Foreign Trade Policy

Management
Assignment
TOPIC: JOINT VENTURES

Submitted By:

N. Nargis Fathima(Roll No:19)

Prajesh Upadhyay(Roll No:23)

Submitted to:
MBA IB (Sem 1)
Dr. S.K. Chadha

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What is a Joint Venture?
A Joint Venture (JV) is a cooperative enterprise entered into by two or more business
entities for the purpose of a specific project or other business activity. The reason for a
joint venture is usually some specific project.

Joint ventures can be informal (a handshake) or formal, and they can be short term or
long term. Often the joint venture creates a separate business entity, to which the
owners contribute assets, have equity, and agree on how this entity may be managed.
The new entity may be a corporation, limited liability company, or partnership.

In other cases, the individual entities retain their individuality and they operate under a
joint venture agreement. In any case, the parties in the JV share in the management,
profits, and losses, according to a joint venture agreement (contract).

Joint ventures are often entered into for a single purpose - a production or research
activity. But they may also be formed for a continuing purpose.

Joint ventures are, basically:

 Separate companies with a shared interest and goals

 Both companies have some proprietary (ownership) basis for in this shared
interest. For example, two companies with online patents for accounting apps
might form a joint venture.
 They agree to share income and expenses.

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Both companies in a joint venture maintain their separate identities for all purposes
except those of the joint venture.

Why Form a Joint Venture?

General Reasons to form a JV

 To combine resources. A bigger entity may have more clout in an industry or

more resources to ensure the success of a venture.
 To combine expertise. In technical businesses, one company might have expertise
in one part of a venture while the second company might have expertise in
another part. For example, Company A might be good at creating software, while
Company B has experience creating the hardware that's needed for a venture.
 To save money. Two companies might consider a joint venture to save money on
advertising, maybe at a trade show or in a trade publication.

Internal Reasons to Form a JV

 Spreading Costs – You and a JV partner can share costs associated with marketing,
product development, and other expenses, reducing your financial burden.

 Opening Access to Financial Resources – Together you and a JV partner might have
better credit or more assets to access bigger resources for loans and grants than you
could obtain on your own.

 Connection to Technological Resources – You might want access to technological

resources you couldn’t afford on your own, or vice versa. Sharing innovative and

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 proprietary technology can improve products, as well as your own understanding of
technological processes.

 Improving Access to New Markets – You and a JV partner can combine customer
contacts and together even form a joint product that accesses new markets.

 Help Economies of Scale – Together you and a JV partner can develop products or
services that reduce total overall production expenses. Bring your product to market
cheaper where the customer can enjoy the cost savings.

External Reasons to Form a JV

 Develop Stronger Innovative Product – Together you and a JV partner may be able to
share ideas to develop a product that is more competitive in your industry.

 Improve Speed to Market – With shared access to financial, technological, and

distribution resources, you and a JV partner can get your joint product to market
faster and more efficiently.

 Strategic Move Against Competition – A JV may be able to better compete against

another industry leader through the combination of markets, technology, and
innovation.

Strategic Reasons

 Synergistic Reasons – You may find a JV partner with whom you can create synergy,
which produces a greater result together than doing it on your own.

 Share and Improve Technology and Skills – Two innovative companies can share
technology to improve upon each other’s ideas and skills.

 Diversification – There could be many diversification reasons: access to diverse

markets, development of diverse products, diversify the innovative working force,
etc.

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Examples of Joint Ventures

Hindustan Aeronautics Ltd

Hindustan Aeronautics Ltd is India’s aerospace and defense company with headquarters
in Bangalore, Karnataka.

HAL is one of the ‘Navratna’ companies of India, meaning, it is one of the drivers of this
country’s economy while being of vital service to the nation.

HAL has the highest number of JVs in India. They include JVs for making fixed wing
fighter and civilian aircraft, aircraft engines, helicopters, defence systems and
aerostructures and myriad other aerospace and aeronautics related products.

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HAL has JVs with Rosoboronexport, Aviazapchast and Mikoyan-Gurevich (MiG) of
Russia, British Aerospace and Rolls Royce Holdings Ltd of UK, Elbit Systems, Israel,
Merlin-Hawk and Edgewood Ventures of the USA, Snecma of France,

Canadian Aerospace as well as Indian firms Tata Technologies, Infotech Enterprises,

Samtel Group and ICICI Bank, among others. These projects are worth billions of US
Dollars and serve defense needs of India and partner countries.

Vistara

A great example of Indian Joint Venture with a foreign company is the airline, Vistara, a
Full-Service Carrier.

Vistara is the brand name of Tata SIA Airlines Ltd, a JV between India’s corporate giant
Tata Sons and Singapore Airlines (SIA).

The airline Vistara commenced operations on January 9, 2015, with its maiden flight
between New Delhi and Mumbai. By end of January 2018, Vistara operated some 25
destinations in India.

It also holds the unique distinction of being the first airline to operate a domestic flight
out of Terminal-2 from Mumbai’s Chhatrapati Shivaji International Airport.

Tata Sons holds 51 percent stake while SIA controls the remaining 49 percent in the
airline. Vistara has carried some three million passengers since its launch.

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The two stakeholders are pumping in billions of US Dollars into Vistara to expand
domestic operations, foray into international markets and expand its fleet of narrow-
body and wide-body aircraft.

Vistara is one the most successful joint ventures company in India and is estimated to
hold about four to five percent share of India’s domestic aviation market.

BrahMos Aerospace

BrahMos Aerospace made history in 2001 when it tested the world’s fastest cruise
missile capable of flying at supersonic speeds of Mach-2.8 to Mach-3.

The name BrahMos is derived from names of Brahmaputra river of India and Russia’s
capital, Moscow.

India’s entry into supersonic missile club was led by BrahMos Aerospace, a JV between
India’s Defense Research and Development Organization (DRDO) and Russia’s NOP
Mashinostoryenia.

BrahMos Aerospace currently makes surface-to-surface, air and sea-launched variants

of BrahMos missiles. The JV is currently developing on creating faster versions of
BrahMos versions that have longer strike range.

The only missile worldwide faster than BrahMos is Russia’s Zircon-5, billed as the
world’s fastest and capable of flying over speed of Mach-5. BrahMos can carry
conventional and nuclear warheads.

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Dhirubhai Ambani Aerospace Park

Dhirubhai Ambani Aerospace Park is a joint venture between India’s corporate giant,
Reliance Group and global defense company from France, Dassault Aviation.

The park is located at Multi-Modal International Hub Airport, Nagpur (MIHAN).

Agreement for DAAP was signed between the Reliance Group and Dassault Aviation in
October 2018.

Under this JV, Reliance and Dassault will design and manufacture an array of defense
equipment required to meet India’s growing demand for indigenous military hardware.

Additionally, DAAP will also serve as a hub for exporting military equipment to friendly
countries under the Make in India and Skills India initiatives launched by the
government of Prime Minister Narendra Modi.

AirAsia India

AirAsia India is a JV between Malaysia-based AirAsia Berhad and Tata Sons. The
Malaysian airline company holds 51 percent stake in AirAsia India while Tata Sons holds
the minority, 49 percent.

The airline ranks as the fourth largest Low Cost Carrier (LCC) in India and has
headquarters in Bangalore. AirAsia India holds nearly four percent of India’s LCC air
travel market share.

The airline commenced operations on June 12, 2014 from Bangalore to

Dabolim International Airport, Goa. AirAsia India is also the second JV in the airline
industry of Tata Sons.
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Forming a Joint Venture

Entering into a JV in India

Choosing a good home partner is the most important tool to the success of any joint
venture.

Once an associate is selected, normally a memorandum of understanding (MoU) or a

letter of intent is signed by the parties – stressing the foundation of the future joint
venture agreement.

An MoU and a joint venture agreement must be marked after consulting a chartered
accountant firm well versed in the Foreign Exchange Management Act; Indian Income-
tax Act, 1961; the Companies Act, 2013; international laws and applicable Indian rules,
regulations, and procedures.

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Terms and conditions should be properly assessed before signing the contract.
Negotiations need an understanding of the cultural and legal background of all the
involved parties. The JV union should obtain all the required governmental approvals
and licenses within a specified period.

Foreign companies no longer require a no-objection certificate (NOC) from the Indian
associate for investing in the sector where the joint venture operates.

Overseas firms in existing joint ventures can function independently in the same
business segment. Previously, they needed prior approval from their Indian partners.

Companies in India are grouped into two categories – companies owned or controlled
by foreign investors and companies owned and controlled by Indian residents.

Before signing a joint venture contract, the below points must be properly assessed:

 Applicable law;
 Shareholding pattern;
 Composition of board of directors;
 Management committee;
 Frequency of board meetings and its venue;
 General meeting and its venue;
 Composition of quorum for important decision at board meeting;
 Transfer of shares;
 Dividend policy;
 Employment of funds in cash or kind;
 Change of control;
 Restriction/prohibition on assignment;
 Non-compete parameters;
 Confidentiality;
 Indemnity;
 Break of deadlock;
 Jurisdiction for resolution of dispute; and,
 Termination criteria and notice.

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How a Joint Venture Pays Taxes

When a joint venture is formed, the most common structure is to set up a separate
business entity. Then the parties each own a specific percentage of the entity. If the
joint venture is a corporation, for example, and two businesses have equal shares in the
business, they structure the company so each partner entity has an equal number of
shares of company stock and equal management and board of directors members.

The joint venture isn't recognized as a taxing entity by the IRS. So the business form that
the joint venture company takes determines how taxes are paid.

If the joint venture is a separate business entity, it pays income taxes and all other taxes
like that business form. For example, if the new joint venture company is an LLC, it pays
taxes as an LLC.

Because the two parties have decided on how to split profits and losses, they will use
that split to decide how each party receives profits, handles losses, and contributes to
paying any taxes that are due.

If the joint venture is simply a contractual relationship with an agreement between two
independent companies, the terms of the agreement will determine how the joint
venture is taxed and how the tax is apportioned between the two entities.

What a Joint Venture is NOT

A joint venture may have some similarity to a partnership, but it's not. A partnership is a
single business entity formed by two or more people. A joint venture joins several
different business entities (each of which may be any type of legal entity) into a new
entity, which may or may not be a partnership. Partnership income taxes are paid by the
owners individually.

Don't confuse a joint venture with a 'qualified joint venture, 'A qualified joint venture is
a

You may have heard the term "consortium" used to explain a joint venture. A
consortium is a looser arrangement between several different and distinct business
entities. A consortium doesn't create a new entity. In the travel industry, for example, a
consortium of travel agencies allow memberships with benefits. The

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consortium negotiates on behalf of its members for special rates from hotels, resorts,
and cruise lines.

The Benefits of Joint Ventures

1) New insights and expertise
Starting a joint venture provides the opportunity to gain new insights and expertise.
Think about it; the market is now way easier for you to understand given the short-term
partnership that you have forged.

2) Better resources
Forming a joint venture will give you access to better resources, such as specialized staff
and technology. All the equipment and capital that you needed for your project can now
be used.

3) It is only temporary
A joint venture is only a temporary arrangement between your company and another.
By definition, you won’t be committing to it long term.

4) Both parties share the risks and costs

In case the joint-group project fails, you are not alone when bearing the costs of its
failure. Because you two had volunteered to share the expenses, you both will also
support the losses. When forming a joint venture you will share the costs and
responsibilities.

5) Joint ventures can be flexible

According to assignment writing service writers, an example of this is that a joint
venture can have a limited lifespan and can only cover only a fraction of what you do,
thereby limiting your commitment as well as your business’s exposure.

6) There are ways to exit a joint venture

In the timeline of divestiture and consolidation, a joint venture offers a creative way for
companies to escape non-core businesses.

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7) You will know what’s yours and will be able to sell it
Gradually, firms can separate their business from the rest of the organization, and then
later, sell it to the other parent company. Approximately 80% of all joint ventures end in
a sale, from one partner to the other.

8) You are more likely to succeed

Your chances of success will become higher as you are already riding with a renowned
brand. As a result of this, your credibility will also vastly improve.

9) You will build relationships and networks

Even though your partnership is only for a specific goal, this move will enable you to
create long-lasting business relationships.

10) Your potential will virtually be limitless

Despite having little to no money at your disposal, you can create more venture deals in
the process. You will create momentum and have partners with you. Take advantage of
it!

11) You get to save money by sharing advertising and marketing costs
And that works for a lot of other types of costs. Starting a joint venture is a great way to
save money and/or split costs.

12) International joint venture eradicates the risk of discrimination.

International joint ventures are very common nowadays. This is a great opportunity to
cooperate with people from different countries and combine our strengths!

The Disadvantages of Joint Ventures

1) Vague objectives
The objectives of a joint venture are not 100 percent clear and rarely communicated
clearly to all people involved.

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2) Flexibility can be restricted
There are times when flexibility is restricted in a joint venture. When that happens,
participants have to focus on the joint venture, and their individual businesses suffer in
the process.

3) There is no such thing as an equal involvement.

An equal pay may be possible, but it is extremely unlikely for all the companies working
together to share the same involvement and responsibilities.

For example, Company A is working on the production process, whereas Company B is

responsible for the production, and Company C is in charge of planning and
implementing market strategies. Since Company A is not directly involved in the
production and promotion process, the pressure is on the latter companies. It will also
affect individual businesses.

4) Great imbalance
Because different companies are working together, there is a great imbalance of
expertise, assets, and investment. This can have a negative impact on the effectiveness
of the joint venture.

5) Clash of cultures
A clash of cultures and management styles may result in poor co-operation and
integration. People with different beliefs, tastes, and preferences can get in the way big
time if left unchecked.

6) Limited outside opportunities

You need to understand what you are getting into as a joint venture could restrict the
activities of your whole business.It is very common for joint venture contracts to restrict
outside activities of participant companies while working on a venture project. You need
to make sure you understand what you are getting into if you don’t want to negatively
impact your entire business.

7) A lot of research and planning are necessary

The success of a joint venture highly depends on thorough research and analysis of the
objectives.

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8) It may be hard for you to exit the partnership as there is a contract involved
Once again, even though a joint venture is temporary, it is crucial that you know what
you are getting into if you don’t want to be locked in a partnership.

9) You might be tempted to leave the joint venture

You will get enough leadership and support in the early stages of a joint venture and
might be tempted to leave.

10) Lack of clear communication

As a joint venture involves different companies from different horizons with different
goals, there is often a severe lack of communication between partners.

11) Unreliable partners

Because of the separate nature of a joint venture, it is possible that the partners do not
devote 100% of their attention to the project and become unreliable.

12) Unclear and unrealistic objectives

Unrealistic and unclear objectives may be set up. To avoid this, it is necessary that you
and your partners do a lot of research before starting your joint venture.

References

 "JOINT VENTURES IN INDIA" (PDF). Majmudarindia.com. Retrieved December 17, 2017.

 "The Pros and Cons of Joint Ventures". IFLR. Retrieved January 1, 2012.
 http://www.iloconsulting.in/knowledge-center/benefits-joint-venture-foreign-parties-india
 A short course in international joint venture by Alan Gutterman
 http://madaan.com/jointventures.html
 http://www.xcdacc.cn/en/show_info.asp?InfoID=91

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