Joint Venture Company

Introduction

A JV may be defined as any arrangement whereby two or more parties co-operate in order to run a
business or to achieve a commercial objective. This co-operation may take various forms, such as
equity-based or contractual JVs. It may be on a long-term basis involving the running of a business in
perpetuity or on a limited basis involving the realization of a particular project. It may involve an
entirely new business, or an existing business that is expected to significantly benefit from the
introduction of the new participant. A JV is, therefore, a highly flexible concept. The nature of any
particular JV will depend to a great extent on its own underlying facts and characteristics and on the
resources and wishes of the involved parties. Overall, a JV may be summarized as a symbiotic
business alliance between two or more companies whereby the complimentary resources of the
partners are mutually shared and put to use. It is an effective business strategy for enhancing
marketing, positioning and client acquisition which has stood the test of time. The alliance can be a
formal contractual agreement or an informal understanding between the parties

Joint Ventures: A thorough understanding

The term, ‘joint venture’ has been defined under explanation clause of section 2(6) of the
Companies Act, 2013 which states, “the expression "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 term ‘joint venture’ in ordinary parlance, means a business enterprise in which two or more
companies enter into a temporary partnership. A joint venture is a mere partnership under which two
or more parties’ pool together to carry on a common activity. This means that a company in whose
equity shares two or more companies have an investment and the relationship between the investors is
governed by a formal agreement usually called as a shareholders’ agreement.
Now, apart from the general meaning, the meaning of joint venture as elaborated under the
Mandatory Accounting Standards, Judicial Pronouncements and Black’s law dictionary are given
below—

Reference made to the Accounting Standards as applicable to the Company in terms of the
General Circular

The term ‘Joint Venture’ is defined under the Mandatory Accounting Standard- 27 (AS-27) issued by
Institute of Chartered Accountants of India on the basis of which the reporting of joint venture assets,
liabilities, income and expenses in the financial statements of venturers and investors, regardless of
the structures or forms under which the joint venture activities take place shall be made.

The terms ‘joint venture’, ‘joint control’, ‘control’, ‘venturer’ and ‘investor’ as defined under AS-
27are reproduced hereinbelow for ease of reference—

“3.1 A joint venture is a contractual arrangement whereby two or more parties undertake an
economic activity, which is subject to joint control.

3.2 Joint control is the contractually agreed sharing of control over an economic activity.

3.3 Control is the power to govern the financial and operating policies of an economic activity so
as to obtain benefits from it.

3.4 A venturer is a party to a joint venture and has joint control over that joint venture.

3.5 An investor in a joint venture is a party to a joint venture and does not have joint control over
that joint venture.”

The joint ventures may take different forms and AS-27 identifies three broad types as follows-

a. Jointly controlled operations

The following characteristics are common to all the joint ventures:

(b) the contractual arrangement establishes joint control.

The contractual arrangement as illuminated under AS-27 shall be construed to establish joint
control over the joint venture and such an arrangement ensures that no single venturer is in a position
to unilaterally control the activity. The arrangement identifies those decisions in areas essential to the
goals of the joint venture, which require the consent of all the venturers, and those decisions, which
may require the consent of a specified majority of the venturers. The existence of a contractual
arrangement may be evidenced in any manner, either by a contract or by minutes of the discussions
between the venturers.

Alongside the contractual arrangement, joint control shall also existing order to be covered under the
ambit of a joint venture and such joint control is a contractually agreed sharing of control over an
economic activity and such control shall mean the power to govern financial and operating policies
of such economic activity to obtain benefits from it.

Further, AS- 27 also differentiates between a venturer and an investor such that a venture is a party to
a joint venture as explained above and does have a joint control unlike, an investor is a party to the
joint venture but does not have joint control. The emphasis shall be made on the criteria of joint
control of the parties, in order to determine whether the parties to a joint venture are jointly
controlling such venture.

In addition to the narrative under AS- 27, reference shall also be made to the relevant judicial
pronouncements for the definition of joint venture and the existence of joint control.

Reference to the Judicial Pronouncements

The term joint venture as explained by the Hon’bleSupreme Court in the case of New Horizons
Limited and Anr. vs. Union of India (UOI) and Ors.[(1995) 1 SCC 478] and as reiterated in the
case of Fakir Chand Gulati v. Uppal Agencies Pvt. Ltd. [(2008) 10 SCC 345] is as follows—

“27. The expression "joint venture" is more frequently used in the United States. It connotes a
legal entity in the nature of a partnership engaged in the joint undertaking of a particular
transaction for mutual profit or an association of persons or companies jointly undertaking
some commercial enterprise wherein all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct and govern the
policy in connection therewith, and duty, which may be altered by agreement, to share both in
profit and losses.[Black's Law Dictionary; Sixth Edition, p. 839].According to Words and
Phrases, Permanent Edition, a joint venture is an association of two or more persons to carry
out a single business enterprise for profit [P.117, Vol. 23]. A joint venture can take the form of a
corporation wherein two or more persons or companies may join together. A joint venture
corporation has been defined as a corporation which has joined with other individuals or
corporations within the corporate framework in some specific undertaking commonly found in
oil, chemicals, electronic, atomic fields. [Black's Law Directory; Sixth Edition, p. 342] joint
venture companies are now being increasingly formed in relation to projects requiring inflow
of foreign capital or technical expertise in the fast developing countries in East Asia, viz.,
Japan, South Korea, Taiwan, China, etc. [See: Jacques Buhart: Joint Ventures in East Asia -
Legal Issues (1991)]. There has been similar growth of joint ventures in our country wherein
foreign companies join with Indian counter parts and contribute towards capital and technical
know-how for the success of the venture. The High Court has taken note of this connotation of
the expression "joint venture". But the High Court has held that NHL is not a joint venture
and that there is only a certain amount of equity participation by a foreign company in it. We
are unable to agree with the said view of the High Court.

28. As noticed earlier, in its tender NHL had stated that it is a joint venture company established
by TPI, LMI and WML and IIPL wherein TP1, LMI and WML and other companies in the same
group as well as Mr. AroonPurie own 60% shares and IIPL owns 40% shares. It was also stated
that the joint venture has received approval of the Government of India and is currently in
operation and that the Promoter will increase their capital/contribution to commensurate with
the project need and that the company has been established as an information and database
management company with expertise in database processing, publishing, sales/marketing and the
dissemination of related information. In the tender it is also stated that as a joint venture in the
true sense of the phrase, the company will have access to expertise in database management,
sales and publishing of its parent group companies. It would thus appear that the Indian group
of companies (TPI, LMI and WML) and the Singapore based company (IIPL) have pooled
together their resources in, the sense that TPI, LMI and WML have made available their
equipment and organisation at various places in the country while IIPL has made available its
wide experience in the field as well as the expertise of its managerial staff. All the constituents of
 NHL have thus contributed to the resources of the company (NHL). This shows that NHL is an
association of companies jointly undertaking a commercial enterprise wherein they will all
contribute assets and will share risks and have a community of interest. We are, therefore, of the
view that NHL has been constituted as a joint venture by the group of Indian companies and
IIPL, the Singapore based company and it would not be correct to say that IIPL which has a
substantial stake in the success of the venture, having 40% of shareholding, is a mere
shareholder in NHL.”

On the basis of the above observation of the Hon’ble Supreme Court, a joint venture connotes a legal
entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for
mutual profit or an association of persons or companies jointly undertaking some commercial
enterprise wherein all contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy in connection therewith, and
duty, which may be altered by agreement, to share both in profit and losses.

The Hon’ble Supreme Court also made a reference to the definition of a joint venture in the Black’s
Law Dictionary, 6th edition stating that a joint venture is an association of two or more persons to
carry out a single business enterprise for profit and a wider definition has been incorporated in
theBlack’s Law Dictionary, 10th edition, page 967, which defines a joint venture as a business
undertaking by two or more persons engaged in a single defined project. Further, the necessary
elements of such a joint venture shall be as follows—
a. an express or implied agreement;
b. a common purpose that the group intends to carry out;
c. shared profits and losses; and
d. each member’s equal voice in controlling the project.

Conclusion
India is presently one of the world’s fastest growing economies with one of the largest domestic markets.
Before 1991, India’s restrictive economic policies resulted in the unavailability of state-of-the-art
products and technologies in the country. While the situation has significantly improved since then, the
Indian market is lagging behind developed economies in terms of the quality of products and services
sold in the domestic market. In this context, joint ventures between foreign partners and Indian companies
are a great way to bridge this gap. Joint ventures can utilize the best in technology and local market
knowledge in order to take advantage of India’s massive domestic market and, further, to use India as an
attractive export hub.