Thomas Weidlich | Attorney-at-Law, Partner | Luther Rechtsanwaltsgesellschaft mbH
First published in M+V’s India Insight
Foreign investors often enter the Indian market having in mind its huge growth potential, but underestimating the inherent risks. This is particularly true of collaborations with Indian partners, many of which have been set up hastily and without proper consideration of certain basic precautions.
There is a similar pattern in many investments that turn sour. Very often the Indian venture was not the foreign management’s top priority in the beginning, and German parties all too often had to later realize that they lost control to the Indian partner even in majority joint ventures. Know-how is typically shared too freely without appropriate protection. Another common issue we are confronted with is an insufficient contractual framework in case of disputes between the parties. Investors cannot rely on the Indian judiciary to enforce their rights and alternative arrangements are highly recommended.
Investors need to have stamina and surprises can never be excluded in India. Still, the India journey will be much smoother if some basic rules are observed right from the start of a cooperation.
5 Golden Rules for collaborations in India
- Careful selection of partner
Joining forces with the right partner can accelerate market access in India, but this is a decision that should only be taken after careful evaluation. A thorough due diligence of the prospective partner is strongly recommended and any form of cooperation should only be contemplated once an acceptable confidence level is reached. Foreign investors should clearly define the area of cooperation and for example, not automatically grant exclusivity to a partner for the whole of India
- Know-How protection
Know-How is often a key asset of the foreign partner and should accordingly be well protected. A license agreement would typically address questions like exclusivity, applicable range of products, type of technology and also, which party is responsible for registrations and defending the technology in India. It is ‘best practice’ for the licensor to keep a strong grip on its rights and for example, to retain its latest innovations. Indian courts unfortunately have not always upheld Indian property rights claimed by foreign companies and it is advisable to evaluate the legal protection of technology or brands under Indian law.
A successful collaboration cannot be managed remotely. Active monitoring of operations and management participation is crucial. Implementing appropriate accounting, reporting and internal control systems, and controlling the finance function is extremely critical in any joint venture to ensure regulatory compliance. Where feasible (and subject to tax implications), the foreign party should also have trusted personnel in India.
- Adequate contractual framework
Trying to save on costs for good advice can become very costly later. It is paramount to negotiate a proper set of contracts including governance provisions and termination clauses.
Naturally, parties shy away from discussing exit scenarios while on their “honeymoon”, but signposts for a way out should be set before the journey starts.
- Provide for arbitration outside India
Indian courts have a heavy backlog of cases and are not a reasonable option to resolve legal disputes. The cooperation agreement should stipulate an arbitration clause that is compliant with Indian law, preferably with a venue outside India such as e.g. Singapore. A recent decision by the Indian Supreme Court has confirmed that foreign awards are generally enforceable in India, but the arbitration clause needs to be carefully drafted to consider all implications.
Sticking to these rules will help avoid the worst headaches, and certainly if foreign investors also heed the advice given by METRO’s head of corporate relations Michael Wiedmann during our India Day 2013: “Always engage very good lawyers!”