Since the term “Joint Venture” is not specifically defined in the Companies Act, 2013 but the reference of the same can be drawn from the explanation to Section 2(6) of the Companies Act, 2013 which is reproduced below for reference.
“joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
The above definition stipulates the following conditions:
1. Joint Arrangement: The parties enter into an arrangement (i.e. executing an agreement in writing) which is beneficial for all the parties. The Agreement entered by the parties outlines the basis of the venture, role and responsibilities of each JV partner in regard to capital investments and other financial aspects, Equity participation by each JV partner, Share of profit and loss, positions held in Board and Management by each JV partner etc. Arrangement is usually entered when there is no dispute between parties and the parties have mutually decided to enter into the Joint Venture.
2. Joint Control: Either both the Companies will form a separate company and participate in the equity of the Joint Venture Company or the Foreign Company will invest in the existing Indian Company. The Parties to the JV may decide what percentage of control is to be exercised by both parties.
The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry has specified two routes for Foreign Direct investment in India i.e. Automatic Route and Approval/Government Route. There are sectors wherein 100% FDI under automatic route is not allowed and the Foreign investors cannot form wholly owned subsidiary in India. Foreign Companies are interested in setting up a Joint venture company as both the parties contribute equally in terms of their efforts, services and equity participation. It is not necessary that both the JV partners will be participating in equity equally. It can be in proportion as may be mutually decided by the parties to Joint Venture.
FDI Norms in relation to Joint Venture
In all sectors where 100% foreign investment is permitted under automatic route, the Foreign Companies/ Body Corporate incorporated outside India can incorporate/ register Joint Venture company in India without any approval. In case of Defence Sector, the Joint Venture Company can be incorporated and foreign investment permitted under automatic route is 49% of the paid up capital and more than 49% of the paid up capital, the same is permitted under Approval route. The Joint venture company in Insurance sector may apply for foreign investment in Private Banking Sector with RBI in consultation with the IRDAI in order to ensure that above mentioned limit of investment applicable for the insurance sector is not breached.