JOINT VENTURE

JOINT VENTURE

INTRODUCTION

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“Joint Venture” is not a strict legal term, but a description of a certain business relation.

The term describes a business situation where 2 or more parties join their capacities in order to achieve a certain common objective with a benefit for every party and mostly over a long period of time.

What does the term “Joint Venture”

stand for?

Joint ventures have become an important strategic option for

many businesses. Due to increased globalisation, the

proliferation of modern technology as the means of conducting business, and

increased international travel, businesses are now operating in a world without borders, albeit that there are still cultural and

language issues. This guide summarises the key

considerations in establishing a joint venture or other strategic

partnership.

The term ‘joint venture’ is an umbrella term which describes the commercial arrangement between two or more economically independent entities.

In practice, the legal form of a joint venture is likely to be determined by a number of factors including the nature and size of enterprise, the anticipated length of the venture, the identity and location of the venturers and the commercial and financial objectives of the participants.

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“friends”market

competitors

The parties always hope to save money and time by unifying their capacities

to achieve a common target and profit both

Negative aspects of the Joint Venture

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NEGOTIATION PHASE

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as the Joint Venture is a complex business, that involves high investment costs and generally a long period of time, there will be the need for substantial resources and other capacities

The Parties, in the determination of the content of the Joint Venture, have to pass through a negotiation phase, as follows:

THE PARTIES SHALL

DEAL WITH

CHOOSING A PARTNER

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Verify feasibility

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Then the parties have to verify the economic, technical and commercial feasibility of the JV.

These feasibility studies are based on assumptions about the market and

principally regard the financial burdens of constituting the JV and

positioning it on the market.

Three basic legal structures can be used for joint venture, these being:

PARTNERSHIP

A partnership is the relation which subsists between persons carrying on a

business in common with a view to a profit.

There are also certain “hybrid” vehicles or arrangements, such as a limited

liability partnership, with characteristics from more than one of the above

categories.

In any case people are getting used to distinguish 2 main different ways to set up

a Joint Venture

by contract by

establishing a company

Contractual Joint

Venture

Equity Joint Venture

Both forms (i.e. contractual and equity J.V.) require different solutions for

similar problems, such as:

attribution of investment costs, attribution of controlling powers, distribution of risks and profits,

dissolution of the JV.

Each form is more suitable for a certain business

target

CONTRACTUAL JOINT VENTURE

EQUITY JOINT VENTURE

The objectives determine the targets of the JV; what it was constituted for.

They show what the future should bring. The purpose of this Agreement is to

provide for the establishment, ownership and operation by the Parties of the New Company, which shall be the exclusive

vehicle of the Parties for the manufacturing, marketing and sale of

Commercial Products and Components in the Territory and the supplying of technical assistance and service in relation thereto

PURPOSES OF THE AGREEMENT

DISSOLUTION OF THE JOINT VENTURE

The JV can survive or it

can be dissolved

THE DISSOLUTION often results in its

liquidation in cases of hardship or deadlock, as also ruled out by

law in many jurisdictions.

IN CASE IT SURVISES: one party leaves the JVC, if it is profitable and the other party wants to continue work.

This is often made by granting put or call options to the remaining or leaving part

DEADLOCK

This reference stands for a standstill resulting from the opposition of two unrelenting forces or factions.

Deadlock can arise either in a 50/50 joint venture where the shareholders’ appointed directors take opposing views or where a

director appointed by a minority shareholder exercises the right to veto.

Similarly, deadlock can arise at shareholder level in relation to matters which require shareholder approval.

It is helpful to have a policy to revert to when an insoluble deadlock arises. The aim

of the policy should be to ensure that a sensible compromise is reached before the

deadlock occurs. When there is an insoluble deadlock, the following options are usually available:

Transfer of shares – a deadlock could serve as a trigger leading one party to transfer its

shares to a third party subject to pre-emption rights.

Voluntary liquidation – the assets of the venture will be sold and the venturers will

share the proceeds according to their equity interest

Furthermore, the JV agreement has to determine the price of the shares. In case of non-performance of one party the price might have a penalizing character.

A situation of dispute can arise in determining the party who has to leave the JV. Especially in cases of deadlock it is not easy to decide which party can stay.

Such a dispute is often solved in an auction procedure (also called Russian roulette) or by the decision that the minority party has to leave.

Furthermore, the JV agreement has to determine the price of the shares. In case of non-performance of one party the price might have a penalizing character.

A situation of dispute can arise in determining the party who has to leave the JV. Especially in cases of deadlock it is not easy to decide which party can stay.

Such a dispute is often solved in an auction procedure (also called Russian roulette) or by the decision that the minority party has to leave.

PUT OPTION

After the occurrence of the Completion and during the continuance of this Agreement, provided that a Termination Event occurs as hereinafter set forth in article ……..without prejudice to any further right to claim for damages, shall have the right to sell its New Company's Shares to NN and NN shall be bound to purchase said Shares, the transfer price being equal to the actual value of the Shares at that time owned by AA as assessed at that time in accordance with the price formula(s) herein referred to in Enclosure <...>.

Experience of Indian Companiesexcelling with Foreign Collaboration

Hero Honda Motors Ltd. is the world's largest manufacturer of two – wheelers, based in India.

The company was a joint venture between India's Hero Group and Honda Motor Company, Japan that began in 1984.

In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and the ‘World No.1’ two-wheeler company in terms of unit volume sales in a calendar year by a single company. Hero Honda has retained that coveted position till date.

Today, every second motorcycle sold in the country is a Hero Honda bike. Every 30 seconds, someone in India buys Hero Honda's top-selling motorcycle – Splendor.

Honda selected the Hero Group for a variety of reasons, which included:

Its engineering capability Relevance and salience of HERO brand Distribution network Commitment to Quality Tight focus on financial and raw material

process Low employee turnover Cordial Industrial Relations

The success of Hero-Honda venture was underpinned on five core strengths:

Relationship Management with all stakeholders Global Scale of operations Maximizing Customer Value Best-in-breed products and solutions Efficient Asset Management

“Hero Honda motors is the most successful Honda joint venture worldwide”

K. Suzuki, Senior Managing Director, Honda Motor, Japan

“Without Hero Honda management it is very difficult to achieve these results with Honda technology alone. It is with mutual cooperation that this is happening.”

Y Munekuni, Chairman Honda Motor

Present Scenario……..

The breakup of Hero Honda in December, 2010 after a collaboration spanning 25 years sent shockwaves across the entire Indian auto industry. Hero Honda had brought the concept of a two–wheeler in India’s collective consciousness.

The Honda group in the past had invested a lot into technology and R & D.

But now to adhere to latest Euro-V norms the up-

gradation means greater investment in technology and innovation while fact is that at the end of the day Honda and Hero Group are competitors.

And therefore Honda India is vary of sharing this technology with the Hero Group

The other important reason being Honda, which provided the technology to the company, was never too happy with its 26 per cent share of the dividends and royalty; it felt its contribution was way bigger.

The Future: The Hero group has announced that it will buy

Honda’s 26% stake. Analysts expect Hero group to lose market share,

currently around 40-50 percent, in the long term as Honda becomes more aggressive.

The name Hero – Honda can be used till 2015. Honda’s first move will be to launch two entry-

level bikes. It is building a new factory for two-wheelers in Andhra Pradesh besides beefing up distribution outlets.

INDIAN ECONOMY-AN OVERVIEW Why are American Companies in India? Excerpts from President Obama’s Speech Types of FOREIGN COLLABORATIONS Benefits to Indian Companies with Foreign

Collaboration Great Experiences

India is world's largest democracy & among the strongest emerging markets in all business field.

India is a liberalized economy with 1.5 billion people with 300 million in the middle class bracket, with well matured financial and securities market and time-tested judicial systems.

India has 5 major metropolitan urban centers growing @ 2.1 % p.a. India's urban population was 218 million as on 2002, and expected to be 500 million by 2012.

India is a WTO member committed to providing opportunity to the global market. The Indian Government is constantly undertaking reforms in every sector with Infrastructure Sector receiving Government's fullest attention.

India now permits foreign investment virtually in every sector of the economy. Majority foreign equity, even upto 100 per cent in some sectors, is encouraged and special investment incentives are provided.

Foreign investment up to 50, 51, 74 and 100 percent in priority industries/activities, is eligible for automatic approval by the RBI.

Automatic approval is also available for holding equity up to 51 per cent in trading companies engaged primarily in export activities.

In addition, 100 % Export Oriented Units (EOUs) and units set up in designated Export Processing Zones (EPZs) are eligible for automatic approval provided they satisfy stipulated criteria.

Foreign technology agreements are also eligible for automatic approvals within certain limits.

India has become a favorite destination for business houses world wide for the following reasons:

Large pool of educated low manpower cost in India. Disposable income is continuously increasing with the

economy growing at more than 8.5% p.a. Cities booming with world class integrated infrastructure. India has potential to attract more than US $ 100 billion

over next five years. Potential for creation of 1 Million direct and indirect jobs

each year.

Indian economy has a favorable business environment in India

The biggest reason is the high potential of Indian market and economy.

Along with China, India is the only fast-growing country that can make a difference to the ' bottom lines of major companies.

As per simple statistics the reason why American companies are coming down to India is that the gross domestic product of U.S. has come down by 0.8% in 2009 while India was growing at 6.6%

Besides, established big brands have already impregnated the U.S. and European markets. But, the Indian market still offers a lot of scope and space for those to grow.

India is also a large depository of skilled yet cheap labor. Hence, it becomes easy for the American companies to optimize their productions in India.

The American companies in India started their dream runs during 1990 when they reaped huge profits. The companies have seen double digit year-on-year growth in various sectors like Technology, Colas, Agriculture, Automobiles, Equipments, Finance and Banking.

According to the American Chamber of Commerce in India, their membership base has soared up from zero in 1992 to more than 300 till date.

The major success in terms of investment and growth came in technology sector. Many of the top IT companies in India are American. In fact, out of the top 20 IT companies operating in India, 9 are from the U.S.

“The United States sees Asia-and especially India-as a market of the future. We don’t simply welcome your rise-as a nation, and a people-we ardently support it. We want to invest in it. And I’m here because I believe that in our interconnected world, increased commerce between the United States and India can be and will be a win-win proposition for both nations.”

“Our relationship is also about more than the goods that we sell or the investments we make-it’s about the innovative partnerships we forge in the name of progress.”

“I’m confident that we can and will forge new economic partnerships and deliver the jobs and broad-based growth that our peoples so richly deserve. And I am absolutely certain that the relationship between the United States and India is going to be one of the defining partnerships of the 21st century.”

There are two types of foreign collaborations: a) Financial collaboration (foreign equity

participation) where foreign equity alone is involved.

b) Technical collaboration (technology transfer) involving licensing of technology by the foreign collaborator on due compensation.

There are two approving authorities 1) Reserve Bank of India, and 2) Department of Industrial Development in the

Ministry of Industry, Government of India.

Collaboration Increases Productivity Collaboration Increases Profitability Collaboration Foster Diversity Collaboration offers new products and services to

customers Collaboration results in better employee attraction and

retention strategies Collaboration helps in profitable alliances with other

businesses Collaboration assists in fighting competition Collaboration builds long lasting business relationships

There are four major benefits to collaboration

Reducing costs Enhancing quality Accelerating speed Creating business agility

Reducing costs Lower transaction cost Elimination of number of cycles Waste Reduction Quality Better decision making Reduction in Product defects Enhanced customer experience

Speed Reduction in cycle time Accelerated go-to-market timeline Rapid concept of commit to production

Business Agility Accelerated rate of innovation Flexible capacity deployment

Great Experiences

Maruti-Suzuki Bharti-Walmart Tata DoCoMo Toyota Kirloskar Motor Private Limited Agro Tech Foods Ltd (ATFL) Kwality Walls Ice Cream

According to maruti vision statement its goals include maintaining leadership in the Indian automobile industry, creating customer delight, increasing shareholder wealth and being “a pride of India.”

The company offers a wide range of cars across different segments. It offers 14 brands and over 150 variants.

In fiscal 2009-10 Maruti Suzuki became the only Indian company to manufacture and sell One Million cars in a year.

Excellent customer service Tops in customer satisfaction surveys Cost leadership Renewed focus on Style and aesthetics Straddling all segments with latest launch of

Kizashi.

Bharti and Walmart have a joint venture in Retail.Walmart manages the Supply chain while Bharti manages the

front end of the new stores. This win win deal has given Wal-Mart access to Bharti’s domestic communications network and an understanding of India customer, while Bharti got access to Wal-Mart’s cutting edge logistics prowess, management systems and overseas network.

What does this really mean for India and Indians?

World class stores with good customer service

Everyday Low Prices Quality assortment of merchandise More jobs & More related jobs across the

supply chain

The cash and carry store of Bharti Walmart would throw open its doors by the end of 2011.

The wholesale cash and carry operation is aimed at business to business customers and caters to retailers, caterers, businessmen, and the neighborhood kirana stores among other institutional customers.

The cash and carry stores are typically spread over a huge area and stock thousands of food and non food items. They keep both fresh and frozen food items and sell a wide range of personal and home care products, electronic gadgets, garments etc.

Over 90% of the goods will be sourced locally, helping keep down costs.

Bharti Wal-Mart, in association with the Punjab government, has also started a training centre offering full scholarship to bridge the shortage of skilled workers for cash-and-carry and organised retail formats.

TATA DoCoMo, usually referred to as DoCoMo is a Tata Teleservices Limited's (TTSL) cellular service provider on the GSM platform-arising out of the Tata Group's strategic joint venture with Japanese telecom giant NTT Docomo in November 2008.

Tata Teleservices received a pan-India license to operate GSM telecom services, under the brand "TATA DoCoMo". Tata Teleservices is the country's fourth largest operator in terms of wireless subscribers (including both CDMA and GSM), after Bharti Airtel, Reliance Communications and Vodafone.

Tata DOCOMO offers both prepaid and postpaid GSM cellular phone in 18 circles. It has become very popular with its one second pulse especially in semi-urban and rural areas. They are launching their service from the south of India to central, east and north.

Tata DOCOMO had about 32.82 million users at the end of June 2010.

On 5 November 2010, Tata DOCOMO became the first private sector telecom company to launch 3G services in India .

3G offers: Great & fast Internet Experience Richer Live Communications 24X7 Live Entertainment whenever and

wherever Mobile becomes a complete infotainment

zone that one can carry around in pocket. New Services like, Google Maps, GPS, live

multi-player gaming or interactive applications.

Toyota Kirloskar Motor Private Limited (1997) is joint venture between Toyota Motor Corporation and the Kirloskar Group, for the manufacture and sales of Toyota cars in India. It currently is the 8th largest car maker in India after Maruti Suzuki, Hyundai, Tata, Mahindra, Chevrolet, Ford, and Honda.

The company Toyota Kirloskar Motor Private Limited (TKMPL) according to its mission statement aims to play a major role in the development of the automotive industry and the creation of employment opportunities, not only through its dealer network, but also through ancillary industries with a business philosophy of "Putting Customer First”.

TKMPL sold 74,759 vehicles in India in the year 2010 registering a growth rate of 38% compared to 2009 sales.

Whether it is time-tested Innova or recently launched Etios Toyota’s USP has always been consistent performance and reliability and the combination of both will be hard to beat in the value and brand conscious Indian car market.

Agro Tech Foods Ltd (ATFL) is a public limited company affiliated to ConAgra Foods Inc. of USA, which is one of the world’s largest food companies engaged in the business of marketing food and food ingredients to consumers and institutional customers.

Sundrop Superlite was first innovative product for the Indian consumer. It was the first REFINED SUNFLOWER OIL in the market in 1988.

Sundrop Heart has been to-date the only Blended Oil with a proven claim of cholesterol reduction. In addition, it is the oil which has the right amount of Oryzanol to stake and prove this claim; also, it is the oil which has the best MUFA-PUFA ratio as recommended by the American Heart Association (AHA).

ACT II Instant Popcorn is a very innovative offering, enabling the consumer to make her own hot and fresh popcorn in just 3 minutes, whether or not she has a microwave oven at home. This innovation was triggered due to the understanding of the consumer infrastructure.

ACT II Microwave Popcorn, when launched, was the only microwave popcorn in the market. Till then, popcorn as a snack existed in the consumers’ minds only as an outdoor snack.

Healthy World Dried Green Peas is the first and only offering of Dehydrated, Long-Shelf-Life (24 months) Green Peas in the Indian market. This allows consumers to have their delicious green-peas laced food "Whenever they want“.

Snack Break is the only shelf-stable pudding, made healthy, nourishing and wholesome because of its contents.

Kwality Ice Cream was the pioneer in the Indian ice-cream manufacturing industry and in 1956 became the first company in the country to use imported technology for manufacturing ice-cream on a commercial scale. As the ice-cream industry exploded in India, in 1995 Kwality Group joined hands with Hindustan Lever Limited and then there was no looking back.

The Indian consumer market was introduced to “KWALITY WALLS” – the result of a collaboration between global brand Walls and the leading Indian ice-cream brand Kwality. Today, Kwality is not just a brand – it is the ice-cream associated with the Indian summer; it’s the first choice in ice-cream during the scorching Indian summers.

Kwality ice-creams are trusted not only for their rich, creamy flavours, but also for their trusted quality and nutritious food value. 

The Kwality Wall’s brand is one of the power brands of HUL and is one of the leading players in the Ice Cream Category in India. It’s fun-filled ice cream parlour concept is called Kwality Wall’s Swirl’s. 

Swirl’s ice cream parlour is an International concept that was launched in 1994 in Netherlands. It now has over 2000 Heartbrand Parlours across the globe. The concept was launched in India in 2004, and till date, there are over 85 Kwality Wall’s Swirl’s Parlours.

The core concept of Swirl’s is ‘Create your Own’ ice cream. Consumers can select their ingredients from an array of options and chose the flavour of their ice cream, which is then crafted for them ‘fresh’ and in Swirl’s ‘style’ as they wait for their delicious dessert.

Swirl’s Parlours attempt to capture the ‘on the move’ consumer trends and are located at high footfall areas such as malls and shopping centers and are classified under the impulse range of products. 

“Continue Collaborating, Continue Progressing, Growing and Succeeding”