between a French multinational oil and gas company and a leading oil and gas player in India for developing liquefied natural gas networks and fuel retail networks to meet the demands of the Indian economy.
Insurance companies are required to be owned and controlled by Indian parties as per the rules stipulated by the Insurance Regulatory Authority of India. As a result of this regulatory requirement, many international insurance companies have formed joint ventures with Indian companies. Further, in the defence sector, Indian companies are being encouraged to enter into joint ventures with foreign entities that have high technological expertise, whether in air, land or sea-related defence equipment under the ‘Make in India’ initiative of the Indian government.
Strategic alliances and technology-transfer agreements between Indian and foreign partners are prevalent in the technology, media and telecom sectors, which provide great investment opportunities in diverse areas such as software development, hardware, print media, sports and outsourcing. Further, the asset-management industry has also witnessed some growth; multiple foreign asset-management companies have formed joint ventures with Indian banks and financial institutions. Other sectors where joint ventures are commonly used that have witnessed a rise in participation by foreign parties are the power sector and the fintech sector, particularly in technology for financial sectors such as banking, payments and investments. Apart from the demographic conditions specific to India, the growth of these sectors from the perspective of foreign investment can be said to be attributable to the availability of low-cost internet and accessibility to pertinent resources, owing to which many sectors have attracted foreign investment from various jurisdictions, such as Russia, the USA and Mauritius, to name a few.
PartiesRules for foreign parties
Are there rules that relate specifically to foreign joint venture parties?
Any foreign party that seeks to invest in a joint venture in India must comply with the legal requirements associated with foreign direct investment (FDI) in India, including the provisions of the Foreign Exchange Management Act 1999 (FEMA), which provides for India’s foreign exchange management regime and regulates the conditions governing foreign exchange and investment into and out of India. Currently, the Indian legal regime governing foreign investment permits persons resident outside India to invest in the securities of Indian companies, subject to the sectoral caps (where applicable) prescribed by the government of India. Foreign investments can be made under the automatic route (no prior approval from the government is required before investing) or the approval route (prior approval of the government is mandatorily required).
In an attempt to simplify the rules and regulations pertaining to the FDI regime in India, the Department of Industrial Policy and Promotion (DIPP) issues a consolidated FDI policy annually, which subsumes all prior press notes, press releases and clarifications issued by the DIPP and reflects the current policy framework on FDI. Recently, the Foreign Investment Promotion Board, which was an inter-ministerial body responsible for processing FDI approvals and recommending government approvals, was abolished and replaced by the Foreign Investment Facilitation Portal (FIFP), which is administered by the DIPP. The FIFP serves as an online interface between foreign investors and the government of India and facilitates the approval and clearance of FDI applications through a ‘single window’ system.
The legal regime of taxation, including tax treaties ratified by India, also specifically provides for rules applicable to foreign parties investing in India. Further, in the event that the parties to the international transaction are related, the Transfer Pricing Regulations (the TP Regulations) would also be attracted to such a transaction and the foreign party shall have to comply with such regulations.
Several initiatives have been taken by the government of India towards liberalisation of various key sectors in India, such as defence, telecoms, insurance and railway infrastructure, thereby leaving very few sectors in India wherein foreign investment is restricted. Some sector-specific rules have to be followed for foreign investors, for example:
- the pharmaceutical sector (where non-compete clauses are not permitted in foreign-investment joint venture agreements);
- the aviation sector (security clearance for foreign personnel);
- the broadcasting sector is governed by the Ministry of Information and Broadcasting, which may temporarily suspend the permission granted to the licensor when it comes to national security or for public interest;
- single-brand retailing (30 per cent domestic sourcing norms for FDI beyond 51 per cent);
- the defence sector (the joint venture company, along with the manufacturing facility, should have a maintenance and life cycle support facility for the product being manufactured in India); and
- multi-brand retailing (minimum amount to be brought in as FDI would be US$100 million, and 30 per cent of the value of procurement of manufactured or processed products will be sourced from Indian micro, small and medium-sized industries, which have a total investment in plant and machinery not exceeding US$2 million).
What requirements are there to disclose the ultimate beneficial ownership of a joint venture entity?
Beneficial interest is typically understood to mean ‘profit, benefit or advantage resulting from a contract, or the ownership of an estate as distinct from the legal ownership or control’.
India has been a member of the Financial Action Task Force (FATF) since 2010 and accordingly aims to achieve the FATF’s objectives of combating money laundering, terrorist financing and other related threats by way of legal and regulatory measures. In this regard, under the Companies Act, declarations of beneficial interest (and any subsequent change therein) in shares of the company is mandated both by the legal owner and the person holding beneficial interest in the shares concerned, and the company is further required to note the same in its register. Pursuant to the recent amendments to the Companies Act and its rules, the law now defines terms such as ‘beneficial interest’, ‘significant influence’ and ‘significant beneficial owner’ and also provides guidance on how such ownership is to be determined and who would be considered a significant beneficial owner for the purposes of disclosures in the case of entities, such as pooled investment vehicles. The significant beneficial owners are required to make declarations and disclosures to the company in which they have such ownership. The Companies Act further requires the company to issue a notice to a person in relation to obtaining information of significant beneficial ownership where the company knows or has reasonable belief to that effect and can even approach the the National Company Law Tribunal (NCLT) in certain circumstances. The declarations need to be in the prescribed form and requests for information, such as particulars of the significant beneficial owner, the nature and extent of indirect holding or rights in the reporting company, basic details of the entity through which such indirect rights are held (name, identification and registration number) and the details of direct holdings in the company, if any.
The concept is also recognised under the Prevention of Money Laundering Act 2002 and its relevant rules (PMLA). The PMLA mandates identification of clients and their beneficial owners by banking companies, financial institutions and other intermediaries. The joint venture entity may need to disclose the ultimate beneficial ownership during such identification. Further, several regulators (eg, the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI)) also mandate the intermediaries, banks and financial institutions to seek details of the ultimate beneficial ownership details of their customers while doing know-your-customer checks.
Further, if the joint venture is a regulated entity (eg, an intermediary regulated by the SEBI), then the joint venture entity itself, in certain cases, may need to disclose ultimate beneficial ownership.
Setting up and operating a joint ventureStructure
Are there any particular drivers in your jurisdiction that will determine how a joint venture is structured?
Typically, the structuring of a joint venture is based on the business plan of the partners and the nature of the business proposed to be carried out through the joint venture. It also depends on the amount of control and supervision that the parties may wish to retain. Factors arising from the foreign-investment regulatory regime of India (such as restrictions and conditions imposed on foreign investments in a few sectors and other requisite approvals) also play a crucial role in the structuring of the joint venture. Further, the parties must also take into consideration the taxation treatment of different structures while fashioning the structure of a joint venture. An unincorporated joint venture could be characterised as an ‘association of persons’, which would be a distinct entity (ie, a separate taxable entity in India), and is likely to result in certain payments from such an unincorporated joint venture to its members being disallowed in the hands of the joint venture for tax purposes.
In the case of a capital-intensive project, the incorporated joint venture structure is usually preferred over the unincorporated joint venture structure, owing to its ability to source huge amounts of capital resources by means of equity, debt or other avenues of financing. Moreover, incorporated ventures, such as companies and LLPs, have the scope to limit their liability, unlike a partnership, which has both a limited ability to raise capital and unlimited liability as well. Further, there are certain incentives based on the place of incorporation of the joint venture, extended by the Government of India, such as for special economic zones, which may also affect the structuring of a joint venture.
The structuring of a joint venture also depends on the time period in which the joint venture parties wish to establish the joint venture and whether the joint venture parties are looking for a permanent identity for their joint venture. Incorporated joint ventures require more start-up time owing to a large number of formalities required for the purpose of incorporation of a company, compared to that of setting up a partnership firm or a contractual joint venture. Moreover, incorporated joint ventures have permanent, separate legal identities, which may not be necessary for a single or specified set of transactions and which could be achieved through an unincorporated joint venture. Unincorporated joint ventures permit partners to enter into strategic alliances without the formality of incorporating a corporate vehicle. Further, the exit mechanism is also simpler in unincorporated joint ventures, as compared to the incorporated joint ventures.Tax considerations
When establishing a joint venture, what tax considerations arise for the joint venture parties and the joint venture entity? How can tax charges be lawfully mitigated?
A joint venture entity can be set up either directly or indirectly by way of setting up an intermediary holding company in an offshore jurisdiction. Any gains made by the shareholders from the sale of shares of the joint venture entity, which are held by the investor as capital assets, are characterised as capital gains and are taxed under the Income-tax Act 1961 (the IT Act). The IT Act provides that taxability of an entity that is resident in a jurisdiction with which India has signed a Double Taxation Avoidance Agreement (DTAA) would be governed under the provisions of the IT Act or the relevant DTAA, whichever is more beneficial to the non-resident taxpayer. India also made the General Anti-Avoidance Rules (GAAR) effective from 1 April 2017. However, it is important to note that tax benefits under the relevant DTAA claimed by a non-resident shareholder may not be available, if the non-resident entity has been set up with the main purpose of obtaining tax benefit, inter alia, where there was no commercial justification for investing through an intermediary holding company. In this context, one would need to be constantly updated with and take note of the ever-changing international tax landscape. Action 15 of the Base Erosion and Profit Shifting (BEPS) programme initiated by the Organisation for Economic Co-operation and Development (OECD) provides for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). MLI seeks to amend the existing network of bilateral tax treaties, and similar to GAAR, inter alia, seeks to deny benefits available under the tax treaties to residents of the signatory countries where the principal purpose of setting up an entity in the relevant contracting state is to avail of such benefits. It may be noted that India deposited the ratified copy of MLI and other requirements with the Depository (OECD Director General) on 25 June 2019 and the ratified MLI came into force in respect of all covered DTAAs of India on 1 October 2019. The Government of India issued a notification dated 9 August 2019 publishing the ratified provisions of MLI applicable for India, the list of covered treaties and India’s position on various articles. The MLI will come into effect for any treaty from 1 April 2020.
Investment into the joint venture company can be made either in the form of common stock or preferred stock, or debt. Foreign investors are generally allowed to invest in common stock or preferred stock, and debt convertible into common stock. While return on debt by way of interest can be claimed as tax-deductible expenditure by the Indian entity, any return by way of dividends payable to common or preferred stock holders would not be allowed as a tax-deductible expense. Conversion of compulsorily convertible preference shares and compulsorily convertible debentures into equity shares has been specifically exempted from tax. As per the provisions of the IT Act, if shares are received for a consideration lower than their fair market value (computed in accordance with the prescribed method), then the difference between the fair market value of the security received by the shareholder and the price paid for the same could be chargeable to tax in the hands of the recipient under the heading ‘income from other sources’.
Further, if the transfer of unlisted securities is made at a value less than their fair market value, then the fair market value (computed in accordance with the prescribed method) of such securities may be deemed to be the full value of sale consideration and the transferor may accordingly be liable to pay capital gains tax as per the provisions of the IT Act.
Further, certain payments to residents and all payments to non-residents that are chargeable to income tax in India are subject to withholding tax obligations. Failure to withhold such tax may result in interest, penalties and fines as prescribed under the IT Act.
The sale or purchase of shares of the joint venture entity or infusion of capital into the joint venture entity would, however, be outside the ambit of goods and services tax (GST) legislation in India, as the same would amount to transfer of securities or money, as the case may be.Asset contribution restriction
Are there any restrictions on the contribution of assets to a joint venture entity?
Generally, there are no restrictions on contributions of assets to a joint venture entity. However, depending on the type of the joint venture entity, there may be certain compliance requirements under extant laws for contribution of such assets. For example, if assets are contributed by a joint venture partner in a limited liability company in lieu of shares, the Companies Act lays down certain procedures for issue of shares for ‘consideration other than cash’. Further, the Companies Act stipulates rules in relation to valuation and treatment of the non-cash consideration.
Further, extant foreign exchange regulations also restrict (and provide detailed procedures for) contribution of assets to the joint venture entity depending on the nature and business of the entity, type of asset and the resident status of the entity or person contributing the asset. The contribution of assets classifiable as supply of goods or the supply of services to a joint venture entity by joint venture partners may be exigible to tax under GST legislation in India. These restrictions and the taxability of such transactions have to be analysed case by case.Interaction between constitution and agreement
What is the interaction between the constitution of the joint venture entity and the agreement between the joint venture parties?
Usually, parties to an Indian joint venture enter into one or more contractual arrangements, typically with respect to shareholding in the joint venture company, to set out the terms, rights and obligations thereunder.
Owing to privity of contract, unless the joint venture company is party to the contractual arrangement between the joint venture parties, the provisions of such an arrangement may not be directly enforceable against it. Therefore, the articles of association (AOA) of the joint venture company must either incorporate the provisions of the joint venture agreement or be silent on the same, thereby not hosting any contradictory or restrictive provision in relation to rights specified in the joint venture agreement in order for the joint venture company to give effect to these provisions. However, in the case of any conflict or inconsistency between the provisions of the AOA and the joint venture agreement (to the extent the joint venture company is affected), the former shall take precedence over the latter. Some understandings, such as pooling arrangements and voting agreements between the joint venture partners (see question 10), may affect the governance of the joint venture company, but do not directly involve the joint venture company per se. It has also been observed by the courts in India that the consensual agreements between particular shareholders relating to their specific shares can be enforced against the parties like any other agreement. However, in the case of an aggrieved shareholder whose rights in relation to the joint venture company cannot be enforced, he or she can approach the courts to seek liquidated damages, as stipulated under the agreement, or unliquidated damages for breach of contract as per the Indian Contract Act 1872.
There is no requirement to register a joint venture agreement.Party interaction
How may the joint venture parties interact with the joint venture entity? Are there any restrictions?
Typically, the joint venture agreement and the AOA provide rights to the joint venture parties to nominate directors on the board of the joint venture company, thus creating an important channel for the joint venture parties to interact with the joint venture entity. A critical element to be considered in relation to transactions between the joint venture parties and the joint venture entity is the regulation of specified types of transactions between related parties under the Companies Act and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) for listed companies (the related-party transactions (RPTs) regime). A ‘related party’ has been fairly broadly defined under the Companies Act and LODR Regulations and includes any person on whose advice, directions or instructions a director or manager is accustomed to act (except in the case of professional advice).
As per the Companies Act, all transactions by the joint venture company with related parties have to be approved by the board and, under certain circumstances, by the shareholders of the joint venture company, except if such transactions are in the ordinary course of business of the company and made at arm’s length. Further, the related shareholder may not vote on such a transaction. However, the aforesaid proviso will not apply to a joint venture company in which 90 per cent or more members are relatives of the promoters or are related parties. Additionally, the requirement for passing a shareholder resolution will be obviated in the case of transactions entered into between the holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at a general meeting for approval. An arm’s-length transaction refers to a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest and is compliant with the TP Regulations.Exercising control
How may the joint venture parties exercise control over the joint venture entity’s decision-making?
The rights of an investor with respect to control and decision-making of any Indian joint venture may be classified into statutory rights and contractual rights. Statutory rights are primarily on the basis of the provisions of the Companies Act and the sector-specific restrictions (if any), as may be prescribed for foreign investment. On the other hand, contractual rights are derived from the terms and conditions of the contractual arrangement between the joint venture parties, irrespective of the extent of each shareholder’s shareholding in the joint venture company.
The Companies Act requires most matters to be approved as an ordinary resolution (a simple majority of votes cast) and certain important matters by way of a special resolution (three-quarters of the votes cast) of the shareholders. Certain matters may only be decided by a resolution of the shareholders and not at a meeting of the board. Control over the joint venture entities’ decision-making by the minority investors may be protected by incorporating provisions in the joint venture agreement that would increase the threshold required for the passing of certain resolutions (therefore providing for veto rights) or provide for special quorum requirements meetings of the board or of shareholders, ensuring representation from the minority investor. The joint venture parties usually negotiate a special regime governing the exercising of voting rights, including where the consent of a minority shareholder might be required for a resolution, where the Companies Act would only require a majority approval. Usually, the joint venture agreements provide thresholds for the shareholders in exercising rights in relation to control and management of the joint venture entity.
The joint venture parties’ interests are also protected through restrictions on their ability to transfer shares held by them in the joint venture company, as well as providing for put or call options upon the occurrence of certain specified events and circumstances (the enforceability of such provisions is discussed in question 8).Governance issues
What are the most common governance issues that arise in connection with joint ventures? How are these dealt with?
Several challenges plague the operation of joint venture companies in India. As a result, the number of successful joint ventures in India, especially those involving a non-resident investing party, has declined.Poor or inadequate due diligence
At the time of entering into a joint venture, Indian promoters have a tendency to ‘window dress’ either the business plan or the asset, and carefully steer the due diligence being undertaken by the incoming joint venture partner. In such instances, the incoming joint venture partner is not made aware of all the pending issues surrounding the business or the asset in question. Discovery of these at a later stage often leads to disputes between the joint venture partners, owing to which there is an increased trend in the market of conducting forensic due diligence on the prospective partner. Such diligence is conducted to run background checks and analyse anti-bribery and anti-corruption policies and practices, as may be applicable on the prospective partner, with the aim of, inter alia, avoiding any possible corporate fraud.Business style in India
There are significant philosophical differences in the manner in which business is conducted overseas and in India. Some practices may lead to bribery and corruption-related issues, including but not limited to violations of the Foreign Corrupt Practices Act 1977 that hinder the governance of joint venture companies. In furtherance of the same, the Prevention of Corruption Act 1988, which governs anti-bribery and anti-corruption activities in India, was amended in 2018 to bring the provisions therein on a par with international practices. Certain types of companies in India are also required to invest in directors’ and officers’ liability insurance, covering any risks arising out of any claims against the directors or officers of the company for any breach of applicable laws, including laws pertaining to corruption and bribery.Modes of corporate governance and mediation of disputes between the joint venture partners
A lack of good mechanisms and ethical standards to internally regulate the governance of the joint venture company can have severe consequences, especially for foreign investors. Therefore, to avoid governance issues and to ensure good governance, it is crucial for the joint venture parties to adopt a variety of checks and balances, such as incorporation of specialised committees consisting of representatives of the joint venture partners and independent advisers, to look into particular aspects of the business of the joint venture. The style in which the joint venture company is to be governed, while often legislated in the joint venture agreements, may not always be practical and feasible for the company to implement, for various reasons.
The Companies Act provides for a governance regime with stringent checks and balances, including material disclosures by the company and the key managerial personnel, so as to safeguard the interests of investors even in the absence of contractually agreed protections. The Companies Act recognises the concept of independent directors, who are not related or affiliated, whether directly or indirectly, with any joint venture partner, including the natural persons in control of a joint venture partner. Independent directors may also provide the joint venture company with the relevant expertise and experience for, inter alia, an independent perspective to help:
- resolve conflicts that may arise among the joint venture parties; and
- ensure compliance with applicable law.
Such independent directors also play a pivotal role in representing the collective interests of minority shareholders. Further, joint ventures in India should also consider establishing committees such as an audit committee, to fulfil the role of a company watchdog, with a say over crucial matters relating to the appointment of the auditors of a company, approval and subsequent modification of RPTs, scrutiny of inter-corporate loans and investments, valuation of undertakings and evaluation of internal controls and risk-management systems. Such committees make decision-making processes more efficient and transparent. Addressing disputes that arise between joint venture partners in a timely manner is essential to ensure that the operations of the joint venture company are not paralysed, owing to pending disputes between joint venture partners. Apart from appointing independent directors and forming committees, the joint venture partners could also consider developing a code of conduct and policies to govern conflicts, which should be comprehensive and clear, and provide for escalation mechanisms at appropriate stages.
The board of a company plays a pivotal role in its governance and decision-making process, and is authorised and empowered to do so by the Companies Act. It has the responsibility to comply with the laws that affect the company’s corporate governance structure, the ambitions of the promoters and the rights of stakeholders, all of which are reflected in the actions of the board. However, in the event the non-resident investing party appoints non-resident directors, then such directors are typically not involved in the day-to-day affairs of the joint venture company, since several powers for the ease of everyday working are delegated by the board to the executive management of the company. Hence, to retain more control over the day-to-day affairs of the company, such non-resident investing parties shall also appoint resident directors who can act as executive or whole-time directors and manage the daily operations of the joint venture company. Recently, joint venture entities have adopted creative arrangements with respect to the appointment of key managerial persons to ensure that every joint venture partner has a say in the day-to-day management of the joint venture. This includes the appointment of the chief executive officer by the joint venture parties on a rotational basis or designating different key managerial personnel by the joint venture parties. The Companies Act also provides onerous duties and corresponding liabilities for such key managerial personnel. Providing insiders with a whistle-blowing mechanism with safeguards against retaliation is an effective way in which concerns can be reported to the audit committee or the joint venture company’s board. The minority investor’s nominee on the board or the committee, as the case may be, would have sufficient awareness of any foul play at a very nascent stage and would enable the minority investor to take corrective action.
The Companies Act sufficiently discourages non-compliance. With the increased cost of non-compliance, including contraventions that result in imprisonment of the company’s officers and personal liability, provisions relating to investigation and the punishment of fraud, the Companies Act ensures that the aforementioned governance requirements are complied with, in letter and in spirit.Kotak committee report and anticipated reforms in corporate governance
In 2017, the SEBI committee on corporate governance proposed some key recommendations with a view to enhancing the corporate governance standards of listed entities. These recommendations include, inter alia:
- the separation of roles of the chairperson and the managing director or chief executive officer;
- a requirement of 50 per cent of the total directors to be independent, which should also include at least one independent female director;
- an increase in the number of board and audit committee meetings;
- the provision of a transparent framework for regulating information rights of promoters with relation to significant shareholding and access to unpublished price-sensitive information; and
- half-yearly disclosures for RPTs.
Addressing the corporate governance issues and procedures recommended to streamline the governance practices of listed entities, a large number of recommendations proposed by the Kotak committee have been accepted by the SEBI, thereby amending major corporate laws in India and strengthening the very core of businesses.Nominee directors
With an incorporated joint venture, what controls exist in your jurisdiction in relation to nominee directors? How should a nominee director balance the potentially conflicting interests of the joint venture company and the appointing shareholder?
A ‘nominee director’ has been defined under section 149 of the Companies Act to mean a director nominated by any financial institution in pursuance of the provisions of any law or agreement, or appointed by any government or person, to represent its interests. Practically, a nominee director is expected to monitor the operations of the company, but at the same time is burdened with many fiduciary and statutory duties and obligations, the breach of which can attract penal provisions under various legislation. When facing a situation with a conflict of interests, wherein the interests of shareholders are in contrast with other stakeholders, such as the employees or the joint venture company itself, the Companies Act has, without prioritising one over the other, provided recognition to both the shareholders and stakeholders. In reality, it implies that the directors are liable to make difficult choices in deciding the hierarchy of conflicting interests without necessarily being favourable to the nominator, the underlying principle being that they are supposed to act in the interests of the company at all times.
Section 166 of the Companies Act mandates that a director must act in the best interests of the company and in good faith to promote the company’s objectives. A director has to maintain a balance between the interests of the nominator and the wider interests of the joint venture company and other stakeholders, and ensure that all duties are discharged with due diligence and reasonable care following due process and exercising of his or her independent judgement. If the joint venture company is proven to have committed any contravention of law, a nominee director will not be exempted and will be held equally liable as an officer in default. A director has to be diligent with RPTs and abstain from self-dealing and ensure that he or she complies with the requirements prescribed under section 184 of the Companies Act and LODR Regulations (applicable if the joint venture entity is a listed entity) with respect to the disclosure of interest by the directors, primarily in relation to any contract or arrangement by a company, where any such non-compliance may be penalised, including by imprisonment.Competition law
What competition law considerations are engaged by the formation and operation of the joint venture? Is approval needed?
The merger control provision of the Competition Act 2002 (Competition Act) governs only the acquisition of an enterprise or mergers and amalgamations of enterprises and, as such, the formation or establishment of a joint venture is not specifically covered. However, notifiablity of a joint venture to the Competition Commission of India (CCI) may depend on the manner in which it has been created (ie, through an acquisition, merger or amalgamation). Given that a greenfield joint venture does not own assets or generate any revenue, greenfield joint ventures are typically not notifiable and do not require the prior approval of the CCI under the Competition Act. In contrast, the formation of a brownfield joint venture (where parent companies contribute existing assets or businesses to the joint venture) may be notifiable if the prescribed financial thresholds under the Competition Act are satisfied.
As per the recent amendment to the merger control regulations under the Competition Act, a green channel of approval has been introduced. As per the green channel, if a combination (ie, the proposed joint venture) falls under such category for which the parties to the combination (and their group entities): (a) do not produce similar or identical goods; (b) do not engage in activities which are at a different stage or level of the production chain; and (c) do not engage in any activities that are complementary to each other, then such parties may file a notice, along with a declaration that the proposed combination qualifies under the green channel and is not likely to cause any adverse effect on competition. Post such filings, the proposed combination (ie, the proposed joint venture) will be deemed to be approved.Provision of services
What are the key considerations in your jurisdiction in structuring the provision of services to the joint venture entity by joint venture parties?
As mentioned above, under the TP Regulations, joint venture partners and the joint venture company are likely to qualify as associated enterprises (AEs). Therefore, transactions between two AEs (ie, joint venture partners and the joint venture company) shall have to be conducted at arm’s length. Thus, if a non-resident joint venture partner renders any services to the joint venture, the consideration for the services should be determined at arm’s length. Similarly, if any resident joint venture partner provides any services to the joint venture, the services will be covered in the definition of RPTs. Accordingly, any expenditure claimed by the joint venture in respect of payments made to its resident joint venture partner should not be excessive or unreasonable. Similarly, the joint venture entity, whether incorporated or not, and the joint venture partners, where they directly or indirectly control the joint venture entity, are treated as related persons under the GST legislation in India. Therefore, any supply of services or goods by such joint venture partners to the joint venture entity, or vice versa, would be exigible to GST, even where such supplies are made without any consideration. However, where either the joint venture or the joint venture partners are located outside India, such supplies between them would be taxable under the GST legislation in India, only where the place of supply of such supplies is in India. Further, indemnity payments and mandatory disclosure of related party transactions by companies in India are typically difficult to enforce.
Additionally, if the payment for services rendered by the non-resident joint venture partners are in the nature of royalty or fee for technical services (FTS), then such joint venture partners may be liable to pay tax on their income for these services at the rate of 10 per cent (plus applicable surcharge and cess). However, they may also be entitled to avail of the beneficial provisions of the applicable DTAA. It may be noted that certain DTAAs (eg, India-UK, India-US and India-Singapore) provide for a restrictive definition of FTS and require that the technical knowledge or experience provided by the non-resident should be made available to the Indian recipient (ie, the service recipient is enabled to apply the technology or experience independently without any further assistance from the service provider). Thus, if the services so rendered by the non-resident service provider from specified jurisdictions do not fall within the restrictive scope of the FTS definition under the relevant DTAA, then the joint venture partner may not be liable to pay tax in India on such income, provided the joint venture partner does not have a permanent establishment in India. Taxability of such payments should also be examined in light of GAAR provisions.
Where the consideration paid for the service rendered by a resident joint venture partner is in the nature of royalty or FTS, the joint venture will be obliged to withhold tax at the rate of 10 per cent while making payment or crediting the resident joint venture partner in its books of account.
Indian tax laws also contain thin capitalisation rules, whereby interest payments in excess of 30 per cent of the earnings before interest, taxes, depreciation and amortisation of the Indian company would not be allowed as a deduction against its taxable income. India has also introduced rules pertaining to secondary adjustments in TP-related matters.Employment rights
What impact do statutory employment rights have in joint ventures?
Indian employment laws will apply to joint venture establishments in the same way as they apply to any other establishment, whether it be a factory or a commercial establishment. The key legislation governing the registration and compliance requirements, as well as the conditions of employment in factories and commercial establishments, is the Factories Act 1948 and state-specific shops’ and establishments’ legislation, respectively. There is another employment legislation in India, governing, inter alia, social security, bonuses and insurance, the applicability of which is dependent on the number of employees, location of the establishment, employee salaries, nature of work undertaken, etc. However, there are special provisions under the Employees Provident Fund and Miscellaneous Provisions Act 1952 (the EPF Act), the primary social-security legislation in India, in relation to individuals holding non-Indian passports, and employers may be required to make a greater contribution in relation to such individuals under the EPF Act.
In relation to secondment, it is not uncommon for foreign companies to send their employees on secondment to their Indian subsidiary, and secondment to an Indian joint venture entity will not be very different. In such arrangements, the secondee usually maintains an employment relationship with the foreign entity while also entering into an employment agreement with the Indian entity in order to mitigate against the creation of an Indian place of business, of the foreign joint venture party, under Indian foreign exchange laws (which will then require the foreign joint venture party to register and comply with Indian laws like any other Indian entity), and a similar permanent-establishment risk under Indian tax laws (which could create a tax liability in India for the foreign joint venture party, in relation to its business profits in India).
Additionally, prior to arriving in India, foreign nationals coming to India on business should be careful to procure the appropriate work-related visa. There are two main types of work-related visas that are available: the business visa and the employment visa; and the type of activities that can be carried out under each visa-type is regulated (eg, an individual on a business visa cannot enter into an employment arrangement with an establishment in India). Also, there may be a requirement under Indian immigration laws for the foreign national to be registered with the local authorities, such as the Foreigners Regional Registration Office.
Further, the Indian parliament has recently passed the Code on Wages 2019 (Code) which will consolidate the provisions of four central legislations, namely, the Equal Remuneration Act 1976, the Minimum Wages Act 1948, the Payment of Wages Act 1936 and the Payment of Bonus Act 1965. The objective of the Code is to create a uniform system of governance and ensure that compliance requirements under Indian labour laws can be easily implemented, thereby raising the ease of doing business in India. In furtherance of that objective, the Code seeks to streamline the aforementioned laws. Though the Code received the President’s assent on 8 August 2019, it will be brought into force only once the appointed date for its implementation is notified by the Central Government.Intellectual property rights
How are intellectual property rights generally dealt with on the creation, operation and termination of a joint venture in your jurisdiction?
Typically, joint venture partners license their intellectual property (IP) to the joint venture through a licence agreement. In very limited cases, there is an assignment of IP to the joint venture. The choice of mode of transfer is dependent on several factors, such as establishment of the joint venture for a specific duration or purpose, and the trust and confidence shared between the joint venture parties. In relation to the foreign collaboration, previously, monetary caps were applicable on remittances (both royalties and lump sum fees) made for technology collaborations and the licence or use of a trademark or brand name. However, these restrictions have now been removed.
While transferring the IP, the joint venture parties have to be diligent while complying with the provisions of the applicable law to the relevant IP, whether trademark, copyright or patent.
Ideally, the issues relating to the termination of the joint venture and any implications thereof concerning the IP, including both the transferred IP and acquired or developed IP by the joint venture entity, are addressed in the transfer or joint venture agreement. The inclusion of options such as buyout of the IP from the joint venture entity, sale to a third party and division of proceeds, enables a smooth termination of the joint venture arrangement.
Funding the joint ventureTypical funding
How are joint ventures generally funded in your jurisdiction? Are there any particular requirements relating to funding and security packages?
Based on the business needs of the joint venture company, each partner decides the nature and quantum of contribution that he or she can make to the joint venture. A cash contribution is usually made in the form of equity or debt infusion into the joint venture, in compliance with the foreign exchange laws of India. Often, partners also contribute by bringing in a non-cash consideration, such as IP, management skills and specific services for the operation of the joint venture.
A joint venture entity incorporated in India may be funded through subscribing to equity shares or compulsorily convertible preference share capital or compulsorily convertible debentures. The price at which these instruments can be issued must not be lower than:
- the price computed in accordance with applicable guidelines issued by the SEBI;
- the fair value determined as per any internationally accepted pricing methodology for valuation of shares at arm’s length, duly certified by a chartered accountant or an SEBI-registered merchant banker (if the joint venture is an unlisted company); and
- the price as applicable to the transfer of shares from resident to non-resident as per the pricing guidelines laid down by the RBI, where the issue of shares is on preferential allotment. However, when the investment is being made by subscribing to the memorandum of association (MOA) of the joint venture company in accordance with the Companies Act, then it can be made at the face value of shares, subject to the FDI Policy. Any deferred payment with respect to the transfer of shares between an Indian party and a foreign or non-resident party is subject to the maximum ceiling and conditions prescribed in the FDI Policy.
A non-resident partner can also receive shares of the joint venture company against a lump-sum technical know-how fee or royalty, subject to certain pricing and sector guidelines and compliance with tax laws. A wholly owned subsidiary set up in India by a non-resident entity, operating in a sector where 100 per cent FDI is allowed under the automatic route and there are no FDI-linked restrictions, may issue equity shares, preference shares, convertible debentures or warrants to the said non-resident entity against pre-incorporation or pre-operative expenses, that may have been incurred by the said non-resident entity, up to a limit specified in the FDI Policy and subject to the applicable law governing the FDI.
A joint venture may also be funded by extending an external commercial borrowing (ECB) or a foreign currency loan, including through subscription to partially or optionally convertible preference shares, optionally convertible debentures and non-convertible debentures (subject to having the minimum equity contribution and maintaining the debt-to-equity ratio stipulated under the extant foreign exchange regulations), which would require compliance with the stipulations laid down for eligible borrowers and permitted end uses. The joint venture company must issue the capital instruments to the non-resident partner within 60 days of the date of receipt of the foreign inward remittance, failing which, consideration received is required to be refunded to the non-resident investor. Further, foreign investors have been permitted to subscribe to partly paid equity shares and warrants, subject to certain additional conditions.
Finally, providing an advance against services to be rendered (in the case of a captive information technology or information technology-enabled services unit) can also fund a joint venture in India. However, the parties must be mindful of TP restrictions and take care that the advance does not extend beyond specified periods, thereby qualifying as an ECB.
It is advisable that, in the event of unincorporated joint ventures, the definitive agreements set forth the payment milestones and mechanism for payment - including the mode and manner of payment - and events of breach, or default, that may trigger payment obligations.Capital injection restrictions
Are there any legal or regulatory restrictions on the injection of capital into, or the distribution of profits or the extraction of cash by other means from, the joint venture entity?
For the purposes of injection of capital into a joint venture by a foreign investor, the restriction on foreign investment is set forth in the FDI Policy, which specifies certain sectoral caps, beyond which foreign investment is not permitted in such sectors. In order to extract cash and repatriate profits from the joint venture company, distributing dividends is a route that is typically exercised. Dividend to a foreign shareholder is freely repatriable without any restrictions (net after dividend distribution tax, if any, as the case may be). The repatriation is governed by the provisions of the Foreign Exchange Management (Current Account Transactions) Rules 2000, as amended from time to time. Further, the joint venture partners may extract cash from the joint venture company, if the joint venture company exercises the buy-back of shares. Buy-back of shares is a scheme whereby a company purchases its own shares from its shareholders in accordance with the provision of the Companies Act. However, in the case of non-resident shareholders, such transactions may have to comply with the TP Regulations. Further, the IT Act requires a company to pay buy-back tax at the rate of 20 per cent (plus applicable surcharge and cess) on the difference between the buy-back price and the issue price of the shares. Yet another way to extract cash from the joint venture company by the joint venture partners is capital reduction. Capital reduction is a scheme regulated by the courts in India, whereby the subscribed capital of the company is either reduced or cancelled. Capital reduction may involve the distribution of capital or profits of the company, or both. Any distribution by the joint venture company to its shareholders on account of reduction of its capital, to the extent of accumulated profits, is deemed as dividend for tax purposes and would be subject to dividend distribution tax (DDT). Any further gains accruing to the shareholders on account of capital reduction (after reducing the cost of acquisition and the amount already considered as dividends) shall be taxable as capital gains.Tax considerations
What tax considerations should be taken into account in the operation of the joint venture?
In India, there is no group-taxation regime, and each entity is required to pay tax on its own taxable income. A joint venture company is liable to pay tax on the total income computed as per the provisions of the IT Act at the rate of 25 per cent (plus applicable surcharge and cess) if the gross receipts of the company do not exceed 4 billion rupees in the financial year 2017-18, and 30 per cent (plus applicable surcharge and cess) for all other companies. However, if the tax payable by the company on the total income is less than 18.5 per cent of its book profits, then a minimum alternate tax at the rate of 18.5 per cent (plus applicable surcharge and cess) of the book profits will become payable.
DDT of 15 per cent (plus applicable surcharge and cess) (effective rate approximately 20.56 per cent) is payable upon the distribution of dividends to shareholders by a company on a gross basis. Such dividend income is then tax-exempt for shareholders (however, resident non-corporate taxpayers are subject to an additional 10 per cent tax on the dividends if such dividends exceed 1 million rupees). A joint venture company may also opt for capital reduction, whereby any distribution by the joint venture to its shareholders on account of reduction of its capital, to the extent of accumulated profits, would be deemed as dividends and, accordingly, will be liable to DDT. Any further gains accruing to the shareholders on account of capital reduction (after reducing the cost of acquisition and the amount already considered as dividends) shall be taxable as capital gains. For non-resident joint venture partners, the joint venture would be required to withhold tax on such capital gains.
The joint venture may also distribute its profits by buying back shares, which would be subject to payment of buy-back tax at the rate of 20 per cent (plus applicable surcharge and cess), in the hands of the joint venture and the proceeds received by the shareholders (ie, joint venture partners) would be exempt from tax.
Where the joint venture entity is funded through debt, interest paid or payable by the joint venture to the joint venture partners would be allowed as deduction in the hands of the joint venture while computing its taxable income. Interest paid or payable on loans and debentures is subject to withholding of tax at the rate of 10 per cent to resident joint venture partners and 40 per cent (plus applicable surcharge and cess) to non-resident joint venture partners, being a company. Interest paid or payable on ECB suffers a lower withholding of 5 per cent (plus applicable surcharge and cess), subject to the satisfaction of conditions specified in the IT Act. In the case of non-resident joint venture partners, they shall be entitled to avail themselves of the beneficial provision of the DTAA, if any.
Where the joint venture partner is a non-resident AE, then the deduction for the interest expenditure on the debt raised from such joint venture partner would be subject to TP Regulations and thin capitalisation norms (see question 14).
Where a joint venture is set up as an LLP, the profits earned by the LLP are taxable at the rate of 30 per cent (plus applicable surcharge and cess). However, if such payable tax is less than 18.5 per cent of its adjusted book profits and the LLP has claimed certain specified deductions, then it may be liable to pay an alternate minimum tax at the rate of 18.5 per cent.
Share of profits in the LLP is exempt in the hands of its partners. In addition, no DDT or equivalent tax is payable at the time of distribution of profits to its partners. In a case where a partner contributes any capital asset to the LLP by way of capital contribution, then the capital gains arising on such transfer would be taxable in the hands of the partner, whereby the amount recorded in the books of the LLP would be deemed to be the sale consideration of the assets.
Supply of services or goods by a joint venture partner to the joint venture entity, or vice versa, where such joint venture partner directly or indirectly controls the joint venture entity, would be exigible to GST even when made without a consideration. However, where either the joint venture entity or the joint venture partners are located outside India, such supplies would be exigible to GST in India only where the place of supply of such supplies is in India.Accounting and reporting issues
Are there any noteworthy accounting or reporting issues for the joint venture parties regarding their investment in the joint venture?
The joint venture is required to prepare its financial statements on an annual basis and get them audited by a chartered accountant, and such financial statements need to be submitted to the Registrar of Companies within the stipulated period. The joint venture parties have to maintain their books of accounts in accordance with Indian Accounting Standards, subject to some conditions, which include, inter alia, specific reporting obligations regarding transactions with related parties, including joint venture partners.
The joint venture parties are required to file an income tax return annually for the relevant period and withholding tax returns (if any tax has been withheld) quarterly. Additionally, where the non-resident joint venture partners and joint venture are construed as AEs, the parties have to undertake a few additional compliance requirements under the TP Regulations, including maintaining the prescribed documentation on a contemporaneous basis and submitting a transfer pricing report to the tax authorities within the specified time period.
Deadlock, exit and terminationDeadlock provisions
What deadlock provisions are commonly included in joint venture agreements in your jurisdiction?
A deadlock is an unresolved difference of opinion between the joint venture parties, which, if not resolved within a predetermined time period, can stall the joint venture and cause it to become ineffective. Deadlock usually arises where the partners have a 50:50 share in the joint venture (or understanding to have equal rights and representation in the joint venture) and equal representation on the board and they take opposing views or when a director exercises the right to veto.
Deadlock resolution mechanisms can be divided into two categories:
- internal mechanisms, such as:
- mutual discussions or negotiations between joint venture partners or senior officials of the joint venture company to come to a workable solution;
- the chairman’s casting vote; and
- allowing one partner to take a call, depending on their substantial contribution or expertise on the subject matter of the situation; and
- external mechanisms, such as:
- reference to an independent director, who may or may not be pre-determined, and who forms a decision based on the best interests of the joint venture entity;
- Russian roulette, wherein one party offers to sell his or her entire share in the joint venture entity to the other party or buy out the other party, both at a given price;
- mediation and conciliation;
- binding dispute resolution procedures (ie, arbitration or litigation); and
In India, while all the typical provisions exist, we have rarely witnessed parties referring to external mechanisms unless it is of a very unusual or special nature, the issues involved are specific to the business or if the deadlock remains unresolved after exercising internal mechanisms. Parties aim to resolve internally, but more often than not, they escalate into formal disputes owing to a breakdown of the relationship and loss of trust between the joint venture parties. Such deadlocks may often trigger the termination of a joint venture entity or lead to exit by either one or all joint venture parties (see question 22).Exit provisions
What exit provisions are commonly included? Does the law restrict any forms of mandatory transfer provision or any basis of calculation?
The following exit provisions are typically included.Initial public offering
An initial public offering (IPO) may be used either as a liquidity event for all joint venture partners, or as an exit for a particular joint venture partner while the joint venture company continues to be in business. An IPO may involve the issuance of fresh securities or the sale of existing securities, or a combination of both, to the public for the first time. An IPO enables the listing and trading of the joint venture company on the stock exchanges in India, provided that the equity shares held by persons other than the promoters have been locked in for a period of one year prior to the filing of the draft-offer document with the SEBI. The procedure for conducting an IPO, eligibility criteria for a company to undertake an IPO, minimum offer requirements, prospectus for the offer, promoters’ contribution and various other nuances are primarily governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, the Companies Act and the Securities Contracts (Regulation) Rules 1957.Put or call option
Put and call options are rights that empower shareholders to force the sale and purchase of shares in the joint venture company. A put option enables the holder of the right to sell its shares to the other party, where the other party must mandatorily purchase the offered shares. A call option, being the exact opposite of a put option, enables the holder of the right to call upon another shareholder to mandatorily sell its shares to the right-holder. However, in terms of the extant FDI Policy and the RBI notification in relation to pricing guidelines for instruments with optionality clauses, these rights can only be exercised upon the completion of a minimum lock-in period of one year or as prescribed under the FDI Policy, whichever is higher, depending on sector-specific lock-in periods, from the date of allotment of such shares. The foreign investor shall be allowed to exercise such option or right without any assured return and at a rate that is either prevailing at the time of exit or another method of valuation as prescribed by the pricing or valuation guidelines issued by the RBI from time to time.Third-party sale
A fully operative joint venture company may be sold to a third-party buyer, thus paving an exit for the various joint venture partners and allowing them to liquidate their shareholding.Exercise of pre-emptive rights
Whenever a shareholder in the joint venture company intends to sell its shares, transfer restrictions - as provided under the shareholder’s agreement and the AOA - come into play, which may be in the form of a right of first refusal (ROFR) or a right of first offer (ROFO). While the selling joint venture partner may have a ROFR and, therefore, the option to reject the right-holder’s offer, having the ROFO and, therefore, the opportunity to move first is usually valuable to the right-holder.Tax considerations following termination
What are the tax considerations on termination of the joint venture?
Joint venture partners may exit from the joint venture by transferring the securities held by them in the joint venture company, whereby the proceeds thereof are subject to capital gains tax, payable by the joint venture partners at the following rates:
Nature of joint venture entity
Nature of gain
Period of holding
Tax rate* non-resident partner being a company
Tax rate* resident partner
Company: disposal of unlisted securities
Long-term capital gains
> 2 years
Short-term capital gains
< 2 years
LLP: disposal of interest in joint venture
Long-term capital gains
> 3 years
Short-term capital gains
< 3 years
*Exclusive of applicable surcharge and cess
However, for non-resident partners, tax liability in India is subject to the provisions of the DTAA signed by India with the country of which the joint venture partner is a resident.
The joint venture company may also distribute its assets or surplus cash to the joint venture partners through dividends, and such distribution may be deemed as dividends under the IT Act to the extent that there are accumulated profits attracting DDT. For a joint venture LLP, any capital asset distributed by the LLP to its partners would be deemed to be the sale consideration, and capital gains arising thereof will be taxable according to the fair market value of the assets on the date of the distribution.
In terms of the GST legislation, disposal of business assets, where input tax credit has been availed on such assets, shall be exigible to GST in India, even when the disposal is made without any consideration. Additionally, where a person ceases to be a taxable person and its registration is cancelled, such person is liable to reverse the amount of input tax credit availed on inputs held in stock or inputs contained in semi-finished or finished goods lying in stock, capital goods and plant and machinery or pay output tax on such goods, whichever is higher. Accordingly, where the joint venture ceases to be a taxable person and its GST registration is cancelled, it would either be liable to pay GST on the disposal of its business assets or reverse applicable input tax credit, whichever is higher, in terms of the GST legislation.
DisputesChoice of law and resolution methods
In your jurisdiction, are there constraints on the choice of law or the method of dispute resolution provided for in joint venture agreements?
Parties are free to agree to a specific law or method of dispute resolution in most contracts, including joint venture agreements, subject to a few qualifications. Where the agreement is between two Indian entities, in an arbitration taking place in India, the substantive law of the agreement by which the dispute will be decided must be Indian law. There is no such restriction in respect of an international commercial arbitration, where parties are free to agree to any governing law. In relation to legal proceedings filed before a court or tribunal, an Indian court will apply the law chosen by the parties to a contract, subject to such law being pleaded and proved. If not proved, the position under a foreign law will be deemed to be the position that exists under Indian law.
Indian courts will enforce jurisdiction stipulations in a contract. Most of the judicial pronouncements on jurisdiction clauses relate to exclusive jurisdiction of one Indian court over others, and these stipulations have been uniformly enforced, subject to the exception that parties, by contract, cannot confer jurisdiction upon a court that has no jurisdiction (territorial or pecuniary), save in matters of arbitration. However, in relation to jurisdiction clauses conferring exclusive jurisdiction on foreign courts, while the principle is recognised, Indian courts may refuse to give up jurisdiction on the grounds of balance of convenience, the interests of justice and similar circumstances.
That apart, there are certain classes of disputes or matters that must be decided by specially constituted courts or tribunals (for instance, insolvency and bankruptcy matters, testamentary matters or issues relating to rent-control legislation), in respect of which the jurisdiction of civil courts is barred. In such cases, proceedings may only be instituted in and entertained by the specially constituted forum.Mandatorily applicable local law
What mandatory provisions of local law will apply irrespective of the choice of governing law?
While the joint venture parties may agree to the governing law of the joint venture agreement, there are certain laws that would nevertheless apply. For instance, if the joint venture company is incorporated in India, the provisions of the Companies Act would apply to the company and its shareholders to the extent of their roles, rights and obligations as shareholders, and to their shareholding. Similarly, other laws, such as taxation statutes, will also apply to the extent relevant to the relationship under the joint venture agreement.
In cases of dispute resolution through arbitration, the provisions of the Indian Arbitration and Conciliation Act 1996 apply where the seat of the arbitration is India. Where the seat of arbitration is outside India, provisions of the Indian Arbitration and Conciliation Act 1996 relating to interim measures that may be granted by the courts (sections 9 and 37) and court assistance in taking evidence (section 27) also apply, unless the parties otherwise agree.Remedy restrictions
Are there any restrictions on the remedies a tribunal can grant that would have a bearing on the arbitration of joint venture disputes? Are there any restrictions on the arbitration of shareholder claims?
Most disputes arising out of shareholders’ agreements, joint venture agreements and other agreements are capable of being decided by an arbitral tribunal, pursuant to the arbitration clauses contained therein. There are, however, certain circumstances wherein an arbitral tribunal may not be the most appropriate forum for certain types of disputes.
When shareholders’ claims arise from a violation of statutory provisions, or in cases where a statutory remedy is sought, such claims may not be capable of determination by an arbitral tribunal. For instance, in a petition filed under the Companies Act seeking the winding-up of a company, the proceedings are governed by the Companies Act, or if the company goes into insolvency resolution or liquidation proceedings under the Insolvency and Bankruptcy Code 2016 (the Bankruptcy Code), the power to adjudicate on this issue is conferred upon the NCLT and the appellate authorities. An arbitral tribunal does not, notwithstanding anything contained in an agreement entered into between the joint venture parties, have jurisdiction to decide insolvency or winding-up matters.
Certain other disputes, such as those relating to oppression and mismanagement, are governed by the provisions of the Companies Act. Minority shareholders are granted a statutory remedy in the case of oppression of the minority, or mismanagement in the affairs of the company, by the majority shareholders by way of filing a petition before the NCLT. An arbitral tribunal is also not competent to adjudicate on such issues. Accordingly, cases of oppression and mismanagement are not capable of being referred to arbitration.
Courts in India have also held that cases of serious allegations of fraud are not arbitrable. However, mere allegation of fraud by one party cannot be a ground to hold the matter incapable of settlement by arbitration.Minority investor protection
Are there any statutory protections for minority investors that would apply to joint ventures?
The Companies Act seeks to bring about a paradigm shift in the manner in which Indian companies are governed. Against the backdrop of excessively disgruntled minority shareholders, the Companies Act is an attempt to make corporate India and its promoters more accountable for their actions. The underlying theme, which finds repeated emphasis in the provisions of the Companies Act, includes higher standards of corporate governance and more power to the shareholders, especially the minority shareholder. Permissibility of incorporating entrenchment provisions in the AOA is seen as one of the major minority protection tools under the Companies Act (see questions 10 and 26).
Statutorily, some degree of minority shareholders’ protection is available under the Companies Act. For instance, the Companies Act requires certain matters to be approved by 75 per cent of the shareholders present and voting. These include selling or disposing of whole or substantially the whole of the undertaking of a company, entering into certain RPTs, alteration of the AOA, etc. Further, under the Companies Act, certain matters require unanimous approval of the board of directors, such as making an investment, or granting a loan, guarantee or security to any person. Fixing a quorum requirement for board meetings (including the board committee meetings), which requires the presence of at least one nominee of the minority investor to be present, would also help to ensure that no critical decisions are taken to the exclusion of the minority investor. The other provisions included in the Companies Act that contribute to the protection of minority investors include an increase in corporate governance standards, approval requirements for RPTs, powers to inspect and undertake an investigation, the right to request a company to appoint a small shareholder director, the establishment of a stakeholders’ relationship committee, procedure for squeeze-outs and the right to demand poll. Persons holding 10 per cent of shares or a minimum of 100 shareholders, whichever is less in companies with share capital, and one-fifth of the total number of members in the case of companies without share capital, have the right to apply to the NCLT to claim relief for oppression and mismanagement. However, the NCLT has the discretion to allow any number of shareholders to be considered as a minority.
However, it is likely that a prudent minority investor would continue to insist on a wide package of contractual rights, in addition to entrenchment in the AOA. Not only would this safeguard the minority investor against any ambiguity or gaps in the extant law governing companies and joint ventures, it would also protect the minority investor against any changes in law going forward.Liabilities
How can joint venture parties have liabilities to each other beyond what is expressly agreed in the joint venture agreement?
The nature and extent of liabilities depend primarily on the constitution of the joint venture. With respect to the joint venture parties, the courts, in some cases, have observed that the rights, duties and liabilities of joint ventures are similar or analogous to those that govern the corresponding rights, duties and liabilities of partners (although they may be less extensive than those of partners in an ordinary partnership). Accordingly, certain fiduciary duties are owed between parties of a joint venture, similar to that which exists between partners in a partnership.
With respect to third parties, although a joint venture agreement may set up a structure for mitigation and distribution of liability from a third party between the parties to the joint venture, it may not insulate them from risks that may be caused by third parties. In the case of Asia Foundation & Constructions Ltd v State of Gujarat (1987 GLH (2) 510), the Gujarat High Court on liability in joint ventures relied on a demonstration that:
[I]f certain services to be rendered by parties to a joint venture are to be allocated amongst the parties of the same by an internal agreement, the rights and duties of the members, inter se are also regulated by that agreement. However, these internal agreements are not effective vis-à-vis the third parties, and they operate amongst the members inter se. Thus, all the members are jointly and severally liable for performance of the construction work jointly undertaken irrespective of internal division of the work. If one member of the joint venture group does not fulfil his commitments, the others are under joint and several obligation to carry out such obligations vis-à-vis the customer.
Further, the Companies Act defines a joint venture as ‘a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement’. Therefore, joint venture partners may be jointly or severally liable to third parties for the debts of the joint venture, claims from employees or even tax liability, although the terms of agreement between parties to a joint venture would likely determine the extent of the tax liability.Disclosure of evidence
Are there any particular issues that can arise in joint venture disputes in your jurisdiction concerning disclosure of evidence?
In a legal action, including one involving a joint venture, the parties are usually obligated to provide discovery of the documents they are relying upon in support of their pleadings. ‘Discovery’ is the process by which the parties to a civil action are enabled to obtain, within certain defined limits, full information of the existence and the content of all relevant documents relating to the matters in question between them. The process of the discovery of documents operates, generally, in three successive stages:
- the disclosure in writing by one party to the other of all the documents in their possession, custody or power relating to matters in question in the proceedings;
- the inspection of the documents disclosed, other than those for which privilege from or other objection to production is properly claimed or raised; and
- the production of the documents disclosed either for inspection by the opposite party or to the court.
For instance, in suits filed in a civil court, under the Civil Procedure Code 1908 (CPC), every party to the suit is entitled to apply to the court for an order directing any other party to the suit to make discovery on oath of the documents that are or have been in his or her possession or power, relating to any matter in question in respect of the suit, which, if allowed by the court, is binding in nature. Therefore, non-compliance with the order of the court by a plaintiff to provide discovery may lead to the dismissal of suit, whereas non-compliance by a defendant would lead to the party being struck off and make the suit undefended with respect to that party. Even in instances where parties are involved in an arbitration to which the CPC may not be applicable, the corresponding rules of procedure of the arbitration proceedings usually provide the procedure for discovery, which is usually analogous to the general principles of discovery.
With respect to legal privilege, while it has been held by the courts that the obligation to produce documents for inspection is coextensive with the obligation to disclose their existence, there are many relevant documents that, despite having to be disclosed in the list of documents, are nevertheless protected from production. There exist several grounds on which this privilege can be claimed, including:
- legal professional privilege;
- that production is contrary to public policy;
- that the documents in question may incriminate the party, or his or her spouse;
- that the production is contrary to some statutory provision that imposes secrecy;
- that production is contrary to some express or implied agreement between the parties; and
- that production would, in the circumstances of the particular case, be oppressive.
Accordingly, where a party claims privilege in respect of a certain document, the court may inspect the document to decide whether the claim of privilege is proper and valid.
Market overviewJurisdictional advantages
What advantages does your jurisdiction offer for parties wishing to set up and operate joint ventures?
India offers, inter alia, the following advantages for foreign investors establishing joint ventures:
- In India’s continuous efforts towards boosting the prevailing investment climate further and realising its FDI potential, 100 per cent FDI is allowed in several sectors, thereby allowing two foreign companies to form a joint venture in India.
- Joint ventures with Indian parties have also come to be seen as the preferred model, owing to a restriction on complete foreign ownership in certain sectors. In sectors where 100 per cent FDI is not allowed in India, a joint venture offers a low-risk option for foreign investors wishing to enter into the Indian market. Further, despite FDI norms being relaxed in various sectors, foreign entities still prefer to set up joint ventures with their Indian counterparts as this provides them with a ready market understanding, access to the Indian market and an easy exit if the need arises.
- India allows free repatriation of dividends generated from the operations of a joint venture in India, subject only to the payment of applicable tax.
- Rules and regulations with respect to specific compliances pertaining to foreign investment are being revised to ensure ease of doing business in India. For example, the RBI has introduced two master forms with the aim of simplifying reporting FDI under the FEMA, thereby merging the erstwhile two-step procedure into a single-stepped and more time-efficient mechanism.
- Various provisions of the Companies Act apply to a joint venture company, which affords an investor-friendly environment for the investors to operate in, including protection from oppression and mismanagement by majority shareholders.
- The constitutional documents of the joint venture company regarding the AOA and MOA, as well as the joint venture agreement or shareholders’ agreement, could be suitably drafted so as to reflect the intentions, rights and obligations of the parties. Laws pertaining to specific performance of contracts have been amended to improve the enforcement of contracts in India and, consequently, this has improved India’s rating as an investment-friendly destination. This move is aimed squarely at ensuring that timely and effective contractual performance is compelled in most instances.
- If the joint venture is incorporated as a private company, it shall be entitled to various exemptions granted to private companies under the Companies Act.
- Under the provisions of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts (Amendment) Act 2018, the pecuniary jurisdiction of the commercial courts has been reduced from 10 million rupees to 300,000 rupees, thus broadening the scope of disputes eligible to be referred to such courts, and expediting the dispute resolution process for commercial disputes (including disputes in relation to joint ventures) in India.
- The legal regime in India is also committed to ensure stakeholder protection and fair corporate governance, which can be evidenced by the adoption of the recommendations made by the committee on corporate governance instituted by the SEBI. With these recommendations, the corporate governance measures in India stand strengthened, covering all stakeholders associated with a company.
- The Government of India also provides for various tax-incentive schemes under the Foreign Trade Policy 2015-2020 and territorial tax benefits under the Special Economic Zone Policy and state incentive schemes, the applicability of which can be examined on a case-by-case basis.
Are there any particular requirements or restrictions relating to joint ventures in your jurisdiction that could deter international investors?
Largely, any foreign entity can set up a joint venture in India. However, some entities may face restrictions under the FDI Policy and FEMA with respect to certain sectors where foreign investment is still prohibited, and there are other prerequisites for investment, as discussed in questions 2 and 3. Commercial arrangements (such as exercising put and call options) generally provide for the protection of the party’s interests. However, the extant FDI Policy and RBI notification in relation to pricing guidelines for instruments with optionality clauses categorically prohibit such exercising of an optionality clause by a foreign investor at an assured return. Such exit options can only be exercised when certain conditions, as discussed in question 22, have been satisfied.
Similarly, exercising other exit options (such as IPOs in India) requires the fulfilment of certain conditions, such as the minimum requirement of promoters’ contribution towards the post-IPO capital and minimum lock-in requirements. If the joint venture company is converted into or incorporated as a public company, it will be required to list its shares on the stock exchange and to comply with all the formalities and compliances of the SEBI, which is the stock market regulator in India.
However, the provisions of the Bankruptcy Code, supplemented by the Delhi High Court’s rulings in Cruz City 1 Mauritius Holdings v Unitech Limited and NTT Docomo Inc v Tata Sons Limited, show that disputes raised by foreign investors have been treated favourably, as it has been settled that, subject to compliance with the terms of the joint venture agreement, the claims of the foreign investors with respect to any assured return on exit of the foreign party in lieu of the damages suffered would be enforceable in India and would not be treated as a violation of the FDI Policy and other related laws.
Updates & TrendsKey developments of the past year
What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?Key developments of the past year32 What are the current trends affecting joint ventures in your jurisdiction? What recent developments in legislation and case law have had an impact on joint ventures?
Against the backdrop of declining global FDI trends and an anticipated slowdown, the current Government of India has continued with its drive to liberalise the FDI regime in order to promote foreign investment. Reforms include, among others:
- the introduction of a new ECB regime (with revised minimum maturity periods, expansion of the list of eligible borrowers and lenders, and consolidation of the multi-tiered structure into two distinct tracks);
- relaxation of FDI caps in sectors such as coal mining, digital marketing and single-brand retail;
- allowance of complete repatriation of dividend and capital invested by foreign partners; and
- enforcement of a simplified FPI framework under the revised SEBI (Foreign Portfolio Investors) Regulations 2019 (with a reduction in categories of FPIs, permitted offshore transactions and relaxation of the broad-based criteria for FPI qualification).
Other measures to incentivise foreign investment pertain to the removal of the cap to foreign equity investment for intermediaries or insurance intermediaries under the Indian Insurance Companies (Foreign Investment) Rules 2015, and reforms in the real-estate regulatory framework under the aegis of the Real Estate (Regulation and Development) Act 2016 (including measures for transparency and speedy adjudication of disputes, exclusion of certain activities such as building of townships, construction of residential and commercial premises, roads or bridges, educational institutions, recreational facilities, etc, from the definition of ‘real estate business’ under the current FDI policy).
Meanwhile, the Make in India initiative, one of the government’s many flagship schemes to promote FDI and joint ventures in India, is contributing to making India an attractive destination for FDI. The initiative, coupled with the relaxation in FDI restrictions, has thus resulted in many joint ventures, most notably in the defence and pharmaceutical sectors, and has seen investment from players such as the UAE-based Neopharma, Israel’s Rafael Advanced Defence Systems and Elbit Systems, and Japan’s ASKA Pharmaceuticals and Astra Microwave Products. The manufacturing sector, a key pillar of the Make in India initiative, is witnessing both actual and proposed investments from manufacturing giants such as GE, Siemens, HTC, Toshiba and Boeing.
Sectors with existing foreign investment, such as e-commerce and multi-brand retail, continue to remain attractive for foreign investors, with key industry players such as Walmart and Amazon looking at potential ventures and consolidation of their footprint in the Indian retail space. The energy sector is also seeing a fair amount of traction, with recently proposed joint ventures between BP and Reliance, and Total and the Adani Group, taking the lead in the oil and gas sector.