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DotSETTING UP A JOINT VENTURE IN INDIA

India is witnessing a revolution both in the context of liberalization and globalization of the Indian economy and transacting business through Joint ventures set up with foreign partners across various industry sectors. This article sets forth some important steps for forming a Joint Venture Company in India.

1. Types of joint ventures.

Three most common types of joint venture companies may be described as follows-

[a] Two parties, who/which may be individuals or companies, one of them non resident or both residents , incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.

[B] Alternately, the above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.

[C] Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash.

2. Incorporation.

In case a new joint venture company has to be formed in India, the following are pertinent issues to decide:

[A] Formalities

{1} whether the joint venture company will be a public or a private limited company,

{2} the place of Registered Office of the Joint venture Company,

{3} propose a name of the joint venture company and check its availability from the Registrar of Companies {ROC} where the registered office of the company is to be situated and the company is to be incorporated,

{4} choose the subscribers to the Memorandum of Association which will obviously include the partners to the joint venture and their nominees,

{5} prepare the Memorandum and Articles of Association in consultation with the joint venture partners , get them printed and suitably stamped, and submitting the same with required documents like statutory declaration u/s 33 of the Companies Act 1956 {Act} and Form no.18 u/s 146 of the Act regarding address of the registered office, to ROC along with fees payable.

{6} On receipt of certificate of incorporation, the new company may start business,

{i} in case of private company, immediately.
{ii} in case of public company ,after obtaining certificate of Commencement of Business for which the company has to file with the ROC prospectus/statement in lieu of prospectus, and the statutory declaration u/s 149 of the Companies Act 1956, duly stamped.

[B] Articles

To avoid contradictions, the Articles of Association should contain the stipulations mentioned in the joint venture agreement and clearly delineate the rights and obligations of the partners.

[C] Non resident partner

In case one of the partners of the joint venture company is a non resident, approval of Reserve bank of India {RBI} will be required for acquiring shares of the company and establishing place of business in India u/s 19 and 29 of Foreign Exchange Regulation Act 1973 {FERA}. However RBI has granted general permission vide its notification dated 26-4-1993, as amended, u/s 19{1}{d} and u/s 29{1}{b} of FERA to a non resident Indian citizen / person of Indian origin to subscribe to the memorandum and articles of association of a company for the purpose of incorporation in India. And such company is also permitted to issue shares to the non residents subject to the condition that the total face value of shares is not to exceed Rs 10,000/-, the company will not engage in the activity of agriculture / plantation/dealing in real estate other than its development and the company files a declaration with RBI within 90 days of its incorporation. With the on going liberalization more general permissions of RBI are expected.

3. Inter-corporate investment u/s 372A of Companies Act.

Where an Indian company [partner] acquires shares of the joint venture company which is exceeding 60% of its [Indian company’s] paid-up capital and free reserves or 100% of its free reserves, whichever is more, Section 372A will apply requiring prior Board decision of the Indian company as well as special resolution of its shareholders. If a foreign company acquires the shares , this section will not be invoked as it applies only to a "company" defined under section 3 {1} [i] of the Act which does not take into account a foreign company. 

4.Approvals

The Joint Venture agreement should be conditional upon obtaining all necessary approvals/ consents/ licenses /permissions of appropriate agencies of Government of India like RBI/SIA etc within specified period. If any of the approvals are not received, or received late, the agreement cannot be enforced and the joint venture cannot proceed on the basis of the Agreement. 

5. Important clauses of a joint venture agreement.

Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture agreement. A Joint venture Agreement requires dexterous legal drafting and should incorporate clearly the relevant clauses that specify the mutual understanding arrived at between both parties as to the formation and operations of the Joint venture company. A brief checklist of important clauses is as follows-

  1. The proportion of shareholding in the joint venture company
  2. Specify nature of shares, indicate their transferability conditions.
  3. Composition of the Board of Directors, Appointment of Chairman ,Quorum of Board meetings ,Casting vote provisions.
  4. General meeting.
  5. Appointment of CEO/MD.
  6. Appointment of Management Committee.
  7. Important decisions with mutual consent of partners.
  8. Dividend policy.
  9. Funding provisons.
  10. Access conditions.
  11. Change of control/exit clauses.
  12. Anti-compete clauses
  13. Maintaining Confidentiality
  14. Indemnity clauses.
  15. Assignment.
  16. Break of deadlock.
  17. Dispute Resolution.
  18. Applicable law.
  19. Force Majeure.
  20. Termination provisions.

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