The ‘Need to Knows’ of Forming a Joint Venture in IndiaMarch 3, 2023
Joint ventures are one of the most lucrative forms of entry strategies that you can consider when planning to expand your business to India. The Ministry of Corporate Affairs permits the formation of joint ventures in India under three functions:
- Jointly controlled operations
- Jointly controlled assets
- Jointly controlled entities
Jointly Controlled Operations
This strategic alliance allows you to utilise the operational assets and resources of an Indian company without establishing a corporation, partnership or separate legal entity. The presiding agreement will regulate the assets you control, the expenses and liabilities you incur, and the profit share you enjoy.
Jointly Controlled Assets
You will enjoy joint ownership of the assets and economic benefits governed by the agreement. When forming the joint venture, you will have control over the capital resources you bring to the table. And you do not have to create a separate entity.
Jointly Controlled Entities
You register your joint venture with an Indian company as a separate legal entity. You can operate your business like any other company, raise funds, manufacture products, undertake marketing activities, etc. Your contractual agreement with your venture partner will govern the structure of economic gains and losses.
With these as a framework, joint ventures in India are widely categorised based on their formation and ownership as well:
On the basis of company formation
Depending upon the constitution of your joint venture; it can be classified as either
- an incorporated joint venture, or
- an unincorporated joint venture
A foreign company can enter into a strategic business relationship with an Indian company through an incorporated joint venture as a limited liability company (LLC) or a limited liability partnership (LLP) registered under the Companies Act, 2013 and Limited Liability Partnership Act, 2008.
The incorporated joint venture will be a separate legal entity wherein perpetual succession is permitted. You will receive economic benefits from the arrangement based on the capital or assets you contribute to the venture. As a part of an LLC, you will receive interest on the capital you will share, and interests will be dictated by the profit-sharing ratio both of you have agreed upon.
An unincorporated joint venture will serve you well if you wish to avoid becoming a permanent or formal firm in India. You can enter into a simple partnership or a strategic alliance with an Indian company without the compulsion of registering as a separate business. The agreement will govern your obligations and benefits. While the assets will be jointly owned, you’ll hold undivided interest depending upon your share of investment and production.
On the basis of ownership
When you enter the Indian market by forming a joint venture with a local company, your agreed arrangement can either be one of the following:
- an equity-based joint venture or
- a contractual joint venture
In an equity-based joint venture module, you can agree with another company to form a separate legal entity. You have the scope of building a larger company using both your resources. You can start a company, a partnership firm, or an LLP without merging your existing business entities. Depending on your capital resources, you can claim equal ownership or settle with a majority-minority ownership model. It is one of the most commonly opted structures for companies that plan long-term business operations in India.
A contractual joint venture, on the other hand, is a consortium that allows you to work jointly with an Indian company without creating a different legal entity. While both companies will work together to achieve a common objective, creating a new entity is not obligated. Neither of you will share ownership of the business, but you might leverage some level of operational control. You will be bound by the governing agreement to share profits and bear any losses or liabilities. You can consider a contractual joint venture if you are deliberating your entry into the Indian market with franchisees, licensing, and purchasing and distribution models.
To conclude, the Indian government allows you multiple routes to enter the Indian market through the joint venture route. No matter which option you pick, forming a strategic collaboration with an Indian company to start operations in the country will give you the network and resources to establish your business in the country. They understand Indian consumer behaviour well and will have abundant operational knowledge to help you streamline your company’s functions and run your business smoothly.