Embarking Joint Ventures

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Embarking Joint Ventures an Indian perspective

• CS Makarand Lele
• Chairman WIRC
• Partner MRM Associates
• makarand.lele_at_mrmcs.com

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What is joint venture

• Definition of JV FDI regulations
• Two or more people coming together
• For common cause
• Pooling of resources
• Combination of strength
• Venture risk undertaking, commercial
  speculation, exposure to risk
• Human element
• Unlocking values
• Creation of assets

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Ingredient of JV

• Business as objective
• Commercial terms
• Technology
• Sharing of benefits risks
• Responsibilities sharing
• Relationship between parties
• Entry and Exit options
• Disputes
• Settlements

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Advantage to foreign partner

• Mitigation of risk in open venture
• Use of local partners infrastructure
• Plug play
• Understanding local business environment/ market/
  legal structure/ compliances
• Goodwill contacts of local partner
• Raw material source
• Skilled manpower
• Limiting competition
• Regulatory requirements to have local partner
• Investment tax benefits in their country

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Expectations of Indian Partner

• Funds
• Technology
• Skills
• Trade mark , brands, IPR
• Export markets
• Value addition in Indian market Goodwill

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Expectations of Foreign Partner

• Entry to Indian market
• Availability of Skilled resources
• Low cost of production
• Outsourcing hub
• Transparency
• Compliances
• Reasonability

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Types of Ventures

• In Existing Entities
• Acquisition of stake
• Change of ownership of holding company
• Technology collaboration
• In New Entity
• Acquiring demerged entity
• New JV company equity participation
• Loan funding
• Technology collaboration
• Tendering/ quoting for BOT/ PPP/ Greenfield
  projects - SPV

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Applicable Laws

• Industrial Policy FDI regulations
• FEMA
• Company law
• SEBI laws Listing agreement
• Contract Act Section 27 agreement to restrain
  trade or profession is void. Non compete
• Stamp Act duty payable as per state act
• IPR laws
• Competition law Big JV needs to check this for
  combination comply with section 6 of the act
  i.e. prior intimation approvals

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Steps to form a JV

• Market Analysis viability study
• SW analysis
• Negotiations
• MOU defining principal terms conditions
• Due diligence representations
• Legal documentation
• Approvals permissions
• Launching

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Due Diligence

• Financial Legal covering
• Company background history
• Status compliances for group companies
• Finance, tax, accounting
• Borrowings, loans, investments
• Manufacturing, marketing, distribution
• Contracts, licenses, approvals
• Corporate compliances
• Properties
• Litigations disputes
• Pollution potential threats
• Employees HR
• Ownership
• IPR rights

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Important points for JV

• Form of Organization
• Permissions approvals
• Financial projections
• Capital requirements
• Infrastructure set up
• Human resources
• Technical analysis
• Costing for products/ services
• Analysis of competition Market
• Environmental impacts
• CSR other social aspects

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Options available to foreign JV partner

• Equity participation
• Technology Transfer Royalty/ Know how fees
• Control the composition of Board Management
• Debt Funding

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Moving ahead.

• Plan
• Recognize war areas
• Understand strength weakness
• Be realistic about demands
• Team has only one leader
• Negotiate
• Listen Understand your partner
• Dont argue
• Dont hurt the ego of other professional
• Affirmative polite approach
• Dont loose the temper
• Keep difficult issues pending for next meeting
• Drafting
• What is a good draft?
• Document should create a confidence
• Clear, clean simple
• Avoid vague terms
• Control on versions

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• Good Document can never be a substitute to a bad
  partner
• CS is the master of documentation

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Structuring JV Agreement

• How much share each party will have?
• How is the composition of the Board?
• Who and how the JV will be operated managed
• Rights relating to shares
• Protection of minority interest
• Valuation of IPR
• Pay out policy Dividend/ Buy back
• Representation warranties
• Compensation policy for senior management team
• Non compete
• Compliances
• Taxation
• Penalties
• Arbitration settlement of disputes
• Exit Route
• Winding up/ Termination/ Closure

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Important terms of JV agreement -1

• Equity participation 11, 26, 51, 76
• Board structure Equal numbers or based
  representation? Who will be a chairman? casting
  vote?
• Management right to appoint MD other KMP,
  Committees, powers duties
• Contribution by partners financial, bank
  guarantees technical, RD support, manufacturing,
  marketing, day to day management

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Important terms of JV agreement -2

• Minority Protection Affirmative vote, right to
  buy out, proper exit route
• Veto/ Affirmative Vote items requiring Board
  approvals, items requiring shareholders approval
• Quorum different from requirement of
  affirmative vote, quorum at adjourned meeting,
  practical approach, consent by circular
  resolutions, video conferencing meetings
• Restriction on Transfer of Shares Transfer
  includes all actions relating to shares voting
  rights, lock in period, general restrictions,
  inter se transfer, affiliate, pledge
  hypothecation in ordinary course of business
• Special Rights relating to shares Tag along,
  Drag along, Right of first refusal, pre-emption
  right.

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Important terms of JV agreement-3

• Dead lock resolution one party should have
  clear right to decide, third party
  reconciliation, out right purchase, distribution
  of assets by demerger, Put call option, Seal Bid
  method
• Arbitration dispute, appointment of
  arbitrators, jurisdiction, award, decree,
  enforcement
• Force Majeure natural calamities beyond the
  control of the parties
• Termination sun set clause, events, procedure,
  right of the parties after terminations,
  compensation
• Exit Route no ambiguity, fair for each party

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Important terms of JV agreement- 4

• General Terms conditions
• Jurisdiction
• Severability
• Representation Warranties by the parties
• Conditions precedent to closing
• Closing events procedures
• Deed of adherence
• exchange of documents
• Copies of the agreement
• Annexure

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Articles of Association

• Copy JV terms to articles
• Validity of obligations on parties
• Conflict between articles JV agreement
• Enforcement
• Information in public domain
• BINDING NATURE OF SHAREHOLDERS AGREEMENT
• The Company shall abide by the
  Shareholders agreement made between the Company
  and its shareholders and carry the same into
  effect so far as it concerns the company. The
  Articles of Association of the Company shall be
  amended in conformity with the Shareholders
  Agreement. In the event of inconsistency between
  the provisions of Shareholders Agreement and the
  Articles of Association, the provisions of the
  Shareholders Agreement shall, to the extent
  permitted by law, prevail. The members shall
  exercise, their voting rights attached to their
  Shares to alter the Memorandum of Association and
  the Articles of Association in a manner
  consistent with Shareholders Agreement.

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Registration Stamping

• Payment of stamp duty
• Execution outside India copies brought into the
  state
• Affixing of Stamps
• Registration under State Registration Act
• Payment of cess

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Governing FDI/ FEMA regulations

• Investment by foreign incorporated entity
  Automatic/ Approval route
• Sectoral caps
• Capital Account transactions
• External Commercial Borrowing regulations
• Payment of royalty technical know how fees
• Acquisition of property in India
• Current Account transactions
• Establishment of place of business in India LO/
  BO
• Pricing guidelines for issue of securities
• Press Note 1 of 2005 conditions removed w.e.f.
  1.4.2011
• KYC norms guidelines for money laundering

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Important aspects of FDI regulations

• The term Capital is defined in FDI policy and
  includes fully, compulsory mandatory
  Convertible Preference Shares and Debentures
  (FCCB), Any other instrument, partly paid share
  and warrants is not capital can be issued to
  resident outside India only after approval
  through the Government route.
• Payments for royalty, lump sum fee for transfer
  of technology and payments for use of trademark/
  brand name caps were removed and were put under
  automatic route vide RBI circular dated
  13/05/2010, with effect from 16.12.09.

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Important aspects of FDI regulations

• RBI revised the method of valuation of shares for
  issue transfer effective from May 2010
• In case of Listed Companies the price should be
  worked out in accordance with the SEBI
  guidelines, as applicable.
• For unlisted Companies valuation to be done by
  SEBI registered Category - I Merchant Banker or a
  Chartered Accountant as per the Discounted Free
  Cash Flow Method.
• The new method is expected to yield a higher
  valuation as it would take into account the
  potential of the business as opposed to the
  accounting approach of the earlier methods.

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Break _____out

• Golden hand shake goals achieved, efflux of
  time
• Deadlock
• Disputes
• Boredom
• Failure in achieving objectives
• Changes in regulations
• Incapacity of parties - insolvency/ bankruptcy/
  closure
• Impossibility to achieve objectives
• Consequence
• Achieving termination
• Simplified separation
• Role of CS

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Few issues in JV

• Post implementation issues
• Enforceability of Transfer Restrictions
• Non compete
• Provisions of the Competition act

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to conclude

• I know what I have given you. I do not know what
  you have received
• - Antonio Porschia

any questions please
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Vision Statement

• To share my knowledge and experience to
• as many learners and after each interaction
• learn to un-learn and re-learn which in
• itself is a continuous process.

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Thank you

• Nice talking to you
• You can write to me
• makarand.lele_at_mrmcs.com
• You can speak to me
• 919822394381