India opened its doors to the global economy in 1993 and the era of economic
liberalization began. It draws all the world's big business houses to come to
India and explore the Indian market.
But they were unaware of the Indian market environment and Indian laws. So they
look toward the Indian companies to set up a Joint Venture with them and invest
money through Foreign Direct Investment (FDI).
FDI policies have been very liberal since 1993 and 100% of FDI is permitted in
some sectors such as Medical Equipment, Print Media, Etc. And thus Joint
Ventures becomes very popular among foreign investors.
What is Foreign Direct Investment (FDI)?
Generally, FDI means an investment made by an investor into a business located
in another country to acquire assets in a foreign company.
In Legal Terms, FDI means investment through capital instruments by a person
resident outside India in an unlisted Indian company; or ten percent or more of
the post issue paid-up equity capital on a fully diluted basis of a listed
What is Joint Venture?
Generally, Joint Venture means a contractual arrangement between two parties for
the joint control of the company assets and collectively they try to achieve
their economic goal.
In Legal Terms, Joint Venture means:
A joint arrangement, entered into in writing, whereby the parties that have
joint control of the arrangement, have rights to the net assets of the
Types of Joint Ventures:
- Contractual Joint Venture:
In India, it is the most common type of Joint Venture practice. Parties
involved collaborate in this Joint Venture to create a successful venture
without claiming any ownership or establishing a new legal entity, i.e.
corporation or company
Collaboration for research and technologies, Joint Tenders for bidding,
Strategic alliances, are some of the types of Contractual Joint Ventures.
Brahmos Aerospace, Mahindra- Renault LTD, PNB Metlife, ICICI Lombard are
some of the successful Contractual Joint Ventures of India.
- Equity-based Joint Venture:
In this Joint Venture, the parties come together in an agreement to form
a new legal entity owned by each party. They are in charge of management and
share benefits and losses as well.
Vistara, Air Asia India, Dhirubhai Ambani Aerospace Park are some of the
examples of Equity-Based Joint Ventures in India.
Forms of legal entities:
Under the Companies Act 2013, parties can create a new company and subscribe
to the share under the agreement or make an agreement with an existing
company and acquire their share and become shareholders.
- Partnership Firm:
The Partnership Act 1932, provides for this form of Joint Venture. The
parties decided to share the benefits of the undertaking they had agreed on.
But this body is limited to Indians only, and in certain cases, NRI is also
- Limited Liability Partnership (LLP) Firm:
Under the Limited Liability Partnership Act 2008, this entity is formed.
Previously foreign investors were not permitted to invest in LLP but it was
permitted by the government in 2015.
Minimum capital investment is not necessary for this entity and it is
mandatory to have at least two partners and one of them should be an Indian.
- Venture Capital Fund:
It is an investment fund pool that manages the money of investors involved
in investing in start-ups and small and medium-sized industries.
According to India Trusts Act 1882, Trusts is defined as an obligation
annexed to the ownership of property, and arising out of a confidence
reposed in and accepted by the owner, or declared and accepted by him, for
the benefit of another, or of another and the owner.
Foreign companies are not allowed to use Trusts as a form of the joint
- Investment Vehicle:
These are the legal entities that are registered and regulated by the SEBI.
Real Estate Investments Trusts, Infrastructure Investment Funds are some
In 2015 the RBI amended the Foreign Exchange Management (Transfer or Issue
of Security by a Person Resident outside India) Regulations, 2000, and
allowed the FDI in Investment Vehicles.
Law governing the Joint Ventures in India:
There are no separate laws for Joint ventures in India.
Contractual Joint Venture is governed by the Partnership Act, 1932 because it is
like a partnership that is binding by the legal agreement no separate Legal
Entity is formed.
Equity-based Joint Ventures are regulated by the Companies Act 2013 because a
new legal entity is formed which are either Public or Private Sector companies.
Some other laws by which Joint Ventures in India are regulated:
- Competition Act, 2002.
- Foreign Trade (Development and Regulation) Act, 1992.
- Industrial Policy and Procedure Policy for Foreign Investment Contract
Act. Foreign Exchange Management Act.
- 1999 SEBI Guidelines, Regulations, Notifications & Circulars.
- Reserve Bank of India (RBI) Guidelines, Regulations, Notifications &
Who can set up a Joint Venture:
A non-resident entity can invest in India, subject to the FDI Policy except in
those sectors/activities which are prohibited.
A company, trust, and partnership firm incorporated outside India and owned and
controlled by NRIs can invest in India with the special dispensation as
available to NRIs under the FDI Policy
Foreign Portfolio Investors (FPI) may make investments in the manner and subject
to the terms and conditions specified in Schedule II of Foreign Exchange
Management (Non-Debt Instruments) Rules, 2019.
Foreign Investment is permitted under the automatic route in Limited Liability
Partnership (LLPs) operating in sectors/activities where 100% FDI is allowed
through the automatic route and there are no FDI-linked performance conditions.
How to set up a Joint Venture:As an Indian company:
For registration and incorporation, an application has to be filed with the
Registrar of Companies (ROC). Once a company has been duly registered and
incorporated as an Indian company, it is subject to Indian laws and regulations
as applicable to other domestic Indian companies.
Limited Liability Partnership:
To register an Indian LLP, you need to first apply for a Designated Partner
Identification Number (DPIN), which can be done by filing eForm for acquiring
the DIN or DPIN.
Then you would then need to acquire your Digital Signature Certificate and
register the same on the portal. Thereafter, you need to get the LLP name
approved by the Ministry. Once the LLP name is approved, you can register the
LLP by filing the incorporation form.
As a foreign company:
Foreign Companies can set up their operations in India through
- Liaison Office/Representative Office
- Project Office
- Branch Office
Such offices can undertake any permitted activities. Companies have to
register themselves with the Registrar of Companies (ROC) within 30 days of
setting up a place of business in India.
Liaison Office/Representative Office:
The liaison office acts as a channel of communication between the principal
place of business or head office and entities in India.
Approval for establishing a liaison office in India is granted by the Reserve
Bank of India (RBI).
Foreign Companies planning to execute specific projects in India can set up
temporary project/site offices in India. RBI has now granted general permission
to foreign entities to establish Project Offices subject to specified
Foreign companies engaged in manufacturing and trading activities abroad are
allowed to set up Branch Offices in India for Exporting and Importing goods,
carrying out research work, representing a parent company, Etc.
A branch office is not allowed to carry out manufacturing activities on its own
but is permitted to subcontract these to an Indian manufacturer.
Limited Liability Partnership:
A foreign LLP can establish in India by filling Form 27 (Registration of
particulars by Foreign Limited Liability Partnership (FLLP)). The eForm has to
be digitally signed by an authorized representative of the FLLP.
There is no mandatory requirement to apply and obtain DPIN or DIN for Designated
Partners of FLLP but the DSC of the authorized representative is mandatory.
Foreign Direct Investment (FDI) Policy:
FDI under the automatic route (means no prior approval of RBI or Government of
India is needed) is now allowed in all sectors, including the services sector,
except a few sectors where the existing and notified sectoral policy does not
permit FDI beyond a ceiling.
No prior approval is required for FDI under the Automatic Route. The only
information to the RBI within thirty days of inward remittances or issue of
shares to Non Residents is required.
Foreign Investment proposed not covered under the Automatic Route are
considered for Governmental Approval on the recommendations of the Foreign
Investment Promotion Board (FIPB).
According to the FDI Policy Circular of 2016, proposals for FDI would be filed
online on FIPB Portal.
Liabilities in Joint Ventures:
Under Partnership Act, 1932:
Each partner is liable for all acts of the business committed when he is a
partner together with all the other partners and even separately.
A retiring partner may discharge his liability to any third party before his
retirement by arranging for him and that third party.
The partner will be held liable for every act done by the firm before his
retirement notice becomes public.
The firm is not dissolved by the death of a partner, the estate of a deceased
partner is not liable for any act of the firm done after his death.
All the parties are liable for every act done by the firm before the dissolution
notice becomes public.
Except for the partner who dies, or who is bankrupt, or of a partner who, not
having been known to the person dealing with the firm to be a partner, or
retires from the firm.
The partner after the dissolution of a partnership may carry the unfinished
business to finish it.
Provided that the firm is in no case bound by the acts of a partner:
- who had been bankrupt.
- Who has after the verdict represented himself or knowingly permitted
himself to be represented as a partner of the bankrupt.
Under the Limited Liability Partnership Act, 2008:
Every partner of LLP is for the business of the LLP, the agent of LLP, but not
of another partner.
A partner is not personally liable, directly or indirectly for an organization
solely because of being a partner of a limited liability partnership
Whenever a partner acts for an LLP in the course of business, an obligation
whether arising in contract or otherwise is solely the obligation of the LLP
which is to be met out of its property
Section 28(2) provides that the provisions of 27(3) and 28(1):
- shall not affect the personal liability of a partner for his wrongful
act or omission,
- but a partner shall not be personally liable for the wrongful act or
omission of any other partner of the limited liability partnership.
Liability of a Foreign Partner:
A foreign partner will have liability as per the domestic laws on the liability
of partners in Joint Ventures.
The foreign partner may also have liability under Reserve Bank of India &
Foreign Direct Investment laws and regulations.
Joint Ventures helps the company to grow exponentially but their structure can
be complex. There should be excellent communication between the partners to make
the venture successful.
FDA is a great way to bring money to one's country. It helps the economy to
thrive and also provides employment. But it should be kept in check so that the
sovereignty of the nation remains intact.
Currently, India is hosting many successful Joint Ventures which are giving
valuable thrust to the Indian economy.