Foreign companies may set up a joint venture in financial collaboration with an Indian business house/company in India. For this purpose, an Indian company with limited liability is formed in India. The companies once incorporated are treated like other Indian companies and enjoy all the benefits of being an Indian company (Including tax rate applicable to Indian Companies).
Depending upon the business sector, the investments on repatriation basis are allowed under automatic route or through prior approval of Government body (FIPB). A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian Companies Act, 1956. Foreign equity in such Indian companies can be up to 100 per cent depending on the business of the foreign investor, prevailing investment policies of the Government and receipt of requisite approvals.
Factors To Be Considered While Forming A Joint Venture in India
In sectors where 100 percent Foreign Direct Investment (FDI) is not permitted and wholly owned subsidiaries cannot be set up, a foreign investor may enter the Indian market through joint ventures. Forming a joint venture encompasses a number of stages and a number of factors. Mentioned below are some of the essential steps to be taken by a foreign party to a Joint Venture:
The most important decision is choosing an appropriate local partner. A local partner can play a significant role in overcoming various legal complexities. Business synergies, which are complimentary for the venture, are also required. Prior to commencing negotiation, confidentiality/ non-disclosure agreements may be entered into between the parties, for the protection of strategic business information. Such agreements are enforceable in India.
Deciding the location
The next step is to identify a location for the proposed project. Choice of location depends upon the type of activity to be undertaken. If the activity relates to consumer goods sector, a variety of locations will be available due to the fact that a number of Indian partners can be easily found for such activities. However, in case of specialized industries, there may be limitations on the choice of location as the number of suitable partners for such activity is limited. Other important factors to be considered for this purpose are availability of infrastructural services and financial incentives such as preferential tax treatment.
Joint Venture Agreement
Another step taken at the initial stages of negotiation is to sign a MoU, which lays down the basic parameters of the project and contains the intention of the parties to enter into the joint venture, but is not legally binding. In order to give such agreement a binding effect, stamp duty has to be paid thereon. However, this document only binds the parties and not the company, except when its terms are incorporated in the Articles of the company.This MoU is then used as a basis for the Joint Venture Agreement. The joint venture agreement/shareholders agreement along with the Articles of Association constitutes the bye-laws of the Joint Venture Company. This document defines the mutual rights of the parties and also prescribes guidelines for efficient functioning of the company.