Embarking Joint Ventures – an Indian perspective CS Makarand Lele Chairman – WIRC Partner – MRM Associates CS Makarand Lele Chairman – WIRC Partner – MRM Associates

What is joint venture Definition of JV – FDI regulations Two or more people coming together For common cause Pooling of resources Combination of strength “Venture “– risk undertaking, commercial speculation, exposure to risk Human element Unlocking values Creation of assets Definition of JV – FDI regulations Two or more people coming together For common cause Pooling of resources Combination of strength “Venture “– risk undertaking, commercial speculation, exposure to risk Human element Unlocking values Creation of assets

Ingredient of JV Business as objective Commercial terms Technology Sharing of benefits & risks Responsibilities sharing Relationship between parties Entry and Exit options Disputes Settlements Business as objective Commercial terms Technology Sharing of benefits & risks Responsibilities sharing Relationship between parties Entry and Exit options Disputes Settlements

Advantage to foreign partner Mitigation of risk in open venture Use of local partner’s infrastructure Plug & play Understanding local business environment/ market/ legal structure/ compliances Goodwill & contacts of local partner Raw material source Skilled manpower Limiting competition Regulatory requirements to have local partner Investment – tax benefits in their country Mitigation of risk in open venture Use of local partner’s infrastructure Plug & play Understanding local business environment/ market/ legal structure/ compliances Goodwill & contacts of local partner Raw material source Skilled manpower Limiting competition Regulatory requirements to have local partner Investment – tax benefits in their country

Expectations of Indian Partner Funds Technology Skills Trade mark, brands, IPR Export markets Value addition in Indian market – Goodwill Funds Technology Skills Trade mark, brands, IPR Export markets Value addition in Indian market – Goodwill

Expectations of Foreign Partner Entry to Indian market Availability of Skilled resources Low cost of production Outsourcing hub Transparency Compliances Reasonability Entry to Indian market Availability of Skilled resources Low cost of production Outsourcing hub Transparency Compliances Reasonability

Types of Ventures In Existing Entities – Acquisition of stake – Change of ownership of holding company – Technology collaboration In New Entity – Acquiring demerged entity – New JV company equity participation – Loan funding – Technology collaboration – Tendering/ quoting for BOT/ PPP/ Greenfield projects - SPV In Existing Entities – Acquisition of stake – Change of ownership of holding company – Technology collaboration In New Entity – Acquiring demerged entity – New JV company equity participation – Loan funding – Technology collaboration – Tendering/ quoting for BOT/ PPP/ Greenfield projects - SPV

Applicable Laws Industrial Policy & FDI regulations FEMA Company law SEBI laws & Listing agreement Contract Act: Section 27 agreement to restrain trade or profession is void. Non compete Stamp Act: duty payable as per state act IPR laws Competition law : Big JV needs to check this for combination & comply with section 6 of the act i.e. prior intimation & approvals Industrial Policy & FDI regulations FEMA Company law SEBI laws & Listing agreement Contract Act: Section 27 agreement to restrain trade or profession is void. Non compete Stamp Act: duty payable as per state act IPR laws Competition law : Big JV needs to check this for combination & comply with section 6 of the act i.e. prior intimation & approvals

Steps to form a JV Market Analysis & viability study SW analysis Negotiations MOU – defining principal terms & conditions Due diligence & representations Legal documentation Approvals & permissions Launching Market Analysis & viability study SW analysis Negotiations MOU – defining principal terms & conditions Due diligence & representations Legal documentation Approvals & permissions Launching

Due Diligence Financial & Legal covering : Company background & history Status & compliances for group companies Finance, tax, accounting Borrowings, loans, investments Manufacturing, marketing, distribution Contracts, licenses, approvals Corporate compliances Properties Litigations & disputes Pollution & potential threats Employees & HR Ownership IPR rights Financial & Legal covering : Company background & history Status & compliances for group companies Finance, tax, accounting Borrowings, loans, investments Manufacturing, marketing, distribution Contracts, licenses, approvals Corporate compliances Properties Litigations & disputes Pollution & potential threats Employees & HR Ownership IPR rights

Important points for JV Form of Organization Permissions & approvals Financial projections Capital requirements Infrastructure set up Human resources Technical analysis Costing for products/ services Analysis of competition & Market Environmental impacts CSR & other social aspects Form of Organization Permissions & approvals Financial projections Capital requirements Infrastructure set up Human resources Technical analysis Costing for products/ services Analysis of competition & Market Environmental impacts CSR & other social aspects

Options available to foreign JV partner Equity participation Technology Transfer: Royalty/ Know how fees Control the composition of Board & Management Debt Funding Equity participation Technology Transfer: Royalty/ Know how fees Control the composition of Board & Management Debt Funding

Moving ahead…. Plan – Recognize war areas – Understand strength & weakness – Be realistic about demands – Team has only one leader Negotiate – Listen & Understand your partner – Don’t argue – Don’t hurt the ego of other professional – Affirmative & polite approach – Don’t loose the temper – Keep difficult issues pending for next meeting Drafting – What is a good draft? – Document should create a confidence – Clear, clean & simple – Avoid vague terms – Control on versions Plan – Recognize war areas – Understand strength & weakness – Be realistic about demands – Team has only one leader Negotiate – Listen & Understand your partner – Don’t argue – Don’t hurt the ego of other professional – Affirmative & polite approach – Don’t loose the temper – Keep difficult issues pending for next meeting Drafting – What is a good draft? – Document should create a confidence – Clear, clean & simple – Avoid vague terms – Control on versions

“Good Document can never be a substitute to a bad partner `` “CS is the master of documentation`` “Good Document can never be a substitute to a bad partner `` “CS is the master of documentation``

Structuring JV Agreement How much share each party will have? How is the composition of the Board? Who and how the JV will be operated & managed Rights relating to shares Protection of minority interest Valuation of IPR Pay out policy – Dividend/ Buy back Representation & warranties Compensation policy for senior management team Non compete Compliances Taxation Penalties Arbitration & settlement of disputes Exit Route Winding up/ Termination/ Closure

Important terms of JV agreement - 1 Equity participation – 11%, 26%, 51%, 76% Board structure – Equal numbers or % based representation? Who will be a chairman? casting vote? Management – right to appoint MD & other KMP, Committees, powers & duties Contribution by partners – financial, bank guarantees technical, R&D support, manufacturing, marketing, day to day management

Important terms of JV agreement - 2 Minority Protection – Affirmative vote, right to buy out, proper exit route Veto/ Affirmative Vote : items requiring Board approvals, items requiring shareholders approval Quorum – different from requirement of affirmative vote, quorum at adjourned meeting, practical approach, consent by circular resolutions, video conferencing meetings Restriction on Transfer of Shares – Transfer includes all actions relating to shares & voting rights, lock in period, general restrictions, inter se transfer, affiliate, pledge & hypothecation in ordinary course of business Special Rights relating to shares –Tag along, Drag along, Right of first refusal, pre-emption right. Minority Protection – Affirmative vote, right to buy out, proper exit route Veto/ Affirmative Vote : items requiring Board approvals, items requiring shareholders approval Quorum – different from requirement of affirmative vote, quorum at adjourned meeting, practical approach, consent by circular resolutions, video conferencing meetings Restriction on Transfer of Shares – Transfer includes all actions relating to shares & voting rights, lock in period, general restrictions, inter se transfer, affiliate, pledge & hypothecation in ordinary course of business Special Rights relating to shares –Tag along, Drag along, Right of first refusal, pre-emption right.

Important terms of JV agreement-3 Dead lock resolution – one party should have clear right to decide, third party reconciliation, out right purchase, distribution of assets by demerger, Put call option, Seal Bid method Arbitration – dispute, appointment of arbitrators, jurisdiction, award, decree, enforcement Force Majeure – natural calamities beyond the control of the parties Termination – sun set clause, events, procedure, right of the parties after terminations, compensation Exit Route – no ambiguity, fair for each party

Important terms of JV agreement- 4 General Terms & conditions Jurisdiction Severability Representation & Warranties by the parties Conditions precedent to closing Closing events & procedures Deed of adherence exchange of documents Copies of the agreement Annexure General Terms & conditions Jurisdiction Severability Representation & Warranties by the parties Conditions precedent to closing Closing events & procedures Deed of adherence exchange of documents Copies of the agreement Annexure

Articles of Association Copy JV terms to articles Validity of obligations on parties Conflict between articles & JV agreement Enforcement Information in public domain BINDING NATURE OF SHAREHOLDERS’ AGREEMENT The Company shall abide by the Shareholders’ agreement made between the Company and its shareholders and carry the same into effect so far as it concerns the company. The Articles of Association of the Company shall be amended in conformity with the Shareholders’ Agreement. In the event of inconsistency between the provisions of Shareholders’ Agreement and the Articles of Association, the provisions of the Shareholders’ Agreement shall, to the extent permitted by law, prevail. The members shall exercise, their voting rights attached to their Shares to alter the Memorandum of Association and the Articles of Association in a manner consistent with Shareholders’ Agreement.

Registration & Stamping Payment of stamp duty Execution outside India & copies brought into the state Affixing of Stamps Registration under State Registration Act Payment of cess Payment of stamp duty Execution outside India & copies brought into the state Affixing of Stamps Registration under State Registration Act Payment of cess

Governing FDI/ FEMA regulations Investment by foreign incorporated entity – Automatic/ Approval route Sectoral caps Capital Account transactions External Commercial Borrowing regulations Payment of royalty & technical know how fees Acquisition of property in India Current Account transactions Establishment of place of business in India – LO/ BO Pricing guidelines for issue of securities Press Note 1 of 2005 – conditions removed w.e.f KYC norms & guidelines for money laundering Investment by foreign incorporated entity – Automatic/ Approval route Sectoral caps Capital Account transactions External Commercial Borrowing regulations Payment of royalty & technical know how fees Acquisition of property in India Current Account transactions Establishment of place of business in India – LO/ BO Pricing guidelines for issue of securities Press Note 1 of 2005 – conditions removed w.e.f KYC norms & guidelines for money laundering

Important aspects of FDI regulations The term Capital is defined in FDI policy and includes fully, compulsory & mandatory Convertible Preference Shares and Debentures (FCCB), Any other instrument, partly paid share and warrants is not capital & can be issued to resident outside India only after approval through the Government route. Payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/ brand name caps were removed and were put under automatic route vide RBI circular dated 13/05/2010, with effect from

Important aspects of FDI regulations RBI revised the method of valuation of shares for issue & transfer effective from May 2010 In case of Listed Companies the price should be worked out in accordance with the SEBI guidelines, as applicable. For unlisted Companies valuation to be done by SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method. The new method is expected to yield a higher valuation as it would take into account the potential of the business as opposed to the accounting approach of the earlier methods. RBI revised the method of valuation of shares for issue & transfer effective from May 2010 In case of Listed Companies the price should be worked out in accordance with the SEBI guidelines, as applicable. For unlisted Companies valuation to be done by SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method. The new method is expected to yield a higher valuation as it would take into account the potential of the business as opposed to the accounting approach of the earlier methods.

Break _____out – Golden hand shake – goals achieved, efflux of time – Deadlock – Disputes – Boredom – Failure in achieving objectives – Changes in regulations – Incapacity of parties - insolvency/ bankruptcy/ closure – Impossibility to achieve objectives Consequence Achieving termination Simplified separation Role of CS

Few issues in JV Post implementation issues Enforceability of Transfer Restrictions Non compete Provisions of the Competition act

to conclude …… “I know what I have given you. I do not know what you have received” - Antonio Porschia “I know what I have given you. I do not know what you have received” - Antonio Porschia any questions please ……

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