Typical pitfalls and how to avoid them
Have you found the right partner for a joint venture (JV) in India and established a trusting basis with them by negotiating and signing a term sheet or memorandum of understanding (MoU)? Then your lawyers and the lawyers of your JV partner will typically work meticulously on the next step, the joint venture agreement All essential aspects of the collaboration should already have been clarified by this point in time through the term sheet or the MoU.
Typical pitfalls and tips
However, as a European contractual partner, be prepared for these 10 pitfalls:
1. Remember that in reality a joint venture in India is always a Indian company is (See blog post: Why Indians always want only one thing: the joint venture – Dr. Wamser + Batra) You are not on site and your Indian partner has the information sovereignty, the network and the actual means to make your life and business success difficult in the worst case scenario. As a result, you are dependent on their willingness to cooperate, regardless of what the JV contract regulates in theory. However, there are ways in which you can set up the control and management options of the JV in a targeted manner right from the start (see point 6).
2. Under the influence of the lawyers involved – especially Indian ones – the focus in the JV contract is often directed to intangible aspects or is unnecessarily overloaded. JV contract shortThe tendency of Indian lawyers to (seem to) regulate all worst-case scenarios waters down important agreements and often paves the way for unnecessary trench warfare later on. A JV is only successful as long as the parties involved see the cooperation as mutually beneficial - similar to a marriage. If too many disagreements arise, contractual arrangements are of little help unless clear and pragmatic "dispute resolution" and exit rules are agreed.
3. Already negotiated and in Term Sheet Binding agreements are suddenly brought up for discussion again by your Indian JV partner or his lawyers during the JV contract negotiations. This breaks with a principle that, from the point of view of European negotiating partners, is essential
The business basis for this is to invest time and effort efficiently in negotiations with the partner. A clear, consistent response is required here, including interrupting the negotiations in a friendly but firm manner, at least temporarily, on key points.
4. Avoid as much as possible from the outset Conflicts of interest between the JV partners. For example, in order to determine whether your partner is charging market prices internally, e.g. for administrative tasks, renting space, hiring out staff, etc., it is important to know benchmark prices and to establish contractual options for checking them. The early development of your own structures and assets in the JV itself is also an important part of avoiding conflicts.
5. Contractually state which of you actually contributes which tangible and intangible assets, e.g. know-how, patents, brand names, OEM certifications, etc. to the JV, and not just “makes them available”, ie gives them to the joint venture in return for payment under possibly unclear or unfavourable conditions. In addition, create a mutual understanding that contributions against payment by the JV, e.g. renting a hall from your Indian JV partner, does not represent a real contribution of an advantage, since you can also obtain this service on the free market at any time. The contribution of alleged sales, purchasing or manufacturing networks should also be subject to prior Due Diligence be subjected to.
6. Create a close network of internal control with appropriate key performance indicators (KPIs) etc. based on the principles and regulations common in your group as well as the principles and regulations that are effective in India. Without a system of continuous controls, irregularities are usually discovered too late, often with serious consequences (see blog post: Why Joint Ventures in India Really Fail – Dr. Wamser + Batra). Therefore, make clear agreements about the later Reporting:Foreign companies often experience unpleasant surprises because the Indian side shares the financial data required by the Companies Act, but withholds other company figures that are important to them in the reporting. The actual performance of your joint company then becomes a black box for you in reality.
7. When providing administrative services, make sure that no unwanted cash pooling arises. We repeatedly observe that the free cash flow is used by the JV partner to take out interest-free loans from the JV for special interests. These loans are usually repaid, but the JV partner thereby grants itself an interest-free loan without asking, the monetary value of which it would have to pay you, e.g. in the form of preferential dividends. In addition, the JV then bears the insolvency risk with regard to the loan. This also shows why careful due diligence in partner selection and ongoing controls are so immensely important.
8. Although it may sound paradoxical at first, a clear exit strategy the lifeline of every JV in India, and should therefore definitely be included in the JV contract. As already mentioned in the term sheet, a clear and unambiguous "dispute resolution mechanism" and a "JV dissolution mechanism" should be regulated, i.e. under what circumstances and at what point you and your Indian partner want to separate, and what the corresponding modalities should look like; a mutual right of first refusal should also be granted if necessary. A strong right of withdrawal often paves the way for an agreement in the event of disagreements more easily than sophisticated regulations that were developed in advance from the then prevailing and naturally limited idea.
9. Any disagreements between you and your Indian JV partner can result in massive delays, costing you energy and money and crippling strategic development opportunities. The clear Identification of stakeholders im Indian JV and the establishment of a trust basis with these people through continuous communication will contribute significantly to the long-term success of the JV.
10. Analogous to the transfer price documentation required for taxable profits in cross-border intra-group transactions above a certain volume, a corresponding business distribution matrix also be helpful for the JV on many levels.
We are happy to answer any questions you may have about setting up a long-term, effective joint venture in India.
We will work with you to find the JV partner that best suits your needs, we will help you with communication and the agreement of the term sheet and, of course, we will also support you in the negotiation and conclusion of the JV contract as well as in the subsequent preparation of the statutes of the Indian joint venture and its establishment.
And should your existing joint venture need to be dissolved, we will also be at your side in this situation with our full experience and timely, pragmatic solutions.
We will support you in all situations! Please feel free to contact us without obligation.
