Joint Ventures- point of Interest

As a lawyer to Indian corporations participating in the negotiations that precede formalised joint ventures with Foreign MNCS, I have obtained some insights that every joint venturer should know

In this article, I would like to share with the readers some of the advantages and problems encountered by the parties to a joint venture (JV). The presumption is that the JV will be in the form of a company

Business persons, world-wide, realise the importance of legal documentation to record the relationships they are in the process of cementing. Their approach in creating these relationships is with a positive mind – that the JV shall, after the initial setting up, consolidate and grow

Simultaneously, commercial acumen and experience shows that every business person should take the worst case scenario and at the outset document the solution to overcome it – when the discussions and negotiations are friendly, it is advisable to consider issues of likely disputes, exits, valuations of the equity on such exit, resolutions requiring unanimity, veto, governing law, the nomination of the CEO, the constitution of the Board, the right to proceed with an initial public offering, etc. This is not to suggest pessimism, but as the old adage says, it is better to be safe than sorry. Hesitation in raking up these issues politely in the beginning means paying fat legal fees and getting adverse media publicity subsequently

Though it might sound crude, getting into a JV is like getting married: each party might as well understand the thinking, goals and aspirations of the other to begin with, rather than express shock and surprise when it is too late

A large number of unsuccessful JVs in India are the result of the parties’ –

not understanding the future of the industry in which the JV is floated

not facing their identified weaknesses or size mismatch at the outset

beginning with a subjective analysis of the relationship or lack of synergy between them

not sufficiently concentrating on the pre-JV phase – especially on issues like the market opportunities for the product/service of the JV once it is formed, the core team which shall run it, inefficient due diligence, etc

not clarifying what they intend to do with the profits in the JV (once they flow in!) – whether to plough them back in to the business or to distribute them as dividends

Foreign Corporations desirous of entering into JVs should, after the above is sufficiently in place, leave a certain amount of discretion with the local JV partner. Every place has its own whims and idiosyncrasies and the people most fit to get over them are the ones who face them every day. Issues such as forming the JV, obtaining the approvals (exchange control or governmental), appointing local auditors (preferably, together with an international service firm, though this may mean double costs), choosing the location to house the JV, and people to staff it, should all see the local partner play a larger role. It can bring grassroots expertise at a cheaper financial cost

To begin with, only if it is very necessary should the JV be headed by an expat CEO. While the local staff under such a CEO would be comfortable, it would be more comfortable under a local CEO. Also, the local CEO would be available at lower cost than the expat. Starting with a local flavour can be very rewarding

Often, however, JVs do need international expertise, which only the nominee of the Foreign Corporation could bring along

Because JVs have come to India in a big way only since liberalisation of the economy began in 1992, there has been considerably less legal documentation concerning JVs infields of technological expertise. This has now resulted in readymade, but time-tested legal documentation being supplied by the overseas lawyers to their local counterparts. This often reduces the Indian lawyer to ‘fine-tuning’ the papers to take care of the Indian law, while hardly having any concrete say in the matter. This has now started to change, with local lawyers picking up international skills

JV partners as astute business persons want to follow the law to the hilt – no shortcuts, no compromises. The stress is now on ensuring that business expands hand in glove with the cultural and social habits of the local populace – less austerity, more technology, less hype, more substance. This is ensured by the parties’ drawing up a common programme for the JV and regularly meeting to ensure that the project does not get derailed

Lastly, there is good news on the JV front – companies in India can now issue non-voting shares and there is a Corporate Good-Governance Code (on the lines of the Cadbury Code) in the offing. In several areas of industry. Foreign corporates can hold up to 100 per cent of the equity