Starting with a partner can be smart in a country like India. The fast growing Indian economy offers opportunities for companies in every sector and industry. Still, to succeed in India, you have to have good connections and really understand the market. Therefore, as a newcomer to the Indian market, starting through a joint venture has many advantages. You can rely on the market knowledge and the extensive network of your Indian partner and you share the risks. But there are also examples of joint ventures in India that went wrong. This is due to cultural differences and a lack of leadership, as happened to McDonalds .
Memorandum of Understanding
A joint venture almost always establishes a new company owned by two or more partners. A joint venture is often set up for a special project. Moreover, it is usually not intended for a long-term business connection. The partners contribute their assets (people, machines, capital and knowledge) for a specific purpose and for a limited time. However, they remain completely separate companies, while the joint venture forms a new company.
Before setting up a new entity as a foreign company with an Indian partner, it is strongly recommended that, as with any other business transaction, conduct due diligence. In addition, drawing up a memorandum of understanding (MOU) is very common in India. It ensures that all parties fully understand and agree on the purpose, responsibilities and risks of the joint venture. It is a short document without much legal jargon, detailing the roles of both parties. Additionally, it establishes a roadmap for the future about the parties’ intentions, management structure and cost allocation.
Articles of Association
Most joint ventures in India are structured in the form of private limited companies, the equivalent of the Dutch BV. It is mandatory for a private limited company to have at least two directors. Of this, at least one director should be living in India. Meaning, someone who has stayed in India for a period of at least 182 days in the previous calendar year. The person does not necessarily have to be an Indian. In a private limited, the Articles of Association (AoA) is a very important document. The AoA is a requirement for establishing a private limited company in India. In fact, it contains regulations for the company’s internal management.
The Companies Act 2013 gives companies the freedom to determine the content of the AoA themselves. For example, the AoA contains a clause on steps to be taken in the event of conflict or termination of a joint venture at deadlock. It is therefore advisable to pay time and attention when drawing up the AoA. Further, do not depend on a standard off-the-shelf concept. The Companies Act, 2013 requires that every company has an MOU and AoA. The MOU and AoA are the company’s charter documents. Both must therefore be submitted to the Registrar of Companies (the Indian Chamber of Commerce) of the province where the foreign company wants to establish itself.
Joint Venture Agreement
Once the MOU and AoA have been drawn up, the basis for the joint venture has been laid. Now, the Joint Venture Agreement (JV Agreement) can be drawn up. This is a working document that explicitly focuses on the decisions that partners can and may take. This can be on shares, management structure, withdrawal rights, competition issues, dispute resolution, intellectual property rights and any guarantees. The JV Agreement is not a binding document. In fact, it is drawn up purely to record the cooperation and responsibilities of the partners. Indian law offers parties sufficient flexibility to record agreements themselves in a final agreement.
The JV Agreement or other agreements related to the joint venture necessarily require competence in preparing the documents. There should not be any room for ambiguity. Complicated and vague documentation can be fatal to the joint venture. Besides, it can hinder the interests of the parties. One of the things that requires expertise is the exit strategy. The JV Agreement establishing a joint venture must also include a planned exit strategy. This is important so that all parties are protected once the partnership has reached its goal.
Most joint ventures are dissolved through a partner buyout. It is recommended to include clear conditions for terminating a JV in the agreement. Once the parties have determined the key points for the JV Agreement, it is wise to transfer the case to a lawyer in India. Taking into account Indian laws and regulations, he can convert the key points into the official Joint Venture Agreement document.
Local support in setting up a joint venture
Setting up a joint venture offers you as an international company and newcomer to the Indian market, interesting advantages. Not a long start-up time in which you have to build a network, find the right distributor and acquire customers. For all this you can rely on your Indian partner. But of course the responsibility of setting up the joint venture itself rests on your shoulders. Local knowledge and support is not an unnecessary luxury in that process. Do you want to tackle all the preparatory work for the joint venture in a sound way? Do you want to start with the right documents? We have a team of local experts ready to make your start as smooth as possible.