Pros and Cons of Joint Ventures in India
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The term Joint venture derives its origin from two different words i.e. joint which means combined and venture which means undertaking a risk. So, in a layman's language, it means undertaking a risky task or business together. Coming to the technical meaning of joint venture that is used in the corporate world, JV means an incorporated contractual business agreement between two or more parties that has been formed by contribution of equity by the parties. This is a kind of contract arrangement. In a JV agreement, the parties not only bear the risks together but they share the profits also. Generally, joint venture agreements are for a finite period of time. Anyone (legal person as well as natural person) can be a party to a JV agreement for e.g. individuals, government, private companies. There are various types of joint venture agreements for e.g. joint venture can be for a specific goal or joint venture for a specific time period. Also, a joint venture agreement can be entered into in any form for e.g. in the form of a LLP or partnerships etc with the requirement being there should be two or more than two parties to the agreement.
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The joint venture agreement which is entered into for a specific purpose is generally referred to as consortium. The best example of this of this can be the consortium formed by upstream oil companies at the time of bidding sessions of NELP. There are various reasons for a company to prefer a joint venture agreement before going for undertaking big projects. JVs are generally entered into for high profit and high risk businesses. For e.g. going for exploration of an oil block obtained after bidding involves a lots of capital investment as well as latest technological know high and there is always a high risk of not getting oil in the block and income from the block starts only after oil is discovered in the block otherwise all the losses have to be borne by the investor alone. Therefore before bidding for the block, several oil companies form a consortium and sign a memorandum of understanding and then together go for final bidding. Another reason for entering into a joint venture agreement is FDI. In 1991, Indian economy was liberalized and foreign investment was allowed and now in most of the sectors foreign investment up to 100% is allowed except some sectors where it is not at all allowed (nuclear sector, agriculture sector) or where prior permission from govt. is required. In such a situation although fiscal incentives succeeded to attract foreign players to the domestic market but their unawareness about the regulatory and policy framework of India compelled them to enter into JVs with Domestic players for a better understanding of the domestic market as well as structural and regulatory framework of the country. This also benefitted them as they did not have to struggle much for the customers as the customers of the domestic players automatically became their customers.
Below are some of the advantages and disadvantages of the JV agreement system:
1)A joint venture agreement provides great opportunities to develop and improve in terms of capital and technological know-how. With the help of it, companies not only increase their capacity but also gain expertise in various fields.
2) JV arrangement allows companies to escape from geographical boundaries to which they are confined from decades and does not let them to stick into only one traditional form of business but instead provides them with ample opportunity to enter into new geographical boundaries and new related businesses.
3) Joint ventures are flexible and make business convenient because they are generally for a particular purpose and limited time thus fixing your liability and reducing your burden.
4) JVs provide companies a creative way to exit from non core business.
5) Companies or partners in a JV have an option to eventually segregate their business from rest of the organization and one party can sell its share to other party to the agreement.
1) Due diligence as well as sincere efforts are required to enter into the right relationship. Entering into partnership with other business may be challenging if:
2) The objectives of the venture are not properly understood by everyone and there is some discrepancy regarding the management structure and the clauses or Memorandum of Understanding are not clear to everyone involved as happened with Enron company who entered into an agreement with Maharashtra govt.
3) The level of expertise, quality of technology and availability of capital of one partner is relatively higher than other partner causing imbalance in level of expertise, capital and technological knowhow.
4) The Parties to the agreement are not clear of the objective.
5) There is lack of support for each other among the partners curtailing leadership opportunities.
6) Due to different cultures and backgrounds, the parties are finding it difficult to co-operate and work with each other.
7) In such situations, the parties distract from the goals of the agreement which not only results in failure of the entity as a whole but also badly affects the business as well as reputation of all individual parties.
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