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Joint Ventures – Features, Advantages And Disadvantages

October 21, 2019
Joint Ventures - Features, Advantages and Dis-advantages

Joint Ventures - Features, Advantages and Dis-advantages

Background

The business world is expanding and the customer requirements are high with stiff competition all around therefore organizations are finding ways and means for expanding their business by collaborating with other organizations to achieve their objectives and gain positive synergy.

Joint Venture is a business proposition usually based on an agreement where the parties come together to share funds, resources, and skills to undertake a particular venture. The risks and rewards of the enterprise are also shared.

In recent times, India has become a very favorable destination for overseas companies to set up their business in India either as a Joint Venture Company or as a Wholly Owned Subsidiary.

Definition

The word Joint Venture is not specifically defined. As per Accounting Standard 27, “A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.”

A venturer is a party to a joint venture and has joint control over it.  Therefore, a joint venture is a commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities.

Reasons to take up a Joint Venture

Organizations enter into Joint Venture due to various reasons, some of which are, to have access to:

  • more resources
  • greater capacity
  • increased technical expertise
  • access to established markets and distribution channels

Features of Joint Venture

  • Contract – A Joint Venture is governed by a contract, the terms, and conditions of which are enumerated in the Joint Venture Agreement.
  • Objective - A joint venture is created with a purpose that is clearly stated in the agreement.
  • Project or Duration - Joint Venture may be created for some specific project or duration and shall terminate once that project is completed or the duration comes to an end.
  • Control – The controlling rights of each party are defined in the agreement as there is no special act or governing body which controls the Joint Venture
  • Profits & Losses - The profits earned or losses incurred are distributed as stated in the agreement between the Co-Ventures.

Some of the popular Joint Ventures

  • Pidilite Industries and Corporacion Empresarial Grupo Puma SL (Grupo Puma)

Pidilite Industries, a leading manufacturer of adhesives, sealants and construction chemicals in India and Corporacion Empresarial Grupo Puma SL (Grupo Puma), a leading technical mortars manufacturer based in Spain. Grupo Puma licenses the technology to the joint venture company which will invest in a modern manufacturing facility in India.

  • Petronet LNG Limited: It is a joint venture among BPCL, GAIL, ONGC, and IOCL.
  • Tata SIA Airlines Ltd: Vistara is the brand name of Tata SIA Airlines Ltd, a JV between India’s corporate giant Tata Sons and Singapore Airlines (SIA). Tata Sons holds 51 percent stake while SIA controls the remaining 49 percent in the airline.
  • PNB Metlife: PNB Metlife is a joint venture between America’s largest life insurer, Metropolitan Life Insurance Co and India’s state-owned Punjab National bank to offer PNB-Metlife Insurance Plans.
  • Max Life Insurance Co Ltd: It’s a JV between Max Financial Services Ltd and Japan’s Mitsui Sumitomo Insurance Co. Ltd.
  • Air Asia 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.
  • ICICI Prudential Life Insurance Company Ltd: It is a joint venture between ICICI Bank, India, and UK-based Prudential Corporation Holdings Limited.

Advantages and Disadvantages of Joint Venture

Advantages

  • Joint Venture provides an opportunity to learn new insights and expertise
  • Both the Co-ventures can use each other resources and can excel.
  • It is a temporary arrangement and comes to an end once the purpose is fulfilled.
  • The risk associated and profit/loss generated in the Joint Venture is distributed between both the parties.
  • In Joint Ventures, there is a scope of building networks and relationships stronger
  • Selection of a good local partner is the key to the success of any joint venture
  • Joint Venture enables flexibility in doing business
  • A Local partner provides a lot of advantages for foreign products or services to easily adapt to the culture. Therefore an International Joint Venture eradicates the risk of discrimination
  • A separate brand name can be given to the new product
  • Joint Ventures can lead to Innovative ideas or reduce cost or enhance productivity

Disadvantages

  • There are times when flexibility is restricted in a joint venture.
  • The objectives of the Joint Venture may not be clear and effectively communicated.
  • Different Companies have different expertise and knowledge and this can have a clash of ideas and thoughts.
  • There can be a great imbalance of expertise, assets, and investment which can have a negative impact on the effectiveness of the joint venture.
  • A clash of cultures and management styles may result in poor co-operation and integration.
  • The Joint Venture success requires lots of planning and research
  • Joint Venture can be unsuccessful due to unreliable partners or due to lack of communication between the partners

Comparison between the Joint Venture and Partnership

Joint Venture Partnership
·       It includes two or more Companies joining together in business ·       Here individuals join together for combined venture
·       Joint Venture is formed for a specific purpose ·       Partnership mainly aims in profit-making
·       It is temporary as it comes to an end once the purpose is fulfilled ·       It will continue for a long time unless any difference
·       a member of a joint venture can retain the identity of his/her firm or property.

 

·       In a partnership, members cannot act according to their wishes because they do not have any individual identity
·       Maintenance of a separate set of accounts is not necessary ·       Maintenance of a separate set of accounts is  necessary
·       There is no special act governing Joint Venture ·       The partnership is governed by the Indian Partnership Act, 1932.
·       A minor cannot become a co-venturer ·       A minor can become a partner to the benefits of the firms.

Joint Venture Agreement

When two or more parties come together to form a Joint Venture, they enter into an agreement/ Memorandum of understanding. The Joint venture agreement lays down the nature of the relationship between the parties. The Memorandum of Understanding or a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement

Joint Venture agreement must cover these points:

  • Name, address, and form of the entity
  • Distribution of profit/loss or expenses in percentage or ratio.
  • A section that includes specific terms for details of the project such as confidentiality agreements.
  • It must be clear and precise specifying the condition
  • Meetings of the Co-Ventures
  • Management of Committee or Boards, if any
  • Plans and Budgets
  • Disputes resolution
  • Opportunity/Threat
  • Restrictions implied
  • Transfer of Shares
  • Termination of Agreement

Consolidation of Financial statement

As per Section 129 of the Companies act 2013:

  • Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement.
  • Provided that the company shall also attach along with its financial statement, a separate statement containing the salient features of the financial statement of its subsidiary or subsidiaries and associate company or companies in such form as may be prescribed.
  • Here Subsidiary includes Joint Venture also as per Section 2(87) of the Companies Act 2013.

Joint Venture Accounting

Accounting Standard-AS 27 govern the Financial reporting of interest in Joint Ventures, reporting of joint venture assets and liabilities, income and expenses

Laws governing Joint Venture

Joint Venture is specifically not regulated by any specific act or law but depending on the nature of the Joint Venture following Law/Act can regulate on some issues:

  • Companies Act, 2013
  • Tax Laws
  • FEMA Act
  • Limited Liability Partnership Act
  • Competition Act 2002
  • Securities and Exchange Board of India
  • Trademark Act
  • Other Act depending upon the nature of Business

Overseas Direct Investment:- Direct Investment by an Indian party in Joint Ventures or Wholly Owned Subsidiaries abroad is allowed under FEMA subject to the conditions specified therein.

Suggestions for a successful Joint Venture

Many Joint Ventures became unsuccessful Before entering to Joint Venture agreement, the organization must consider certain points for achieving success:

  1. Analyze and appreciate the strengths of each partner in light of the requirements for which the Joint Venture is proposed to be entered.
  2. There must be proper planning and strategy to be followed.
  3. Try to work towards overcoming the weakness of the Joint Venture parties.
  4. There must be transparency, trust and clear communication between the parties.
  5. It's essential to Monitor performance and ensure that everyone knows what is the objective and work towards the same goals
  6. Handling disagreements and disputes in a proper manner such that the venture should end successfully after achieving the goal for which it was framed
  7. There must be protection of confidential information and there should not be any dead-lock

Dissolution & Termination of Joint Venture

Joint Ventures are established for a particular period of time or to achieve the goal framed, once it is achieved the Joint Venture comes to an end. In order to provide a smooth exit, there must be a provision in the agreement regarding the terms and conditions of ending the Joint Venture before entering into it. Sometimes before the goal is achieved there comes a requirement for termination based on circumstances like lack of fund, market imbalance, a dispute between parties, etc., Provision for such contingencies also have to be factored and suitably provided for in the agreement.

The Joint Venture can be dissolved when one party buys out the stake of the other Joint Venture partner or by selling the assets to a third Party or by mutually sharing the assets and liabilities

Conclusion

A Joint Venture can be an ideal arrangement and can be highly successful if the parties to the venture are focused on the objective to be achieved and align all their resources towards achieving that objective.

Disclaimer

The entire contents of this document have been developed based on relevant information and are purely for private circulation. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

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