A joint venture is considered to be a very popular in India, especially in sectors where the government does not allow 100 percent FDI. Joint venture partnerships allow businesses to reduce the risk involved and still take part in the active Indian market. Of course, the success of any joint venture depends on a number of factors, with compatibility being one of the most crucial. Given below is a quick overview of joint venture partnerships and its benefits.
Overview and Benefits of Joint Venture Partnership
Joint ventures are tactical partnerships in which two, or more, parties or enterprises come into an agreement to put together their capital, services and goods for a uniform commercial project. Joint venture partnerships are mainly chosen by corporate houses in order to do business in India. There are no separate rules in the country that govern joint ventures. This means that companies that are registered in India are always considered local companies, even if their equity is completely overseas.
The benefits of a joint venture are many. A joint venture partnership allows a company to achieve greater market penetration into new areas and expand to other region. Smaller firms can be benefited by such tactical partnerships, since it allows them to form a self protective network. Given below are some benefits of joint venture contracts:
1. It allows business to share risks, thus reducing the risk involved each member of the contract. The number of activities can be expanded with the help of small investment outlays when compared to how it would have been in case of independent financing
2. All parties in the business can acquire a huge amount of knowledge through joint venture contracts. In fact, the complexity of knowledge that would be transferred is one the most important facts in determining the contract between partners. The knowledge might be related to all aspects, or limited to single segments like marketing, production, research and development, etc
3. Joint venture contracts give partners certain tax advantages
4. It helps in the expansion of a company’s operations to other countries. Local partners can contribute by offering specialized knowledge about certain regional factors that play a key role in the success of a business venture.
Problems and Issues
A joint venture would be prone to certain problems and issues. With every change in circumstances, there would be a necessity to adjust the terms and conditions of a joint venture contract. However, if the contract is not flexible enough to allow this, it would lead to difficulties. The most common reasons for problems and even complete failure in a joint venture are given below:
• Underdevelopment of the technology behind the venture
• Inadequate planning of the joint venture
• Inability to reach a mutual agreement to solve the basic goals of the venture
• Refusal of a party to share knowledge with other parties in the venture when required
• Inability to share control on the ventures equally among parties, or to come in a compromise on difficult issues
Definitions and Details of Joint Venture Contracts
The definition of a joint venture is best given in India by the Accounting Standard 27, or AS-27, of the Institute of Chartered Accountants in India. The ICAI AS-27 defines this tactical partnership as a contractual arrangement whereby two or more parties undertake an activity that is subject to joint control. Joint control is nothing but an agreement that details the sharing of power and control over operating and financial policies in order to obtain benefits from it.
Every joint venture is characterized by the presence of two or more ventures that are bound by contractual arrangement. The main role of this arrangement is to establish joint control. A joint venture contract can be evidenced in several ways. For example, it can be done by a signed contract between parties, or through the minutes of the discussion among the parties. In certain cases, the arrangements of control would be incorporated in the articles or by-laws of the joint venture contract.
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