JOINT VENTURE

1. JOINT VENTURE

2. INTRODUCTION • A joint venture is when two or more businesses pool their resources and expertise to achieve a particular goal, and were the risks and rewards are also been shared amongst the enterprise. • In sectors where 100 percent FDI is not allowed like India, a joint venture is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market. • For any successful JV into India, compatibility is important for both the parties. • To maintain a successful joint venture in India both of the associated parties should have a long term goal and conditions should be written in the clauses in JV.

3. Reasons for JV • Overseas business • Business expansion • Development of new products or moving into new markets What can a JV give? • More resources • Greater capacity • Increased technical expertise • Access to established markets and distribution channels

4. Methods of joint ventures in India • Equity joint venture: The equity joint venture is an understanding whereby an independent legal entity is created in accordance with the agreement of two or more parties. • Contractual joint venture: The contractual joint venture might be used where the organization of a detached legal entity is not needed or the creation of such a separate legal entity is not feasible.

5. When you decide to create a joint venture, you should set out the terms and conditions in a written agreement. This will help prevent any misunderstandings once the joint venture is up and running. A written agreement should cover: • The structure of the joint venture. e.g. whether it will be a separate business in its own right • The objectives of the joint venture • The financial contributions by each. • Transfer any assets or employees to the joint venture • Ownership of intellectual property created by the joint venture • Management and control. E.g. respective responsibilities and processes to be followed • Sharing of profits & losses and liabilities. • Resolution of disputes amongst the partners if any. • Exit strategy options

6. EXAMPLES • The world’s largest retailer, Wal-Mart, entered into a 50:50 joint venture with Bharti Enterprises for the wholesale cash-and-carry business in India that will roll out 10-15 such outlets over seven years. This also covers a supply chain and back-end logistics. • Nissan Motors signed a 50:50 JV deal with Ashok Leyland to make commercial vehicles, engine and components in India.

7. Advantages • Provide opportunity to gain new capacity and expertise. • Allow companies to enter related businesses or new geographic markets or gain new technological knowledge. • Access to greater resources, including specialized staff and technology, sharing of risks with a venture partner. • Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure. • In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit from non-core businesses. • Companies can gradually separate a business from the rest of the organization, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

8. Disadvantages • It takes time and effort to build the right relationship and partnering with another business. • The objectives of the venture are not 100 per cent clear and communicated to everyone involved. • There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners. • Different cultures and management styles result in poor integration and co-operation. • The partners don't provide enough leadership and support in the early stages. • Success in a joint venture depends on through research and analysis of the objectives.

9. SOME OF THE MAJOR POINTS THAT ARE TO BE TAKEN INTO CONSIDERATION • Management: It is important to have the opinion over the proposed management structure and to categorize the work of both the parties. • Royalty payments: For the automatic route, RBI permits lump sum payments not exceeding US$2 million. Royalty payable is restricted to 5 percent for local sales and 8 percent for exports, without any constraint on the period of the royalty payments and are calculated according to standard conditions. • Profit repatriation: India allows free of charge repatriation of profits once the entire domestic & central (tax) liabilities and other compulsions are met.

10. Exit strategy: The general exit options are: • Buy-sell agreements: In a buy-sell agreement, either IJV party will decide to purchase the interest of the other by sending a buy-sell trigger notice to the other party specifying a cash purchase price at which the offered party is willing to buy the assets. • Unilateral sale rights: Although unilateral sales rights are not so common, in some instances, one or both partners may have the unilateral right to sell their interest in the venture to a third party.

11. Put/call rights: Put/call rights are incorporated in an IJV agreement when one partner wants to liquidate as soon as possible, while the other partner wants to hold the venture assets long-term. A "call right" would give the foreign firm the right, but not the obligation to buy the IJV from the local partner at a certain time (triggering event) for a certain price. Conversely, a "put right" would force the local partner to buy its interest when the foreign firm decides that it wants to liquidate. • Termination of operations and the liquidation and closure of the venture.

12. BIBIOLOGRAPHY • http://www.scribd.com/doc/36839210/Joint-Ventures-in-India-Bloomberg-Article • http://www.india-briefing.com/news/establishing-joint-venture-india-4833.html/ • http://www.usibc.com/sites/default/files/committees/files/jointventuresinindiaanoverview.pdf