From the article series “Joint Ventures India”:
Besides the argument “too little market know-how” German medium-sized companies expect their future Indian joint venture partners to make a corresponding financial contribution to the capitalization of the joint venture: “The risk of doing it alone is too great for me, so I want to share the risk with a local partner” (argument number 2 for establishing a joint venture)
Indian JV partner likes to be “the Swabian housewife”
Be careful, risk sharing is a thing in India! In almost all joint venture proposals we have seen in recent years, you are expected to have technology, know-how (see article Why Indians always only want one thing: the joint venture) and above all capital. In addition to the “relationships, etc.” already mentioned, the contribution from the Indian side is mainly limited to “contributions in kind”; these are often just insignificant trivialities without any real value, such as “organizing the founding of a company” or other, usually very vaguely formulated activities , like “General Project Support”.
Joint venture vs. M&A
Of course, there is also the situation in which your potential joint venture partner offers to bring an existing business into a joint venture. In this case, you are faced with the need for a complex economic and other assessment of a current company, i.e. comparable to buying it. This only has an indirect connection with a joint venture! Don't make the mistake of trying to carry out this valuation on your own; we advise you to seek professional support, including from chartered accountants/auditors etc.
Of course, the proposal sounds extremely interesting at first: an Indian company that produces similar products still has free space and buildings on the property that could be used directly for the JV and also has workers that can be deployed quickly. And sales & marketing, as well as the initial management tasks, could also be covered by the existing structures.
There's no free lunch in India!
But if you then take a closer look, you realize that you or the joint venture should of course pay rent for the “already existing” production hall and also the other services offered, i.e. the use of the “structures directly available to the partner” are by no means free , rather you or the joint venture will be billed for costs, certainly on a scale for which you could hire qualified personnel directly from outside. Your partner may still contribute his or her share of the initial (minimum) share capital, but as soon as money is really needed, you will mostly be held responsible or it will be suggested that you finance the necessary investments through loans (of course you are expected to do so). provide appropriate security!).
Indian companies are usually quite capital-poor and hold German partners accountable.
In this context, the following aspect is important: Indian family businesses still tend to transfer every euro from the company directly into private assets. Sufficient reserves are rarely left in the company and therefore most privately held Indian companies are actually in a rather weak financial position. And if the Indian's private assets should simply serve as security if necessary, that sounds like a practical solution. Unfortunately, it is family property and therefore the brother, wife, cousin and widow of the deceased great uncle would also have to sign. Hopefully there won't be a family dispute... And the banks often don't play along and demand "real" security - guess who that means: you, of course, or the German parent company!
Conclusion: When negotiating a joint venture, you should pay particular attention to future obligations and establish binding and secured agreements to finance medium and longer-term investments.
