Joint ventures (JVs) are commonly used in several key sectors in India, particularly where foreign investment, technology transfer, and local market access are crucial. Key sectors include:

• Automobile Industry: Foreign automakers partner with Indian companies for market access and local manufacturing.
• IT and Software Services: JVs between global IT firms and Indian companies help leverage India’s IT expertise.
• Manufacturing and Heavy Industries: JVs are common for setting up manufacturing units in steel, chemicals, and machinery sectors. For example, Tata Steel has collaborated with foreign partners in manufacturing.
• Retail and E-commerce: International retailers and platforms form JVs to tap into India’s growing market. Walmart’s JV with Flipkart and Metro’s with Kirloskar are notable cases.
• Pharmaceuticals and Healthcare: Foreign pharmaceutical firms partner with Indian companies to expand in the market, such as Roche with Cipla.
• Banking and Financial Services: JVs between international banks and Indian firms help cater to the vast consumer base. (Eg. HSBC Bank)
• Energy and Infrastructure: JVs are common in renewable energy, oil, and gas sectors, where foreign companies bring technology and capital.

Joint ventures in India are classified into Equity joint ventures and Contractual joint ventures based on their structure and purpose.

An Equity Joint Venture is an arrangement whereby a separate legal entity is created in accordance with the agreement of two or more parties. The parties undertake to provide money or other resources as their contribution to the assets or other capital of that legal entity. This structure is best suited to long-term, broad-based Joint ventures.

The Contractual joint ventures might be used where the establishment of a separate legal entity is not needed or the creation of such a separate legal entity is not feasible. This agreement can be entered into in situations where the project involves a temporary task or a limited activity or is for a limited term.

In India, the most commonly used corporate vehicles for equity joint ventures are private limited companies and limited liability partnerships (LLPs).

Private limited companies are used corporate vehicles for equity joint ventures. They provide an independent legal identity, limited liability, and structural flexibility, making them ideal for tailored arrangements. Additionally, companies enable efficient capital raising and long-term sustainability.

Limited Liability Partnerships (LLPs) are another option, offering the benefits of limited liability and operational flexibility. They combine the features of corporations and partnerships, making them suitable for specific ventures requiring both protection and adaptability.

Unincorporated joint ventures, such as cooperation agreements or strategic alliances, are also used. These are ideal for collaborations like technology transfer, marketing, or joint product development where formal legal structures are not required.

The structure of Joint Ventures can be incorporated (as companies or LLPs) or unincorporated (as partnerships or strategic alliances or cooperation agreement).

The choice of a joint venture maybe influenced by a need for a separate legal identity and limited liability, which is provided by corporate vehicles like companies. These vehicles ensure continuity even when there are changes in ownership, making them a reliable option for long-term ventures.

Capital and financing considerations also play a role. Corporate vehicles are preferred as they provide easier access to external financing and allow the raising of capital efficiently. In contrast, partnerships and LLPs, though simpler, may face challenges in these areas. Tax implications are another key determinant. Partnerships and unincorporated joint ventures might face higher tax burdens if classified as an “association of persons” under the Income Tax Act, 1961. This risk affects the decision to opt for a specific joint ventures structure. Finally, the purpose and duration of the collaboration influence the choice. Strategic  alliances or contractual joint ventures are preferred for short-term projects or collaborations where formal structures are unnecessary

Principal Legal Documents in a Joint Venture

In establishing a joint venture (JV), several key legal documents are essential to define the relationship and obligations of the parties involved. The principal documents include;

• Joint Venture Agreement (JVA): This is the core document that outlines the terms of the partnership, including the purpose, duration, responsibilities of each party, profit-sharing arrangements, management structure, and procedures for dispute resolution. It serves as a contract between the parties and may also be referred to as a shareholders’ agreement when applicable.
• Articles of Association (AoA): If a new entity is formed for the joint venture, the articles of association govern the internal management and structure of the joint venture company (JVC). This document complements the JVA by providing specific rules regarding company governance.
• Memorandum of Understanding (MoU) or Letter of Intent (LoI): While not legally binding, an MoU may be created to outline preliminary agreements and intentions before drafting the final JVA. It serves as a roadmap for negotiations.
• Incorporation Documents: If a new entity is established, incorporation documents such as the Memorandum and Articles of Association are necessary.
• Board Resolutions: Existing entities involved in the joint venture must provide board resolutions authorizing participation in the JV.
• Regulatory Approvals: Depending on the industry, various regulatory approvals may be required from governmental bodies.

Interaction between JVA and Constitution of Joint Venture Vehicle.

The interaction between the Joint Venture Agreement (JVA) and the constitution of the joint venture vehicle, such as its articles of association, is essential for effective governance and operation. The JVA provides a detailed framework for how the joint venture operates, including governance, profit-sharing, and decision-making processes. In contrast, the articles of association outline the formal rules governing the internal affairs of the JVC, ensuring compliance with legal requirements. Generally, if there is a conflict between provisions in the JVA and those in the articles of association, the JVA will typically prevail since it directly reflects the parties’ intentions regarding their partnership. However, both documents must be aligned to avoid legal ambiguities. The JVA often specifies how decisions are made within the framework established by the articles of association, thus ensuring that operational procedures align with both legal requirements and partnership agreements.

The process typically begins with obtaining necessary registrations, such as Digital Signatures and Director Identification Numbers (DIN) for the directors. Following this, if the JV is structured as a company, incorporation documents must be prepared and filed with the Registrar of Companies. The timeline can be influenced by the complexity of the joint venture structure, the efficiency of the parties involved, and any regulatory approvals that may be required, especially if foreign investment is part of the arrangement. Additionally, if the joint venture requires specific licenses or permits related to the industry, this can further affect the timeline. In short, while some joint ventures can be established relatively quickly, others may take longer due to regulatory requirements and documentation processes.

A joint venture structured through the incorporation of a company offers the advantage of limited liability for the parties involved. In this structure, the liability of each party is confined to the extent of their investment in the company, typically in the form of shares or assets. This means that the shareholders or partners are generally not personally liable for the debts or obligations of the company beyond the value of their equity stake or contribution. In addition, the working together allows each party to contribute most effectively. For instance, one partner might bring technical expertise while the other might contribute ground level local knowledge as well as management skills.

Joint ventures are generally financed through a combination of equity and debt. Capital contributions are typically made through equity instruments, such as shares, or by issuing debentures and preference shares that are mandatorily convertible into equity. Debt financing, on the other hand, may be sourced from loans provided by the joint venture partners themselves or from banks and financial institutions.

When the joint venture is funded with equity by a foreign JV partner, it qualifies as Foreign Direct Investment (FDI). FDI in India is subject to various regulations, including sector-specific limits, pricing guidelines, reporting obligations, minimum lock-in periods, and other conditions set forth under the Foreign Exchange Management Act, 1999 and the FDI Policy. For Indian joint ventures, debt can be raised through the external commercial borrowing (ECB) route or by issuing non-convertible debentures (NCDs).

The Companies Act, 2013 provides a clear framework for minority shareholder protection, allowing minority shareholders to seek redress for acts of mismanagement, oppression or prejudice under Sections 241 – 246 of the 2013 Act. In the context of a JV company, this protection extends to the minority partners.

Certain rights can be outlined separately in a Shareholder Agreement between the JV partners to provide additional protections. One such provision is granting the minority shareholder the right to exit the JV through a put option, which allows them to sell their shares to the majority shareholder or the company itself. This exit mechanism safeguards the minority partner by providing a clear path to liquidate their investment if they wish to exit the venture. Alternatively, a mandatory Right of First Refusal (ROFR) may be granted to minority shareholders, giving them the preferential right to purchase shares that another shareholder intends to sell. This ensures that undesirable third parties do not enter the JV, while also offering the minority shareholder an opportunity to increase their equity stake in the venture. To ensure fairness and transparency in such transactions, the valuation of shares should be carried out through an independent and impartial valuation process. Additionally, to protect minority shareholders, certain key actions in a joint venture may require their explicit consent or a special majority vote, either at the board or shareholder level, ensuring unanimous agreement for critical decisions and safeguarding the interests of the minority partner.

Directors of an equity joint venture in India have fiduciary duties under the Companies Act, 2013, which include acting in the best interests of the JV, avoiding conflicts of interest, and ensuring regulatory compliance. Key duties include:

• Duty of Care and Diligence: Directors must act with care, skill, and diligence in decision-making and management.
• Duty of Loyalty and Good Faith: They must prioritize the JV’s interests over personal or parent company interests, avoiding any misuse of their position for personal gain.
• Avoiding Conflicts of Interest: Directors must disclose any interest in contracts or arrangements involving the JV, especially related party transactions, and recuse themselves from decisions where conflicts arise.
• Related Party Transactions: Transactions with parent companies or affiliates must be at arm’s length and disclosed for board approval.
• Duty to Act within Powers: Directors must act within their authority as granted by the JV agreement and the company’s Articles of Association (AoA).
• Duty of Confidentiality: Directors must protect sensitive information related to the JV and its parent companies.
• Duty to Prevent Fraud and Mismanagement: They are responsible for preventing fraud and ensuring proper financial management.
• Corporate Governance: Directors must adhere to corporate governance standards, ensuring transparency, fairness, and accountability in decision-making.
• Compliance with Laws: Directors must ensure the JV complies with Indian laws, including tax and foreign exchange regulations.

The management structure of a joint venture (JV) in India typically includes a board of directors, with representation reflecting the ownership structure. If the parties have equal stakes (e.g., 50-50), the board usually has an equal number of directors from each party. In cases of disproportionate shareholding, the board composition is proportional to the ownership. Independent directors may also be appointed if required by the Companies Act, 2013, ensuring unbiased governance.

The Chairperson of the board may be chosen by mutual agreement or from the majority shareholder. The board consists of executive directors, responsible for day-to-day operations, and non-executive directors, who provide strategic oversight. A CEO or Managing Director (MD), often appointed by the board, oversees the JV’s strategic direction and operations. Voting rights and decision-making processes, such as the need for majority or unanimous consent, are typically defined in the JV agreement. In case of deadlock, provisions like a casting vote or escalation mechanisms are employed.

Yes, Indian law implies fiduciary duties and duties of good faith between parties in a joint venture, particularly in the context of corporate JVs.

1. Fiduciary Duties: If the JV is structured as a company, directors owe fiduciary duties under the Companies Act, 2013, including acting in the best interests of the company, avoiding conflicts of interest, and exercising care and diligence. In partnership-based JVs, parties may also owe fiduciary duties to each other, including acting with utmost good faith and avoiding actions that harm the JV’s interests.
2. Duty of Good Faith: The duty of good faith is implied in most JV agreements, requiring parties to act honestly, transparently, and fairly towards each other. Indian contract law under the Indian Contract Act, 1872, does not explicitly mention good faith, but courts often interpret it as an implied duty in collaborative ventures. Courts may enforce these duties when disputes arise, emphasizing fairness, transparency, and mutual trust.

Yes, in addition to general corporate commercial laws, the Foreign Direct Investment [FDI] policy formulated by the Department for Promotion of Industry and Internal Trade [DPIIT], Ministry of Commerce and Industry, Government of India applies to the joint ventures in India. Also, the Foreign Exchange Management Act, 1999 [FEMA] regulates foreign exchange transactions by joint ventures involving foreign investment.

FDI policy provides sectoral caps on foreign investments flowing in and out of India. The foreign investment is permitted through two routes; a) the Government route- which permits investment in sectors [such as private security agencies, multi-brand retail, print media etc.] only after obtaining prior approval of the Government of India and b) Automatic route- which permits FDI up to 100% is permitted without prior approval of the Government of India in few sectors [such as construction and development, healthcare, renewable energy etc.].

India being one of the fastest-growing economies, has taken several initiatives to ease foreign investment focusing on technology-driven industries and green industries.

In India, issues related to anti-trust and competition are governed by the Competition Act 2002 which has to be read in consonance with the Competition Commission of India (Procedure in regard to the Transaction of Business relating to Combinations) Regulations 2011. These provisions and rules prohibit anti-competitive agreements and any combinations which cause or are likely to cause an adverse impact on competition within the concerned market in India.

Additionally, as per Section 5 of the Competition Act 2002 – all acquisitions, mergers or amalgamations crossing the prescribed thresholds must approach the Competition Commission of India for prior approval to complete the process. The Act provides protection in the form of de minimis exemption [small target exemption]; where the parties to a combination having a value of assets not more than INR 450 crore in India or turnover is not more than INR 1250 crore in India are exempted from prior approval from Competition Commission of India.

In India, a joint venture is required to declare its ultimate beneficial ownership [UBO] under various laws, particularly the Companies Act 2013 and the Prevention of Money Laundering Act 2002 [PMLA]. In 2010, India became a member of the Financial Action Task Force [FATF] to tackle money laundering and terror financing. According to FATF, UBO refers to the natural person who ultimately controls or owns a legal entity and/or the natural person on whose behalf a business is being conducted.

The Ministry of Corporate Affairs [MCA], Government of India has introduced the concept of Significant Beneficial Ownership [SBO] through the Companies Act 2013 to comply with the FATF principles. In addition to provisions under the Companies Act, specific rules have been framed namely the Companies (Significant Beneficial Owners) Rules, 2018 which defines ‘beneficial interest’, ‘significant beneficial owner’ and ‘significant influence’. In 2019, MCA amended the aforesaid rules to define SBO as ‘an individual who alone or together, or through one or more persons or trust, possesses not less than 10% of share capital, voting rights, total distributable dividend, or has right to exercise significant influence or control, in any manner other than through direct holdings alone’. And it further lays down a disclosure regime to be followed by all companies.

Further, the PMLA mandates the joint ventures and their beneficial owners to exercise due diligence of their clients by a reporting entity using ‘reliable and independent sources of identification’. SEBI and RBI also have their own rule and regulations regarding disclosure and KYC for UBO of Indian entities.

The system of the joint venture is prominent in a range of industries, particularly, information technology, biotechnology, pharmaceutical, manufacturing and communication sectors, set up for mutual beneficial goals wherein Intellectual Property [IP] rights are the most important factor. IP includes various intangible assets such as patents, trademark, copyright and trade secrets.

The formation of the joint venture is usually prone to several IP issues especially when a joint venture involves the transfer of technology. In order to prevent any disputes, the joint venture agreement should clearly define ownership, scope, duration, territory, royalty or consideration to be paid and restrictions on the use of licensed IP. Further, the confidentiality and non-disclosure clauses also become crucial for the protecting the rights of the parties.

In case of termination, the implications for the IP rights including Background IP, Foreground IP or Transferred IP are dealt with by the joint venture agreement itself on the based on mutually agreed terms as to how to retain, buyout or sell the IP rights. The clarity in terms and conditions of the joint venture agreement the only key to smooth functioning of a joint venture.

When transferring employees to a joint venture in India, several legal considerations must be addressed. Key aspects include:

• Employment Contracts: Review existing contracts and ensure employee consent if terms (salary, role, location) change.
• Labour Law Compliance: Adhere to the Industrial Disputes Act, 1947, ensuring employee rights like retrenchment protection and continuity of service. Comply with the Factories Act, 1948 and Shops & Establishments Act where applicable. Engage with trade unions if employees are unionized, especially regarding changes in employment conditions.
• Service Continuity: Maintain employees’ service records, including EPF and gratuity entitlements, ensuring no disruption in benefits or seniority. Ensure uninterrupted access to benefits like maternity leave, provident fund, and bonus schemes.
• Employee Communication: Inform employees about the transfer, with necessary consent and respect for the notice period.
• Asset and Liability Transfer: Address the legal aspects of transferring employee rights, obligations, and liabilities to the JV.
• Tax and Visa Implications: Consider tax implications and necessary documentation for foreign employees.

Requirements under the Companies Act, 2013 must be considered. Key requirements include:

• Board Approval: The JV agreement and related transactions require approval from the Board of Directors of the publicly listed company. Any significant decisions, including capital investment or transfer of assets, must be approved by the Board.
• Shareholder Approval: In certain cases, shareholder approval may be required, particularly for transactions that affect the company’s capital structure or involve related party transactions. This is governed by Section 188 and other provisions for related party transactions.
• Disclosures and Transparency: The company must disclose the JV’s details in its financial statements, including the nature and financial performance of the JV. This is important for transparency and ensuring that shareholders are informed about the JV’s impact on the company’s financials.
• Regulatory Filings: The JV must be reported to regulatory authorities such as the Registrar of Companies (RoC), and any changes must be filed as required by the Companies Act, 2013.
• Compliance with SEBI Regulations: If the publicly listed company is also subject to SEBI (Securities and Exchange Board of India) regulations, additional disclosures and compliance with listing obligations may be required.

When establishing a joint venture in India, both the JV parties and the JV vehicle must consider key tax implications under Indian laws:

• Corporate Taxation: If the JV is structured as a company, it will be taxed as a separate legal entity under the Income Tax Act, 1961, with corporate tax rates of 22% for domestic companies and 30% for foreign companies. Tax incentives may apply depending on the sector or region. The JV must also comply with transfer pricing regulations for transactions with related parties.
• Withholding Tax: Payments made by the JV to foreign parent companies (e.g., dividends, interest, royalties) are subject to withholding tax. Rates depend on the nature of the payment and any Double Taxation Avoidance Agreements (DTAAs). Dividend payments are subject to Dividend Distribution Tax (DDT).
• Capital Gains Tax: If JV shares are sold, capital gains tax applies, with different rates for short-term (15% for listed, 30% for unlisted shares) and long-term capital gains (10%, with an exemption limit for listed shares).
• Indirect Taxes: The JV may be liable for Goods and Services Tax (GST) if its turnover exceeds the threshold. Customs duties apply for imports, and state-specific taxes like VAT may be relevant depending on the business.
• Cross-Border Transactions: Tax considerations for foreign investors include DTAA provisions, potential permanent establishment status, and taxation of repatriated profits.
• Tax Audits and Compliance: The JV must ensure timely filings and comply with both direct and indirect tax laws to avoid penalties..

Key restrictions include on Profit Distribution

Statutory Reserves: Certain portions of the profits must be set aside in statutory reserves, such as the debenture redemption reserve or capital reserve, which may limit the amount available for profit distribution.

Restrictions in the Articles of Association: The Articles of Association (AoA) of the JV may impose specific restrictions on the declaration and distribution of profits, particularly if it involves foreign investors or if the JV has a special purpose.

Dividend Distribution Tax (DDT): Under the current Indian tax regime, the JV entity is required to pay Dividend Distribution Tax (DDT) on declared dividends. This may limit the amount available for distribution as profits, as DDT is paid before dividends are distributed to shareholders.

Deadlocks in decision-making within joint ventures in India are addressed through specific provisions in the JV agreement. Common mechanisms include:

• Escalation Procedures: Deadlocks are often first addressed through mediation or arbitration, as outlined in the agreement. If unresolved, the issue may escalate to senior management.
• Casting Vote: A provision where one party (typically the majority or controlling party) holds a casting vote to break ties on key decisions.
• Buy-Sell (Shotgun) Clause: One party offers to buy the other’s stake, or vice versa, at a specific price to resolve the deadlock.
• Tag-Along and Drag-Along Rights: Allow minority shareholders to sell alongside a majority shareholder or require the minority to sell in case of a majority sale.
• Third-Party Expert: A neutral expert may be appointed to make the final decision on the matter causing the deadlock.
• Supermajority Requirements: Certain critical decisions require approval by a supermajority (e.g., 75%) instead of unanimous consent, reducing the chance of a deadlock.
• Termination Clause: If all else fails, a termination clause may allow one party to exit the JV, specifying buyout terms.

Joint ventures in India are often established for a limited duration, after which the partners may decide to exit. Joint venture agreements also commonly address termination scenarios triggered by “events of default” or “material breaches” by one or more parties. In such instances, non-defaulting partners may have the right to terminate the agreement. It is standard practice to include a notice of termination that outlines the reasons for the decision. The party initiating the termination must provide written notice to the other party, with the notice period typically ranging from 30 to 180 days. Upon receiving the termination notice, the affected party is usually given the chance to rectify the issues leading to the termination.

Exit options typically include liquidation of the joint venture entity, selling the entity to a third party, or transferring ownership to one or more partners. A well-defined exit strategy is critical and should be outlined in the joint venture agreement.

In cases where only certain partners wish to exit, share ownership can be transferred to another party. A drag-along right can be particularly beneficial in such situations, especially when a third-party purchaser requires a larger shareholding than the exiting partner alone can provide. Additionally, put and call options may be included to facilitate transfer of ownership during an exit.

Under Indian law, restrictive covenants such as non-compete and non-solicitation clauses are subject to legal constraints. The Indian Constitution guarantees the right to freedom of trade and profession, which means non-compete clauses that prevent individuals from practicing their trade are generally unenforceable. Section 27 of the Indian Contract Act, 1872 generally voids agreements in restraint of trade. However, Indian courts have acknowledged that temporary, reasonable restrictions during the term of the agreement may not be seen as a violation of this provision. Indian Courts have also recognized that partners in a joint venture owe an equitable duty not to compete with the venture’s business.

When evaluating the enforceability of restrictive covenants like non-compete or non-solicitation clauses, courts across various jurisdictions typically assess several key factors. These include depending on context, the employee’s role within the company and their access to sensitive trade secrets. Additionally, the duration and geographical limits of the restriction is an important consideration. Restrictions that extend beyond the term of the contract are scrutinized more closely, with courts applying a more stringent test to determine whether they are reasonable and justifiable in the given context. Enforcement of these covenants, however, remains a challenging issue, as seen in recent legal precedents.

JV agreements typically include clear dispute resolution mechanisms to handle potential disagreements between partners. It is common to outline a procedure that encourages the parties to settle their differences amicably before resorting to formal arbitration or litigation. Mediation is often seen as a preferred option due to its potential for reducing both costs and time, making it a wise choice to incorporate a mediation clause into the JV agreement at the outset. Arbitration is another prevalent dispute resolution method, particularly in international joint ventures, due to its faster pace, efficiency and flexibility as compared to court proceedings. However, arbitration can be expensive. In India, the Arbitration and Conciliation Act, 1996 governs arbitration, and foreign entities often prefer international arbitration to avoid delays in the Indian judicial system.

The choice of governing law is also crucial in a JV agreement. It determines the substantive legal framework that will apply in case of disputes. Factors such as intellectual property protection, damage assessments, and the efficiency of the judicial process should guide this decision. Additionally, enforcement of foreign judgments and awards may be challenging in India in certain cases.

In recent times, India has witnessed significant progress in the clean energy and automotive industries, marked by a significant increase in joint ventures. Growth in the clean energy sector is supported by several key government initiatives such as the National Green Hydrogen Mission and the Green Hydrogen Policy formulated under it. India also now allows foreign direct investment (FDI) up to 100% through the automatic route for renewable energy projects, including solar projects. At the same time, the Indian automotive industry has undergone a significant shift in its joint venture strategies, moving away from traditional manufacturing partnerships towards alliances focused on research and development (R&D), technology transfer and innovation. Government initiatives such as FAME India Scheme Phase-II, Product Linked Incentive Scheme, Battery Swapping Policy, Electric Mobility Promotion Scheme, 2024 and tax cuts on electric vehicles are driving this strategic shift.