WIRC FEMA CONFERENCE JOINT VENTURES IN INDIA CA Amit Amlani 19 August 2011 1 India Investment Destination India at a Glance Demographic Leverage Pre & Post Liberalization background Foreign Investment Inflows FDI inflows Major Countries Structuring of Joint Ventures in India What are JVs? Purpose Process Factors Influencing JV Set-up Forms of JVs FEMA/FDI Aspects (including recent updates) Pricing / Valuation Aspects CONTENTS Structuring of JVs (cont...) Funding Aspects Profits Repatriation Review of CCI Regulations Legal & Documentation Aspects Taxation in brief Joint Ventures Abroad Case Studies 2
INDIA INVESTMENT DESTINATION Factors Gross Domestic Product (GDP) INDIA AT A GLANCE Index / Particulars US$ 4.44 trillion GDP Growth rate 8.50% (2010-11) Global Ranking Population Political System Currency Business Languages 3 rd largest economy in the world 1.2 billion (more than 50% of the population below the age of 25 years) Federal Constitutional republic with Parliamentary democracy Indian Rupee English, Hindi Foreign Investment Inflow US$ 62 billion (2010-11) 4
18 August 2011 Source: CIA World Fact book 5 Pre-liberalization Background (Before 1990) Protectionist Policy Strong emphasis on import substitution, industrialization under state monitoring, state intervention at micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, central planning Nationalizatio n of Industries Steel, mining, machine tools, water, telecommunications, insurance, electrical plants, among other industries, were effectively nationalized in the mid-1950s. Elaborate Licenses Elaborate licenses, regulations and the accompanying red tape, commonly referred to as License Raj, were required to set up business in India between 1947 and 1990 Rupee Nonconvertibility Rupee was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. 6
Post Liberalization Background (1991 onwards) Exemption of Industries from Licensing Expansion of Industries Inviting Direct Foreign Investment Going away with the Concept of MRTP Extending Investment Limit of Small Industries Freedom of Production 7 Foreign Investment Inflows 8 Source- RBI July 2011
Source- DIPP, Ministry of Commerce 9 Permissible Avenues for Investment in India FOREIGN INVESTMENTS Foreign Direct Investments Foreign Portfolio Investments Foreign Venture Capital Investments (FVCI) Other Investments (NCDs, etc) Investments on Non-Repatriable Basis Automatic Route Govt. Route FIIs NRIs, PIOs SEBI regd FVCIs FIIs NRIs, PIOs NRIs, PIOs Persons resident outside India VCF, IVCUs 10
STRUCTURING OF JVs IN INDIA 18 August 2011 What are JVs? General Definition,- A JV may be defined as an arrangement wherein two or more parties co-operate operate in order to run a business or to achieve certain defined commercial objective. As per Consolidated FDI Policy,- Joint Venture means an Indian entity incorporated in accordance with the laws and regulations in India in whose capital a non-resident entity makes an investment. 12
Purpose Of Setting-up of JV Leveraging Resources & Business Flexibility Exploiting Capabilities & Expertise Risk Mitigation & Effective Management Strategic Business Expansion 13 Process for Setting-up of JV Foreign investors determining the need for JV and the business objectives Understanding regulatory framework in India for the proposed venture Identifying JV partner in local market Commercial feasibility & Due Diligence (legal, financial, tax, valuation, etc.) Need for Intermediary Jurisdiction / SPVs to bring in legal / tax efficiency and flexibility Entering into Memorandum of Understanding ( MoU ) / Term Sheet The nature of JV entity Capital Contribution by each JV partner Roles and Responsibilities of each party to JV Dispute Resolution Mechanism 14
Process for Setting-up of JV Finalization of terms and conditions of JV Legal Documents such as SHA, MOA/AOA, LLP agreements, Business Co-op. Agreement etc, as applicable JV incorporation & Capital contribution (Cash / Non-cash) Resource mobilization (human / capital / infrastructure / funding / assets) Obtaining various business registrations Note: The Secretariat for Industrial Assistance (SIA) set up in the Ministry of Commerce & Industry to provide single window service for,- entrepreneurial assistance, investor facilitation & receiving and processing all applications which require Government approval 15 Factors Influencing JV Set-up JV objectives considering the draft JV terms and conditions Regulations framework for business activity Factors Past performance and due diligence of the JV partner Assess the ability of the JV partner to increase the existing skill sets Tax Considerations Impact on divulgence of IPR Management and Policy Control in the JV Business Return on Investments 16
Forms of JVs Foreign Investors Incorporated Entity Unincorporated Other Modes of Doing Business in India Limited Liability Partnership (LLP) Companies Partnership Firm Co-operation Agreement/ Strategic Alliance Liaison Office Project Office Branch Office Note: Investment in Partnership Firms by way of capital is allowed in case of non-resident Indians or person of Indian origin resident outside India. A person resident outside India other than NRI or PIO may make investment with prior approval of RBI 17 17 FEMA Aspects JV Structuring Aspects Funding and Profit Repatriation JV Documentation Automatic / Approval route Sectoral caps Conditional Compliances Pricing guidelines (DCF / Pricing formula) Reporting & Compliances Funding Aspects - Cash considerations - Non-cash considerations Profits Repatriation Options For Company - SHA / JVA - MoA & AoA - Other Business Agreements For LLPs* - LLP agreement For Partnerships* - Partnership Agreements For Strategic Alliances * - Business Co-op Agreements * Other agreements e.g. Technology transfer / trade mark licenses etc 18
FEMA / FDI Aspects FEMA / FDI Aspects - Background Brief Overview Automatic & Approval Route Prohibited Sectors / Activities for FDI Significant Sectors with FDI Caps Purpose of Various FDI Caps Pricing Guidelines (Discounted Cash Flow / Upfront conversion formula) Issue of shares against Import of capital goods/ pre-operative & pre-incorporation expenses Removal of the Condition of Prior Government Approval in Case of Existing Joint Venture / Technical Collaborations In the same field Funding Options Downstream Investment / JVs Guidelines Profit Repatriation 19 18 August 2011 FEMA / FDI Aspects - Background FDI in India is regulated by Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 (FDI Regulations). FDI scheme is governed by the provisions of Schedule 1, Regulation 5 of the FDI Regulations. Annexure A to Schedule 1 - Activities / sectors which require prior approval of the Government and also which are prohibited for receiving FDI Annexure B to Schedule 1 - Specifies sector specific policy for receiving foreign investment covering the FDI Cap / Equity and Entry Route i.e. automatic or approval. If the business in which the Indian partner and foreign partner proposes to enter into JV falls outside the purview of Annexure A and also Annexure B, then the said investment by the foreign partner can be made under the Automatic Route. 20
Brief Overview - Automatic & Approval Route AUTOMATIC ROUTE Allowed for most sectors / activities Subscription as well as acquisitions are allowed Limits : Sectoral caps/ stipulated sector specific guidelines Inward remittances through proper banking channels** Pricing guidelines prescribed** Post facto filing within 30 days of receipt of funds ** Allotment within 180 days from receipt of funds** Filings within 30 days of share allotment ** Includes Technical Collaboration / Royalty** Filing of Annual Return of Foreign Liabilities & Assets** APPROVAL ROUTE (FIPB Approval) Specified activities / sectors which requires approval An application to be made to the FIPB in the Ministry of Commerce & Industry. FIPB is empowered to approve the projects having FDI up to Rs. 1,200 Crores Proposals exceeding Rs. 1,200 crores shall be approved by Cabinet Committee of Economic Affairs (CCEA) ** To be complied in Approval route, as well 21 18 August 2011 Significant Sectors with FDI Caps Sector/Activity FDI Cap Remarks Banking - Private Sector 74% Subject to guidelines for setting up branches / subsidiaries of foreign banks issued by RBI Insurance 26% Subject to licensing by the Insurance Regulatory & Development Authority Telecom Sector 74% Subject to sectoral requirements Construction/ Development Projects 100% Subject to specified conditions Petroleum and Natural Gas 100% Subject to specified conditions Power Sector 100% Subject to specified conditions Trading Wholesale trading 100% Subject to specified conditions Single Brand Retail Trading 51% Subject to approval and specified conditions 22
Purpose of Various FDI Caps The FDI policy incorporates equity caps at broadly four levels- 26%, 49%, 51% and 74%. These caps reflect the ownership / control levels in a company, under the Companies Act, 1956. Caps Purpose > 26% Equity holding greater than 25% gives a right to block a special resolution. 49% A level just short of ownership 51% Ownership and a right to pass all ordinary resolution 74% The Indian equity holders, acting in unison, can block a special resolution 23 Prohibited Sectors / Activities For FDI Retail Trading (except single brand product retailing) Lottery Business including Government /private lottery, online lotteries, etc. Gambling and Betting including casinos etc. Business of chit fund Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate Business or Construction of Farm Houses Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). 24
Pricing Guidelines For Issue / Transfer of Shares of Indian Co. Shares issued to Persons resident Outside India Issue of Shares to Nonresidents Transfer of shares (Resident to Non- Resident) Transfer of shares (Non-Resident to Resident) (a) (b) (c ) (d) Listed Companies Unlisted Companies The price worked out in accordance with the SEBI guidelines The price per issue of shares shall not be less than the Fair valuation of shares done by SEBI regd Category I Merchant Banker or a CA as per DCF method Price of shares shall not be less than the price at which a preferential allotment can be made under the SEBI guidelines Transfer of shares shall be at a price not less than the fair value determined by SEBI regd. Category I Merchant Banker or a CA as per DCF method Price of shares transferred by way of sale, by nonresident to resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to non-resident as per column (c) 25 Issue of Convertible Instruments - Option of Prescribing a Price / Conversion Formula Upfront Issue of Convertible Instruments - Option of Prescribing a Price / Conversion Formula Upfront** Company may provide upfront conversion formula for equity-linked instruments rather than only upfront price Conversion price not to be less than fair value at the time of issuance of such instruments ** RBI Guidelines awaited 26
Liberalized Payments Of Royalty And Lump-sum Payment Under Technical Collaboration Agreements Erstwhile Provision: Prior Approval of Ministry of Commerce & Industry ( MCI ) required for Royalty exceeding 5% of local sales & 8% on exports Lumpsum payment exceeds US$ 2 million Revised Provision: No approval of MCI required, banks may permit drawal of foreign exchange for such payments 27 Issue of Equity Shares Against Import of Capital Goods Approval Route Category Import of capital goods / machinery / equipment (including second-hand machinery) Conditions specified in the FDI Policy Import to be in compliance with the Export / Import policy The imported goods / equipments are subject to an independent valuation by a Valuer from the country of import The beneficial ownership and identity of the Importer Company as well as overseas entity should be clearly disclosed. All such conversions of import payables for capital goods into FDI being done within 180 days from the date of shipment of goods Note: General permission under Automatic route is available to Indian companies for conversion of External Commercial Borrowings ( ECB ), Lumpsum Fee & Royalty into Equity Shares, subject to certain conditions 28
Issue Of Equity Shares Against Pre-Operative & Pre-Incorporation Exps Approval Route Category Pre-operative/ pre-incorporation expenses (including payments of rent etc.) Conditions specified in the FDI Policy Submission of FIRC for remittance of funds by overseas promoters for expenditure incurred Verification and certification of pre-incorporation / pre-operative expenses by statutory auditor Payments must be made directly by foreign investor to the company. Payments made through third parties citing the absence of a bank account or similar such reasons are not allowed. The capitalization must be done within the stipulated period of 180 days permitted for retention of advance against equity under the new FDI policy. 29 18 August 2011 Prior Approval in Case of Existing Joint Venture/ Collaborations In the Same Field Done Away With Erstwhile Provision Foreign collaborator had an already existing agreement as on January 12, 2005 Prior approval through FIPB required for new proposals in the same field, in case of existing JVs / Technology transfer / trademark agreements as on 12 January 2005 Seek consent from Indian partner of the existing JV Revised Provision Prior Approval of FIPB / consent from the Indian Partner prior to setting up a new JV - conditions removed ** RBI Guidelines awaited 30
FDI in LLPs Allowed** LLP combines limited liability of the company model & flexibility of partnerships FDI in LLPs allowed through Government / Approval route for LLPs,- Operating in sectors/activities where 100% FDI is allowed through automatic route & There are no FDI-linked performance related conditions (eg.: NBFCs / Development of Townships, Housing, Built-up infrastructure & constructiondevelopment projects etc) LLPs with FDI not allowed in agricultural/plantation activities, print media or real estate business Indian company having FDI permitted to make downstream investment in an LLP - provided both companies are operating in sectors where 100% FDI is allowed through Automatic route & with no FDI-linked performance conditions LLPs with FDI Downstream investment not permitted Capital contribution by partners in Cash consideration. LLPs are not allowed to raise funds through ECBs The DP should be Indian company or Indian residents. This would require some more clarity particularly for foreign JV partners ** RBI Guidelines awaited 31 CONTRIBUTION TO JV
18 August 2011 Contribution to JV Financial Contribution The foreign JV partner is contributing his agreed share in the JV in form of cash repatriated to India through normal banking channels. This contribution can either be made in equity or loan. Non-Financial Contribution Technology Contribution Managerial Contribution Conversion of import payables The terms of the JV agreement can require the Foreign JV partner to contribute its share partly by way of Financial Contribution and partly by way of non-financial contribution. 33 Investment Instrument Funding Options FOREIGN INVESTORS Equity Debt Equity/ ADRs/ GDRs Fully Convertible Preference Share/ Debentures (FCPS / FCDs) FCCBs ECBs/Optionally Convertible Preference Shares/Deb. Trade Credits Warrants / Partly paid shares may be issued only after approval through government route 34
Investment Instrument Funding Options Equity capital carries voting rights Equity capital is repatriable only on liquidation or transfer of shares, although limited buy back options are available Pricing guidelines applicable End use restriction - No end-use restriction prescribed except for making downstream investment in other Indian companies for which separate guidelines are prescribed. Better debt-equity ratio Equity Capital 35 Investment Instrument Funding Options Fully Convertible Preference Shares / Debentures (FCPS/ FCDs) Foreign investment through convertible preference shares / debentures is subject to FDI caps. FCPS/FCDs cannot be redeemed Pricing guidelines applicable Dividend rate on FCPS shall not exceed 300 basis points above SBI s prime lending rate. No such restriction on interest rate Non-convertible preference shares/ debentures fall outside such cap and shall have to comply with ECB guidelines. No Control / Voting Rights in Indian Co. Better debt-equity ratio in case of FCPS. However, FCDs would have adverse impact. End use restriction (Refer note) Note - No end-use restriction prescribed except for making downstream investment in other Indian companies for which separate guidelines are prescribed. 36
Investment Instrument Funding Options External Commercial Borrowings (ECBs) Condition to be Eligible as recognized lender Automatic route Approval route For ECBs up to US$ 5 million More than US$ 5 million at least 25 percent to be held directly by the lender at least 25 percent to be held directly by the lender and proposed ECB should not exceed four times the direct foreign equity holding At least 25 percent to be held directly by the lender but proposed ECB exceeds four times the direct foreign equity holding Loan Size (in million) Up to US$ 20 M More than US$ 20 M Minimum Average Period 3 years 5 years Avg Maturity Period All-in-cost ceiling over 6 month LIBOR 3 years 5 years 300 basis points > 5 years 500 basis points 37 Permissible End-use Investment Instrument Funding Options External Commercial Borrowings (ECBs) Import of capital goods by new or existing production units in real sector- industrial sector, including SMEs. Investment in infrastructure sector, Overseas direct investment in JV /WOS Any other eligible purpose as specified by RBI. End-use restriction For on-lending / investment in capital market For investment in real estate business, working capital requirements, general corporate purpose and repayment of existing Rupee loans. Note: Trade Credits exceeding 3 years are categorized as ECBs
Investment Instrument Funding Options Foreign Currency Convertible Bonds (FCCBs) Bond issued by Indian Company in Foreign currency Principal & Interest payable in Foreign currency ECB regulations applicable Available under automatic route with some specified ceiling End-use are same as ECB regulations. Note - Other modes of raising equity includes American Depository Receipts ( ADRs ), Global Depository Receipts ( GDRs ) 39 DOWNSTREAM JVs
What is Downstream JV? Overseas India Foreign Company Investment Indian Company Indian Investing Co. (having FDI other than Owned & Controlled by Resident Indian Citizen) Indirect FDI Downstream investment means indirect foreign invt, by one Indian Co having foreign invt, into another Indian Co, by way of subscription or acquisition, subject to certain conditions. If the investing company is owned or controlled by non-resident entities, the entire investment by the Investing Co into subject Indian Co would be considered as indirect foreign invt. Foreign investment through investing Indian Co would not be considered for calculation of indirect foreign invt in case of Indian Cos which are owned and controlled by resident Indian citizens. The total foreign invt is the sum of direct & indirect foreign invt. 41 Calculation of Indirect / Downstream FDI Investment < 50% Company A Investment Foreign Investor Company B No Indirect FDI Investment > 50% (Say 75%) Company A Investment 26% Investment 80% Investment 100% Company B Company B Company B Indirect FDI 26% Indirect FDI 80% Indirect FDI 75% 42
Downstream Investment Compliances Indian Company with foreign investment to notify SIA / DIPP / FIPB of its downstream investment within 30 days of investment along with modalities of investment in new/existing ventures (even applicable if capital instruments are not allotted) Downstream investment by way of induction of foreign equity in an existing Indian Company to be duly supported by a resolution of the Board of Directors supporting the said induction as also a shareholders Agreement, if any Issue/Transfer/Pricing/Valuation of shares shall be in accordance with applicable SEBI/RBI guidelines For the purpose of downstream investment, the Indian companies making the downstream investments would have to bring in requisite funds from abroad and not leverage funds from domestic market for such investments. This would, however, not preclude downstream companies, with operations, from raising debt in the domestic market. Downstream investments through internal accruals are permissible 43 Profits Repatriation Certain Options Payment of Brand License Fees Payment of Dividend Buyback of Shares Reduction in Share Capital Overseas Investments Outbound Regulations Cost allocation arrangement / Service fees Other Options - Acquiring office premises - Downstream JVs / investments strategic / investment - Business Expansion Combination of aforesaid options 44
New Competition Commission Regulations Applicable In Case Of JV Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 on combination of business effective from 1 June 2011. Combination is defined in section 5 of the Competition Act 2002 The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if the specified criterion of assets or turnover is fulfilled. Section 5 exhaustively specifies the asset-turnover criteria for the purpose of determining whether the acquisition transaction shall be a combination within the provisions of the CCI Combination Regulations. If any proposed Combination exceeds the threshold limits, the person / enterprise need to intimate to CCI within 30 days from the board approval. A Combination cannot come into effect until 180 days from date of intimation or CCI order, whichever is earlier. 45 New Competition Commission Regulations Applicable In Case Of JV Parties Assets / Turnover base Standalone (both acquirer and the target company) Standalone (both acquirer and the target company) Assets Criteria Turnover Criteria India Rs 1,500 crores Rs 4,500 crores India and outside India US$ 750 million aggregate Including Rs 750 crores in India US$ 2,250 million aggregate Including Rs 2,250 crores in India Group (after acquisition) India Rs 6,000 crores Rs 18,000 crores Group (after acquisition) India and outside India US$ 3 billion aggregate Including Rs 750 crores in India US$ 9 billion aggregate Including Rs 2,250 crores in India The CCI may grant a final order within 180 days. If approval is not granted within the said period, the parties may assume deemed approval from CCI. 46
New Competition Commission Regulations Applicable In Case Of JV Specific exemption is provided from applicability of Competition Regulations to an enterprise, whose control, shares, voting rights or assets being acquired has assets of the value of not more than Rs 250 crores or turnover of not more than Rs 750 crores for a period of 5 years. Further, exemptions are provided from intimation to CCI for certain transactions that are ordinarily not likely to have appreciable adverse effect. Such transactions inter alia include; Investments made in the ordinary course of business not resulting into control over the other enterprise, Acquirer already holding more than 50% except where it results into transfer from joint control to sole control, Acquiring stock, materials, etc. in the ordinary course of business, Acquisition within the same group Solely as investment or in the ordinary course of business such that the total shares or voting rights held by the acquirer directly or indirectly, do not exceed 15% of the target co, directly or indirectly 47 Certain Other Relevant Aspects Permissibility of opening of Escrow Account. The facility is intended to facilitate due diligence process & finalization of the JV terms. AD to open & maintain non-interest bearing account in INR Permissible debits / credit restricted to transaction No fund / non-fund facilities to be extended Maximum operational period not to exceed 6 months Permissibility of pledge of shares in the Indian company by the foreign investor in favour of the Indian banks for lending at the Indian company level or with the overseas banks for loans at the investor level. Only for bonafide business purposes 48
LEGAL & DOCUMENTATION ASPECTS JV Documentation Memorandum of Understanding (MoU) / Letter of Intent Issues to be addressed- Intentions / Aspirations of the parties Future roadmap of the venture Commercial Terms / Capital Contribution Clarity on the management & control Cost Distribution / Profit sharing Extent of Legality of the MoU Memorandum & Articles of Association Binding Incorporation Documents MoA would set out the business objectives AoA to include majority of terms of JVA (only in case of pvt. Ltd. companies) MoA & AoA to be consistent with the JVA AoA supersedes the JVA in case of any dispute AoA in itself a contract between JV Partners Joint Venture Agreement (JVA) / Shareholders Agreement Objects & Products Contribution by JV partners Management structure Business conduct Rights and responsibilities of JV Partners Technical Assistance / License agreement Right of first refusal Drag Along Rights Tag Along Rights Transfer of shares Put & Call Options 50
JV Documentation Joint Venture Agreement (JVA) / Shareholders Agreement (Cont...) Exit Options / Termination Terms Dilution clause in case of non fulfillment by one JV partner Transfer price of inter-group transactions Valuation for non-cash contributions Non-Compete clause Confidentiality & Exclusivity Dispute resolution & Arbitration Representations / Warranties and indemnities Force Majeure Important Aspects of JV Agreement (JVA) Important Clauses to be incorporated in JVA Board Representation / Management Structure Roles & Responsibilities Clause for Amendment of Incorporation Documents Non-compete Clause Representations/Warranties & Indemnity Purpose Clear Provisions in the JVA detailing the Management Structure & Composition & Control of the BOD Based on Shareholding / Capital Contribution & Other Technical / Trademark / Licensing Agreement Clearly pre-defined roles & responsibilities of each party to the JV to avoid dispute / arbitration Contain a clause providing for amendment in MoA & AoA, in case of any inconsistency between JVA & incorporation documents Important clause. No Specific permission required in case of existing JV of FIPB / existing partners. Therefore should be incorporated as a safety caution for a specific time frame Certain assumptions / Representations made by JV partners to be incorporated in JVA, as practically impossible to cover all aspects in Due Diligence. Adequate indemnity provision for misrepresentation 52
Important Aspects of JV Agreement (JVA) Important Clauses to be incorporated in JVA Tag along rights Drag along rights Right of First Refusal Objects & Products Purpose The right assures that if the majority shareholder sells his stake, minority holders have the right to join the deal and sell their stake at the same terms and conditions as would apply to the majority shareholder This right protects majority shareholders. The right assures that if the majority shareholder sells his stake, minority holders are forced to join the deal. JV partner to be provided preferential right to purchase shares of other JV partner intending to sell his shares. The mechanism, pricing, notification, etc needs to be clearly defined. (Subject to FDI / FEMA pricing aspects / Sectoral guidelines) The object of the JV, the products, the geographic reach, for which the JV entity shall function should be elaborative and clearly defined. 53 Important Aspects of JV Agreement (JVA) Important Clauses to be incorporated in JVA Transfer of Shares Dispute Resolution & Arbitration Put & Call Options Purpose Adequate mechanism built-in restricting transfer to third party. To restrict transfer outside a group Clear Roadmap on the process to resolve disputes (i.e. following predetermined matrix either mutually / engaging third party etc) Provision for Arbitration in case of unresolved disputes specifying the governing laws / jurisdiction Safeguard Clause. JV partners to have option of either to purchase / sell shares of JV at a future date depending upon purpose / agreements between the parties Note: AoA supersedes the JV agreement while enforcing the same in Company Law forums. All important JV clauses & understanding between the JV partners to be incorporated into AoA. AoA should be in consistent with all relevant aspects of JVA. However, JVA is enforceable under Civil Courts under Contract Act 54
JV Documentation Other Aspects Preferably separate agreement for any Technical Collaboration & Licensing Other documents may include,- Trademark license agreement Technology Sharing / Transfer Agreement Distribution Agreement Supply Agreement Any Service agreement 55 Challenges in the recent past - JVs Apart from the concerns on account of rift between the JV partners due to various commercial / management issues, there are certain challenges faced by the JV in the recent past due to macro-level economic environment, like; Global volatility Political uncertainties Inflationary measures vis-à-vis growth Public movements / agitations / revolutions across the globe including India Tax Environments Uncertainties, evolving laws, tax treaty negotiations, anti-avoidance measures vis-à-vis investments, aggression by the tax authorities Land acquisitions issues, environmental issues Certain Protectionism policies 56
TAXATION OF JVs IN INDIA 18 August 2011 Taxation of JVs in India Company - Corporate Income Tax Rates Domestic Company 30%* Minimum Alternate Tax (MAT) 18.50%* Dividend Distribution Tax (DDT) (payable on distribution of dividends) 15%* 1. The dividend received by the holding company from the subsidiary company shall be reduced from the dividend declared by the holding company while computing the Dividend Distribution Tax 2. Indian Transfer Pricing regulations are applicable. Transactions between Indian JV & Foreign shareholders to be on Arm s length basis *Tax rates to be further increased by education cess and surcharge, as may be applicable 58
18 August 2011 Partnership and LLP Taxation of JVs in India Income Tax Rate (the share of profit is exempt in the from tax in the hands of the partners) 30%* Alternate Minimum Tax (AMT) 18.50%* Capital Gains Tax Capital Gains Tax on listed Securities (Long Term / Short Term) 0/15/20/30%* Capital Gains Tax on other Securities (Long Term / Short Term) 20%/30/40%* *Tax rates to be further increased by education cess and surcharge, as may be applicable 59 JVs ABROAD
JVs Abroad At present, there is an increasing trend of Indian companies going abroad. Major drivers for Outbound Investments: Global Ambition Support Existing Export Business Global market Penetration Backward / Forward Integration Technology / Skill Transfer Exploring growing markets Cost Competitiveness Leveraging on the resources 18 August 2011 Setting-up of JVs Abroad Many big Indian entrepreneurs have invested in JVs abroad. Recent outbound JVs include,- Tata Steel - Corus, Hindalco-Novelis, Tata Motors Ltd - Jaguar & Land Rover, Sterlite Industries acquisition of Asarco, ONGC controlling Imperial Energy, etc Also, many Indian Companies engaged in the power and energy business are investing abroad for leveraging on the scarce natural resources. 62
18 August 2011 Process of setting-up of JVs abroad Setting-up of JVs Abroad Determining the need for JV abroad Jurisdiction of the JV (political, economical, social, business environment) Overseas Regulatory framework Identifying JV partner / target company Appointment of legal counsel Due Diligence (Commercial, legal, financial etc) Funding Aspects Availability of tax treaty benefits Repatriation Regulations abroad & implications in India (determining need for intermediary jurisdiction) Other JV aspects and documentation similar to JV in India, as discussed above 63 JV Abroad FEMA Aspects Companies (including any body corporate and partnerships) are allowed to invest abroad under the automatic route Overseas JV should be engaged in bonafide business activity and not in real estate or banking business Indian party can invest under automatic route in overseas JV subject to 400% of its net-worth. The limit of 400% includes capital, loan and 100% of the amount of guarantees issued (other than performance guarantee) and 50% of amount of performance guarantee issued Indian party should not be on RBI s caution list or under investigation by any enforcement agency Report investment (including guarantee) in Form ODI to AD Bank within 30 days from date of transaction All transactions relating to a JV/WOS should be routed through one branch of an AD Bank Other compliances like filing of APR, intimate to RBI for investment in step down subsidiary or change in capital structure of JV, etc.
JVs Abroad Certain Critical Aspects Corporate Guarantee Indian party can issue guarantee to or on behalf of JV provided it has equity participation No guarantee should be open ended Indian party can issue guarantee to its step down subsidiary (whether direct subsidiary is an operating company or SPV) provided it has equity participation An Indian party can issue guarantee on behalf of second level subsidiaries under approval route provided it directly or indirectly holds 51% stake in overseas JV. Share Valuation For making overseas investment in an existing JV, the valuation of shares shall be made: - Where the investment is more than US$ 5 million, by a Category I Merchant Banker registered with SEBI, or an investment banker/ Merchant Banker outside India - In all other cases, by Chartered Accountant or Certified Public Accountant For investment by way of swap of shares, valuation of the shares shall be by Category I Merchant Banker registered with SEBI or investment banker and approval of FIPB is required. Round tripping Indian resident Individual can invest in the existing JV abroad but cannot set up JV abroad (FAQ dated 17 September 2010) CASE STUDIES 66
Amit Amlani Associate Director RSM Astute Consulting Private Ltd 13 th Floor, Bakhtawar, 229 Nariman Point, Mumbai 400 021. Contact No.: +91 22 6121 4444 Email: amit.amlani@astuteconsulting.com This presentation is for general reference purpose. No reader / participant should act on the basis of any statement / details contained herein without seeking professional advice.