Joint Venture

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Contents

Introduction

Joint Venture & Strategic alliance – Key Features

Forms of Equity Joint Venture

Term Sheet – Key Components

Tax issues

Critical Factors for Successful Joint Venture

Joint Venture – ConceptWhat is a Joint Venture ? • A joint venture (JV) is a business arrangement in which two or more parties agree to pool

their resources and expertise to achieve a particular goal. The risks and rewards of the enterprise are also shared.

• A joint venture can also be very flexible having a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure.

• What matters when forming a joint venture is cash flow, which creates value

Joint Venture – Objectives Key Objectives :

Gaining access to markets in the same industry Gaining new capacity and expertise Reducing costs Gaining access to new markets in foreign countries Gaining Access to new technologies / financial resources Developing new brands/extending own brands Risk Sharing

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Equity based Joint Venture – Features There is an agreement to either create a new entity or for one of the parties to join

into ownership of an existing entity Shared Ownership by the parties involved Shared management of the jointly owned entity Shared responsibilities regarding capital investment and other financing Shared profits and losses according to the Agreement

The form of business entity owned may vary – company, partnership firm, trusts, LLP, venture capital funds etc.

Foreign company may want to exercise management control even though it is not investing in the JV company

From the point of a foreign company, the most preferable form of business entity is company.

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Strategic Alliance– Features New Jointly – owned entity is not created Partners do not share ownership of the business entity Partners have a common intention – of running a business Each party brings some inputs Both parties exercise some controls on the business venture Capital investment depends on terms of contract Very low level of statutory regulation required Zero lead time to start activities Legal relations between the parties are structured and regulated on a contractual basis Companies pool resources and maintain their respective identities

Foreign companies often resort to Strategic Alliance when they do not wish to invest in the equity capital of a business in India even though they wish to exercise controls and want to decide the shape that the venture takes

Comparison – Equity Based Vs Strategic Alliance Particulars Equity Based Joint Venture Strategic alliance

Liability Limited Limited by Contract

Formation Company formation – Two to Three weeks

Zero lead time to startactivities

Capital Both parties contribute capital Depends on terms of contract

ManagementControls

Statutory protection of rights of JV partners

Limited statutory protection of rights

Ownership Ownership shared by parties Ownership is not shared.

Govt Approvals Subject to FDI policy (Foreign Investment)

No approvals required

Exit Route (1) JV partner may buy the other(2) Both partners may sell their

shares to a third Party(3) wound up of company

Subject to the terms of thecontract

Source : Anil Chawla Law Associates LLP

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Forms of Equity Based JV

Most preferred structureCompany • Types - Private Limited & Public limited Company • Shareholders : Private Company (2) , Public Company (7) • The shareholders may be foreign citizens or foreign companies

Less Preferred Structure Partnership Firm • Not permitted for joint ventures in India in most of the cases.• Exceptions are made in case of NRI but subject to various conditions.

Less Preferred Structure LLP • Theoretically, foreign companies may use an LLP as a joint venture entity• Conditions prescribed are long• Getting approvals a difficult process in the context of foreign investment

Source : Anil Chawla Law Associates LLP

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Prohibited Sector for Equity Based JV Foreign companies are not permitted to establish joint ventures in the following areas:

Lottery Business

Gambling and Betting

Chit Funds

Real Estate business or construction of farm houses

Manufacture of tobacco products and substitutes

Sectors not open to private sector investment e.g. Atomic Energy and Railway Transport

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Structuring & Tax Issues Residents are taxable in India on their worldwide income, whereas non-residents are taxed

only on Indian source income

Returns to foreign investors from India are generally structured as capital gains or interest income

Indian Residents - Certain typical Indian tax considerations will be relevant (Section 56)

Tax Treaties –NRI Investment through intermediate jurisdiction

Preferred vehicle for foreign investment

Mitigate tax leakage

Favourable legal and regulatory environment

Beneficial provisions with regard to capital gains tax and tax withholding on interest payments

Lower domestic tax regime

Reduce the effective tax liability of foreign investor

Override the provisions of ITA

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Joint Venture Agreement - Key Terms The object, purpose and scope of the joint venture

Capital Structure / Funding Arrangement

Management & Composition of Board of Directors

Reserved Matters

Deadlock Resolution

Representations and Warranties

Indemnification

Transfer Restrictions

Confidentiality

Exit strategies - Buy /sell, Put / call options

Essential factors for a successful JV Trust is Vital

Partners should be transparent about the value of contributions, expectations, responsibilities, ownership of intellectual property,etc

Create a sound structure Careful negotiation and drafting of commercial issues, governance structures,

operating agreements and break-up considerations is critical Deadlines should be imposed at an early stage Decision processes should be efficient in order to be able to move fast

Having clear agreement on objectives and management control issues Partners strategic compatibility Manage the relationship with your partner carefully with permanent channels of

communication

Annexures

Tax Treatment Income stream

Tax Treatment

Mauritius Singapore Cyprus

Sale of shares

• Income from the sale of shares of an Indian Company by a Mauritius Company is only taxable in Mauritius

• Mauritius levies no capital gains tax. Hence, there will be no tax incidence

• Income from the sale of shares of an Indian Company by a Singapore Company is only taxable in Singapore.

• No capital gains tax Levied in Singapore. Hence, there will be no tax incidence.

• Income from the sale of shares of an Indian Company by a Cyprus Company is only taxable in Cyprus

• No capital gains tax Levied in Cyprus. Hence, there will be no tax incidence.

Tax Treatment (Continued…)Income stream

Tax Treatment

Mauritius Singapore Cyprus

Buyback 20% BBT payable by the Indian company

20% BBT payable by the Indian company

20% BBT payable by the Indian company

Dividend •15% DDT payable by the Indian Company •Dividend Income taxable as business income in Mauritius at 15%•Mauritius Company eligible to avail foreign tax credit of 80% which will reduce the effective tax incidence to 0%-3%

•15% DDT payable by the Indian Company•Dividend received exempt from tax in Singapore

•15% DDT payable by the Indian Company•Dividend received exempt from tax in Cyprus

Interest income • 40% withholding tax • 5% withholding tax – ECB

• 15% withholding tax – • Taxed as Business

Income in Singapore at 17%

• Tax credit available • 5% withholding tax –

ECB

• 10% withholding tax • Taxed as Business

Income in Singapore at 10%

• Tax credit available • 5% withholding tax –

ECB

Thank YouAbout the Author:He is an MBA (Finance) with over 8 years of experience into investment banking. Have undertaken extensive training in financial modelling and has strong deal origination and execution experience on Private Equity, M&A & Debt Syndication transactions across various sectors.

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