Joint venture arrangements are those where two different companies/person join hands and form a new company combining strength of two companies in order to achieve some purpose. Joint Venture between one foreign company/person and one Indian company/person may sometimes be necessitated due to legal compulsion as the sector is which the investment is sought is where FDI Policy/ FEMA regulations mandates the lower limits of investment by a foreign enterprise. For example in insurance sector, limit of equity stake by foreign enterprise has been capped at 49% as of now. Second situation may be more from a commercial/operation angle where two enterprise needs each other irrespective of the fact whether the relevant sector has any sectoral limit or not. Situations may be like when a foreign investor due to lack of local knowledge and competition, may wish to have local joint venture partner who can guide them on local laws, local conditions and other indianised aspects. So essentially a joint venture company is formed in a situation where in some of equity is held by a foreign investor and the rest of the equity is held by the Indian company.
It is always advisable to check, before entering into a joint venture relationship with a foreign partner, the sectoral cap of the relevant sector as per FDI Guidelines / FEMA Regulations. Once convinced, one can go for forming a joint venture company in accordance with the agreement reached between the parties. The parties share the profit and losses of the joint venture entity in proportion to the capital contribution made by them. Equity joint ventures may be in the form of Company or Limited Liability Partnership.
1. Local Knowledge: When a foreign investor forges the joint venture relationship in India with good Indian partner, it can rely and assure on the capabilities and local knowledge conditions including customer preference, labour conditions and way of working of Indian societies.
2. Joint Financial Resources: Financial resources pool will be much larger when both the partner (foreign as well as Indian) will infuse the equity. Further it would be easy to obtain financial help from the Indian banking system when both are backing the joint venture company.
3. Joint Talent Pool: This is most important advantage to keep in mind the long term objective. Both can deploy their best man to the joint venture and try to achieve the long term objective.
4. Contact & Relationship: National & international reach will be much wider when both (foreign and Indian) will join hands and this will help in achieving the scale of business in shorter span of time.
5. Regulatory Comfort: When foreign company is backed by Indian partner it can rely on the Indian team which can take care of legal and regulatory issues comfortably.
From regulatory point of view, foreign direct investment in a joint venture company may happen through two routes. First is the Automatic Route in which foreign enterprise need not to obtain the consent of any government authority before making an investment. Here only the intimation to the prescribed authority regarding the investment needs to be made. Second Route is the approval route in which a proper approval needs to be sought from the appropriate authority before making any investment in the joint venture company. Both the routes have been discussed hereunder:
1. Automatic Route: Under the automatic route, no approval (either from the Government of India or the Reserve Bank of India) is required for making an investment in India in the joint venture company in accordance with the conditions as specified in the FDI Policy issued by the Government of India from time to time.
2. Government Route: There are certain sectors in which there is no automatic approval and in those cases you have to obtain the prior approval from the Government of India before making any investment in India. Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, under the Ministry of Finance deals with those cases and approves them.