Looking At Joint Ventures
In these days when our economy has been freed from the rigours of regulatory framework and all the multinational and transnational corporate entities are setting up shops in our country, it is worth taking a hard look at joint venture as one the business relationship which is fairly common and popular in different parts of the world. The joint ventures utilize a separate business entity to conduct a specific line of business activity. This device allows the participants to limit their respective liabilities in a venture and make appropriate use of the incentives and concessions offered under any local foreign investment programme.
Thus in essence, a joint venture consists of an agreement between two or more parties to forge a combination in a way that their resources of the respective parties are allocated to an agreed formula to manufacture, produce or sell a product or to render a service and share the profits in mutually agreed formula.
The rationale for joint ventures varies from case to case according to the strategic business objectives and capacity of the respective partners as well as external factors. A joint venture mechanism can aim at acquiring raw materials, production facilities, technology or know-how. Most often, however, these are the means of market expansion. Market access may depend on linking up with established distribution networks or operating under a brand name already well-recognised in the market. The risk of operating in unfamiliar territories could be fraught with business risks and the management of these risks could be a lot easier in a joint venture with a local partner who is familiar local scenario, laws and social and business culture. Foreign investment policies of many countries call for a minimum level of local participation. In some of the jurisdictions, foreign investors are required to allocate a certain quota equity shares of the joint venture to the host government.
There are basically two kinds of joint ventures viz., Equity Joint Venture and Contractual Joint Venture.
Equity Joint Venture
It is an arrangement under which an independent legal entity is formed in line with the agreement entered into by the respective parties and they commit funds or other resources as their contribution to the assets or other capital of the organization. Normally it is a corporate body and it retains its distinct character in relation to the persons who are behind its formation. And it becomes the owner of the entity. The broad agreement that is reached among the parties lays down the objectives, function, operation of the entity as well as the proportion of the capital to be contributed by the respective parties and the share of each party in the profits or losses of the venture.
Contractual Joint Venture
When the parties do not contemplate forming a separate entity, this mode of joint venture may be considered. It is most suitable in a situation where the project aims at a focused objective and the life of the project is of a limited duration or there might be the existence of laws in the host country coming in the way of formation of a separate entity.
The relationship in a contractual joint venture is guided by a document known as the contract or agreement which generally reflect all negotiations that the parties carry on before concluding the agreement. The licensing agreement, know-how agreement, technical services or technical assistance agreement, franchise agreement all come within the purview of this kind joint venture.
It is very important to keep in mind while executing a joint venture agreement that the contracts must entered into and executed within the four corners of the laws of the host country and that of other country to which parties belong especially tax laws, laws relating to agency or partnership and other economic legislations.
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