Types of Joint Ventures
Joint-Venture
A joint venture is based on the principle of sharing.
It involves parties who possess:
capital resources,
specialised technology,
unique skills, and
experience in a particular industry or sphere.
Such parties agree to come together to share resources that may not be available to them individually.
This coming together of parties to establish a business enterprise is known as a:
strategic alliance, or
more commonly, a joint venture.
Joint ventures have become increasingly common in modern business practice.
They are undertaken across a wide range of activities.
These activities span almost every conceivable field, ranging from:
manufacturing small products, to
operating large-scale businesses such as aircraft fleets.
Joint ventures are conceived for a wide variety of purposes.
These purposes may include:
financing of projects,
sharing of technology,
sharing or use of a brand name, and
establishment of a new venture outside the core business areas of the parties.
In many cases, a joint venture is a matter of choice rather than necessity.
It enables participants to pool their complementary resources, such as:
capital,
technology, or
both.
Through such pooling, joint ventures can support and strengthen the parties’ existing businesses.
A joint venture may also serve as a strategic instrument allowing a venturer to align with another venturer to:
enter a new field of business,
sometimes unrelated to the venturer’s existing business.
Structuring a new business through a joint venture helps ensure that:
the profits or losses of the new venture do not adversely affect the profitability of the flagship or core business.
This model provides flexibility to an aspiring venturer to:
enter into multiple joint ventures with different parties simultaneously,
subject to applicable restrictions under Indian law, particularly in the case of international joint ventures.
There is no separate or exclusive law or set of principles in India that governs the:
formation,
conduct, and
termination
of joint ventures.
Determining the applicable laws is a secondary consideration.
The primary and foremost requirement is to determine the form of the proposed joint venture.
While determining the form of the joint venture, the following factors must be considered:
the choice and mind-set of the parties,
the surrounding circumstances, and
the purpose for which the parties seek to establish the joint venture.
In practice, it is often the purpose of the joint venture, rather than the mere choice of the parties, that determines:
the type, or
the mode
of the proposed joint venture.
Depending on its purpose, the lifespan of a joint venture may vary:
from a short-term arrangement, to
a venture lasting several years.
Experience shows that joint ventures may have varied outcomes.
While some joint ventures fail at inception and never take off, others:
continue for long periods, and
evolve and strengthen over time.
Joint ventures created for a single purpose or for execution of a specific project generally have:
a pre-determined time span, and
dissolve upon completion of the project.
Joint ventures designed to fulfil long-term objectives are usually structured differently.
Such long-term joint ventures are generally constituted through:
an incorporated company (incorporated form of joint venture).
An incorporated company is often the most suitable joint venture vehicle where:
continuous business operations are intended.
For example, setting up medical pathology laboratories for ongoing business operations is best carried out through an incorporated joint venture company.
A joint venture in incorporated form is capable of:
continuing indefinitely, or
surviving in perpetuity,
subject to:prevailing market dynamics, and
the willingness of the parties to sustain the venture.
A consortium agreement formed for bidding on a specific project generally has a limited lifespan.
For example, a consortium entered into between:
a civil construction company,
a heavy machinery manufacturing company, and
a venture capital fund,
to bid for a project contract may last only:a few months, or
a few years.
Such a consortium typically ceases to exist once:
the contract is awarded and executed, or
the consortium is outbid.
Without prejudice to the general meaning of a joint venture, it is important to understand:
the dynamics of the sector in which the joint venture operates.
Each sector may impart specific characteristics or peculiarities to a joint venture due to:
its unique commercial, technical, or regulatory dynamics.
In certain sectors, the formation of a joint venture is often unavoidable.
The construction industry is one such example.
In the construction sector, joint ventures enable co-venturers to pool:
financial and capital resources,
technology,
skills, and
expertise.
Such pooling is essential to:
negotiate, and
execute
large turnkey projects.
These projects would otherwise be beyond the individual capacity of each entrepreneur acting alone.
A joint venture can often act as a “passport” for entering a foreign jurisdiction.
Through a joint venture, parties can gain access to new markets and potential business opportunities.
In certain sectors, a joint venture is the only permissible mode of entry for foreign participants.
For example, in India, entry into sectors such as:
print media
is strictly regulated for foreign investment.
In such regulated sectors, participation through a joint venture is the only viable route for foreign entities to operate.
A joint venture, commonly referred to as a “JV”, may be formed by:
individuals, or
business entities, including corporations and partnerships.
Contributions to a joint venture may take various forms, including:
capital or financial contributions,
physical assets such as machinery, land, or buildings,
services or labour,
intellectual property, including proprietary information, technology, trademarks, designs, and patents, or
a combination of the above.
A joint venture enables participants to achieve synergies by leveraging each other’s unique strengths.
It also allows co-venturers to mitigate their individual weaknesses.
For example, one entity may lack sufficient financial or other resources to undertake a project, while another may possess surplus resources but lack the necessary experience.
By entering into a joint venture, such entities can combine their strengths to execute the project effectively.
A joint venture facilitates:
sharing of risks, and
reduction of individual investment burdens.
Further, joint ventures enable partners to:
pool their technologies and expertise, and
significantly expand their capacities, capabilities, and business opportunities.
A joint venture is ordinarily entered into to avail several commercial and strategic benefits.
(a) Facilitation of capital financing
One of the principal advantages of a joint venture is that it facilitates capital formation.
Modern businesses often require substantial seed capital, which can act as a significant entry barrier for small entrepreneurs.
By enabling pooling of financial resources, a joint venture allows even small entrepreneurs to enter sectors that would otherwise be beyond their individual financial capacity.
(b) Risk mitigation
Many ventures involve high entry risks and long gestation periods.
This is particularly true for sectors such as:
power projects,
oil exploration and refining, and
other infrastructure projects.
It is often impractical for a single entrepreneur or entity to bear the entire risk of such ventures.
A joint venture enables distribution of risks among multiple parties, thereby facilitating entry into high-risk projects.
(c) Facilitation of efficiencies
Joint ventures allow parties to derive the benefits of synergy.
The combination of production facilities enables achievement of:
economies of scale.
Joint venture partners can also:
share specialised skills, and
acquire new technological or managerial capabilities.
(d) Spreading of technology and know-how
Joint ventures are particularly beneficial in technologically intensive sectors, such as:
information technology,
chip designing, and
drug development.
These sectors require substantial capital investment for setting up and maintaining research and development (R&D) facilities.
Through joint ventures, partners can pool resources to jointly undertake R&D activities.
This helps in spreading:
the financial burden, and
the risk of technological obsolescence.
(e) Expansion of marketing reach
Joint ventures enable partners to access previously unexplored markets.
A co-venturer can leverage the joint venture partner’s:
understanding of domestic market conditions,
to enter local markets.
Partners may also pool their:
marketing resources, and
distribution networks,
to expand market reach and penetration.
Definition & Governing Law
The expression “joint venture” refers to an association of two or more individuals or business entities.
Such parties combine and pool their respective:
expertise,
financial resources,
technology,
skills,
experience, and
knowledge.
The pooling of resources is undertaken for the purpose of furthering a specific project or undertaking.
Indian law does not provide a statutory definition of the term “joint venture”.
In common business parlance, a joint venture denotes a business relationship between two or more parties who:
undertake an economic activity together, and
share the profits arising from such activity.
There is no separate or exclusive legislation in India governing the formation, operation, or regulation of joint ventures.
Consequently, a joint venture is governed by a combination of applicable laws and policies, which may include:
the Companies Act, 1956,
the Indian Partnership Act, 1932,
the Indian Contract Act, 1872,
the Foreign Exchange Management Act, 1999,
the Industrial Policy, and
relevant tax laws.
The Accounting Standard (AS-27) issued by the Institute of Chartered Accountants of India defines a joint venture as:
a contractual arrangement whereby two or more parties undertake an activity.
Such activity is subject to joint control, meaning:
an agreed sharing of control or power to govern the financial and operating policies of an economic activity.
The objective of such joint control is to:
obtain benefits from the jointly undertaken economic activity.
Although a joint venture can be described concisely, it may take numerous forms and manifestations in practice.
The mode or type of joint venture entity or vehicle adopted in India is the determining factor for:
the applicability of relevant laws.
From the foregoing discussion, it is evident that:
no single definition can comprehensively cover all forms of joint ventures.
Nevertheless, the discussion helps in understanding the core concept of a joint venture.
Such understanding facilitates a structured examination of the:
types, and
modes
of joint ventures.
The present chapter focuses on discussing the broad types or modes of joint ventures.
Under these broad categories, all joint venture agreements and arrangements between contracting parties may be classified for the purposes of this book.
Types of Joint Ventures
Joint Ventures can be broadly classified into various forms depending upon the criteria of classification:
On the basis of constitution
Where the parties to a joint venture wish to give it:
a separate identity, and
an independent legal existence,
distinct from the parties constituting it, they may opt for an incorporated form of joint venture.
An incorporated joint venture is constituted as:
a limited liability company.
In such a structure, the parties to the joint venture become:
shareholders of the company.
This form of joint venture is generally preferred where:
the activities proposed to be carried out are perpetual or long-term in nature.
Examples of such activities include:
supply of raw materials,
manufacture of goods, and
technology sharing arrangements.
The incorporated joint venture structure supports:
continuity of operations, and
long-term business objectives.
An incorporated joint venture entity may be constituted as either:
a public limited company, or
a private limited company.
The choice between a public limited company and a private limited company depends on:
the preferences of the parties, and
the specific requirements of the joint venture.
The factors determining the selection of a private or public limited company as the joint venture vehicle are discussed separately in detail in Chapter 2.2.
For example, a joint venture between:
A of Australia, and
I of India,
formed as a private limited company to set up medical pathology laboratories in India, constitutes an incorporated joint venture.
In such an incorporated joint venture:
the liability of the members (A and I) is limited to the extent of the capital agreed to be subscribed by them.
The joint venture company has:
a separate legal personality, distinct from that of the participating members.
Such an incorporated joint venture enjoys:
perpetual existence,
and continues to exist until the private limited company is wound up in accordance with law.
Unincorporated Joint Venture
Where the parties to a joint venture do not intend to associate with each other in perpetuity, they may opt for an unincorporated joint venture.
Such a structure is generally chosen where the joint venture is intended:
for a limited period, or
for a specific or defined purpose.
In these circumstances, the parties prefer not to create a separate incorporated legal entity.
An unincorporated joint venture may be structured in the following forms:
(a). Joint Venture by way of contract
In a joint venture formed by contract, the rights and liabilities of the parties are governed by the contractual arrangement between them.
The contract acts as the constitutional document of the joint venture.
The contract typically sets out the inter se rights and obligations of the parties.
Without limitation, the contract specifies:
the tenure or duration of the joint venture,
the proposed capital contributions of the respective parties,
the profit-sharing mechanism,
performance guidelines and obligations,
the dispute resolution or redressal mechanism, and
the determination or termination clause.
(b). Joint Venture by way of Partnership
As an alternative, the parties to a joint venture may decide to constitute the joint venture in the form of a partnership.
The law governing partnerships in India is the Indian Partnership Act, 1932.
Under the Indian Partnership Act, 1932, a partnership may be formed by:
an agreement that is express, or
an agreement that is implied.
However, a written partnership agreement is always preferable to:
avoid ambiguity, and
reduce uncertainty regarding the rights and obligations of the partners.
The Indian Partnership Act, 1932 does not mandate compulsory registration of a partnership firm.
Nevertheless, registration of the partnership is essential to obtain:
various statutory benefits, and
exemptions available under other laws and enactments.
In the absence of registration of a partnership firm:
the partners are not entitled to institute legal proceedings (including arbitration) to enforce rights arising out of the partnership agreement or under the Indian Partnership Act, 1932.
Further, an unregistered partnership firm:
cannot sue any third party to enforce its contractual rights.
A consortium agreement entered into between:
financing participants, and
a construction company,
for the purpose of bidding for an infrastructure project is an example of an unincorporated joint venture.
Such an unincorporated joint venture is created for:
a limited purpose.
The joint venture has a finite lifespan.
It automatically stands terminated:
if the consortium is outbid, or
if the bid is successful, upon effective commissioning of the project.
Characteristic of Incorporated and Un-incorporated Joint Venture Agreements
(a). Liability of Participants
In an incorporated joint venture, the liability of the participants is limited to:
the amount of share capital invested by them in the joint venture.
The participants are not personally liable for:
the debts or obligations of the joint venture entity.
Liability for:
taxes, and
other statutory dues
rests with the incorporated joint venture entity.
A default by the incorporated joint venture does not, by itself, affect:
the personal assets of the participants.
However, this limitation of liability does not absolve the participants from:
liabilities that may arise under statutory provisions imposing prosecution or penalties.
Such liabilities may accrue to:
persons responsible for the management and control of the defaulting incorporated joint venture entity.
In an unincorporated joint venture, the liability of the participants is unlimited.
The participants are personally liable to repay:
the debts of the joint venture.
Such liability is:
joint, and
several,
meaning each participant may be held responsible for the entire liability.
The same principle applies in cases of:
default in payment of statutory dues, and
taxes payable by the joint venture.
The concept of joint and several liability is most commonly encountered in:
consortium agreements.
(b). Legal Entity
Upon incorporation, a joint venture acquires a legal existence separate and distinct from:
its directors, and
its shareholders.
An incorporated joint venture is a juristic person.
Such a juristic person is established under the provisions of the relevant statute.
After incorporation, the joint venture is capable of:
owning property in its own name,
instituting legal proceedings, and
being sued in its own name.
An unincorporated joint venture, such as a consortium of two or more participants, does not have a separate legal entity under law.
In the absence of a distinct legal personality, an unincorporated joint venture cannot:
own property in its own name,
sue in its own name, or
be sued in its own name.
However, for taxation purposes, such an unincorporated joint venture may be treated differently.
Under the Income Tax Act, 1961, a consortium or unincorporated joint venture may be regarded as:
a distinct taxable entity known as an “Association of Persons (AOP)”.
(c). Stability of Existence
The term “perpetual” means:
continuing,
everlasting, and
unending.
Perpetual existence refers to the continued existence of a corporation or company until it is dissolved in accordance with the procedure prescribed by law.
An incorporated company has:
a separate legal entity under law.
Due to its separate legal personality, the existence of an incorporated company is:
unaffected by the death of its members, or
any change in its membership.
This feature makes an incorporated company:
a more stable, and
enduring
form of organisation.
An unincorporated joint venture does not have a legal existence separate from its members.
Its continuity is directly affected by events relating to its participants.
In particular, an unincorporated joint venture may be affected by:
the death of a partner,
the insolvency of a partner, or
a notice issued by a partner seeking dissolution of the partnership.
Owing to these factors, an unincorporated joint venture:
does not enjoy perpetual existence, and
is not perpetual in nature.
(d). Ability to raise funds
An incorporated joint venture enjoys greater leverage in raising funds.
It has the ability to issue various financial instruments, including:
equity shares,
preference shares,
secured debentures,
unsecured debentures, and
other instruments such as bonds.
An incorporated joint venture is better positioned to access:
bank financing,
funding from financial institutions, and
capital markets.
This enhanced fund-raising capability makes the incorporated joint venture:
more suitable for capital-intensive and long-term business ventures.
An unincorporated joint venture has a limited ability to raise finance.
It is largely dependent on:
capital contributions from its participants
to meet its funding requirements.
Due to the absence of a separate corporate personality, an unincorporated joint venture cannot:
issue shares, or
issue debentures.
The lack of such financing avenues restricts its ability to:
source funds for operations, and
undertake capital-intensive activities.
(e). Statutory formalities for formation
Several statutory formalities must be complied with prior to the formation of an incorporated joint venture.
The law mandates registration of:
the Memorandum of Association, and
the Articles of Association
of the proposed joint venture at the time of incorporation.
The proposed joint venture is also required to comply with:
statutory requirements relating to minimum paid-up capital.
Consequently, the formation of an incorporated joint venture involves:
numerous legal and procedural formalities.
The law prescribes relatively fewer formalities for the formation of an unincorporated joint venture.
There is no legal requirement mandating:
registration of the partnership deed or contractual document setting out the inter se rights and liabilities of the parties.
The law also does not prescribe:
any minimum capital requirements
for an unincorporated joint venture.
As a result, an unincorporated joint venture is:
simpler, and
quicker
to set up compared to an incorporated joint venture.
(f). Termination of Existence
The existence of an incorporated joint venture is perpetual in nature.
An incorporated joint venture is brought into existence through:
a definite procedure prescribed by law.
Similarly, the termination of its existence is also governed exclusively by:
a detailed and mandatory legal procedure.
The mere desire or actions of one or more participants cannot, by themselves:
bring the existence of an incorporated joint venture to an end.
This is subject to statutory remedies such as:
just and equitable winding-up,
oppression and mismanagement proceedings, and
derivative actions.
An incorporated joint venture is created by law and can be dissolved only by:
law.
The legal process for termination is detailed and often cumbersome.
Such termination involves, inter alia:
settlement of all government dues, including tax liabilities,
payment of dues to workers, and
settlement of claims of creditors.
An unincorporated joint venture can be terminated relatively easily.
Termination does not require a complex or mandatory statutory procedure.
A notice issued by any one of the participants seeking to:
dissolve, or
terminate
the joint venture may result in its termination.
Consequently, the existence of an unincorporated joint venture is:
less stable, and
more dependent on the will of the participants.
On the basis of territory
Domestic Joint Venture
A joint venture in which all the parties are domestic entities is referred to as a domestic joint venture.
A domestic joint venture is comparatively easier to constitute.
This ease arises because all parties are:
familiar with the prevailing legal and business environment.
Domestic joint ventures are generally formed to:
obtain synergies in supply, and
strengthen marketing capabilities.
International or Foreign Joint Venture
A joint venture formed between a domestic entity and a foreign entity is known as an international joint venture.
An international joint venture is also commonly referred to as a foreign collaboration.
Such joint ventures provide an opportunity for co-venturers to benefit from each other’s comparative advantages.
The domestic partner typically contributes:
knowledge of domestic market conditions,
familiarity with government regulations and bureaucracy,
understanding of local labour practices,
access to local supply sources, and
awareness of existing manufacturing conditions.
The foreign partner typically contributes:
foreign investment,
established brand value,
advanced technology and know-how,
modern management techniques, and
access to overseas markets.
Through such collaboration, the parties are able to:
enter sectors or markets that would otherwise be inaccessible to them individually.
On the basis of Strategy
A joint venture enables co-venturers to pool their resources for limited purposes.
In doing so, the parties do not lose their respective identities in entirety.
Such arrangements are often referred to as strategic joint ventures.
Strategic joint ventures allow collaborators to:
derive efficiencies, and
gain operational advantages,
without sacrificing their independent market presence.
However, strategic joint ventures may also give rise to:
monopolistic concerns,
anti-competitive issues, or
anti-trust implications.
Strategic joint ventures may be structured as:
incorporated joint ventures, or
unincorporated joint ventures,
depending on the specific requirements and constraints of each case.
(i). Production Joint Venture
A production joint venture involves an agreement between co-venturers to jointly produce a product.
The products so produced may be:
sold to third parties, or
used by the co-venturers themselves as inputs in their respective production processes.
Such production joint ventures are generally:
pro-competitive in nature.
Participants in a production joint venture may combine:
complementary technologies,
technical know-how, or
other assets.
This combination enables the joint venture to:
produce goods more efficiently.
Production joint ventures also allow venturers to:
achieve economies of scale.
As a result, such joint ventures are able to:
offer goods and services that are cheaper, and
improve overall efficiency.
(ii). Marketing Joint Venture
A marketing joint venture involves an agreement between parties to jointly:
sell,
distribute, or
promote
goods or services.
The goods or services marketed may be:
jointly manufactured, or
individually manufactured by the venturers.
Marketing joint ventures raise greater competition law concerns compared to other types of joint ventures.
This is because such arrangements may provide a mechanism through which:
competitors can coordinate pricing, or
allocate or coordinate marketing territories.
Consequently, marketing joint ventures are more closely scrutinised from an:
anti-competitive, and
anti-trust
perspective.
(iii). Buying Colloboration
Multiple entities may enter into a joint venture for the purpose of jointly purchasing necessary inputs.
A joint venture formed for buying inputs is commonly referred to as a buying collaboration.
Such a joint venture enables participants to:
exercise enhanced bargaining power with suppliers.
By pooling demand, participants are able to:
achieve economies of scale.
A buying collaboration may also be extended to allied business activities, such as:
transportation, and
warehousing facilities.
Through such joint ventures, participants can access:
inputs that may otherwise be unavailable or uneconomical to procure individually.
