Deciphering the Distinctions between Joint Ventures and Partnerships in India

In the ever-changing panorama of corporate partnerships, organizations frequently experiment with different configurations in order to undertake the shared business model, operations intention and execution of the shared objectives of the entities. To effectuate a specific business structure, entities incorporated and set up in a dynamic landscape be predisposed to delve and decipher conjoint benefits and thereafter seek assistance in furtherance of such objectives. During the recent years, India has witnessed a significant surge in foreign investments from across the globe.

For the purpose of implementation of the pecuniary outcomes, the entities necessitate legal assistance in terms of effectuating and reviewing definitive agreements pertaining to joint ventures, a form of customary business arrangement and opinions pertaining to contractual obligations and rights pertaining to partnerships being entered by the parties. While joint ventures and partnerships are two consistently engaged business structures in common parlance, these jargons are frequently used interchangeably, however, it is imperative to comprehend the legal differences, ramifications and it’s governing legislations, particularly in the Indian context.

This article provides a rounded assessment of the legal implications, advantages, and other focal components to deliberate upon while effectuating joint ventures and partnerships as a part and parcel of business restructuring, which is incessantly and swiftly thriving in India.

Joint Ventures

A business agreement in which two or more parties collaborate on a specific project or series of projects, joint ventures are distinguished through collaborative inputs pertaining to resources, risks, and investments. Joint ventures are frequently executed by entities for a limited duration of time, and the partners involved retain their own legal identities. Since joint ventures have matured in reputation among corporations seeking for collaborative opportunities in India, understanding the legal landscape governing joint ventures is becoming increasingly indispensable as businesses pursue such ventures to achieve common goals.

Joint ventures in India are governed largely by a number of legislations, including the Companies Act, 2013 (“Companies Act”), which concerns the incorporation and administration of companies, which are frequently used as the vehicle for joint ventures. The Companies Act establishes a framework for the formation of joint venture enterprises, defining the rights and obligations of the parties involved. Furthermore, depending on the nature of the objectives, such as technical collaborations or infrastructure initiatives, sector-specific restrictions may be applicable thereof. Joint venture agreements outline the rights, liabilities, and governance structure of such joint venture between the entities who thereby negotiate and structure their joint ventures in accordance with individual requirements, rights and business operations.

In order to govern and further enforce the conditions and/or restrictions in foreign direct investments, the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India on October 15, 2020, the foreign direct investment (“FDI”) policy (“FDI Policy”) and further rules were laid out from time to time under the Foreign Exchange Management Act, 1999 (“FEMA”). FDI Policy and various sector specific legislations control, influence and monitor cross border joint ventures. The Reserve Bank of India (“RBI”) and the Ministry of Corporate Affairs are in charge of ensuring that parties follow FDI limits, sectoral caps, and regulatory criterion. Obtaining relevant regulatory licenses is critical for the smooth running of joint ventures, particularly in sectors with restrictions on foreign participation. Under the FDI Policy, FDI is permitted through either the automatic or the government route, wherein the automatic route signifies that a person resident outside India does not require the prior approval of the Central Government for the purpose of such foreign investment. However, as per the government route, an approval from the Government of India is required by the person resident outside India for the purpose of such foreign investments being undertaken through this government route.

Partnerships

Alternatively, partnerships in India are governed by the provisions enshrined under the Indian Partnership Act, 1932 (“Partnership Act”). In accordance with the Partnership Act, a ‘partnership’[1] is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. It is clarified that persons who enter into a partnership with one another are individually referred to as ‘partners’ and collectively as a ‘firm’.

Partnerships are classified according to the objective for which they are executed, the tenure of such partnership, nature, and the obligations and liabilities, be it limited or unlimited, of the partners entering the said arrangement. For example, partnerships may either encompass the partner’s goal may extend to collaboration for a particular time, or the relationship may exist solely until the object succeeded. Some examples of such collaborations are:

Partnership at will: A partnership[2] which can be terminated at the whim of the partners by giving notice of their decision to do so and the duration of such partnership will be determined at the partner's will. In the partnership at will, the receipt of termination notice from one partner implies that the entire partnership stands terminated.

Particular partnership: This type of partnership[3] is formed to conduct a specific business and ends upon fulfillment of business goals.

Limited liability partnership: In the event the partners executed a limited liability partnership, some or all partners have restricted obligations. Partners are only personally liable for their investment and unto a limited extent. In furtherance, limited liability partnership permits engagement in the firm's general management or regular conducts of the partnership firm.

Comparative Analysis of Joint Ventures and Partnerships

Pursuant to the examination in terms of necessities of a joint venture and a partnership, the status as a legal entity is the foremost distinction wherein in the event of a joint venture between two or more parties, another one is created, however, in the case of partnerships, a separate entity is not formed. Further, it is noted that ‘partnership’ as a term of reference may be utilized, at times, for new or existing joint ventures since the same is a result of partnership of corporations.

Further, in terms of the liability either arrangement, there is limited degree to which the entities invest in a joint venture, which thereby reduces the stakes of the investments and risks thereof and the liabilities of the parties executing a joint venture agreement amongst each other. In furtherance to the abovementioned, in the event parties invest jointly for the purpose of implementation of business operations, they may incorporate a company in India registered under the Companies Act.

A joint venture partnership is registered under the Partnership Act; however, such a partnership has unlimited liability for it’s shareholders, requires consent from all partners prior to the transfer of shares. It is pertinent to note that partnerships are formed through the process of execution of a partnership deed, payment of requisite stamp duty and registration with the Registrar of Firms. However, a public private partnership is a special kind of joint venture wherein the Central Government or the State Government collaborates with private companies, domestic or international, and thereby offers concessions in order to construct, develop and operate projects as public sector undertakings. Further, a joint venture can also be set up as a limited liability company or a limited liability partnership under the Companies Act and the Limited Liability Partnership Act, 2008.

In accordance with the apex court judgement of New Horizons Limited and Ors. vs. Union of India and Ors.[4], a ‘joint venture’ refers to a legal entity which is in the nature of a ‘partnership’ engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement, to share both in profit and losses. The corollary between the two, joint ventures and partnership under the Partnership Act, has been reiterated, and accepted in the judicial precedent of Gammon India Limited vs. Commissioner of Customs, Mumbai[5].

Conclusion

While joint ventures and partnerships entail collaborations and cooperations, the legal distinctions are essential for efficiently establishing pacific economic agreements. In India, the legislative framework for joint ventures and partnerships provides a clear route for companies intending to engage in collaborative ventures, assuring legal compliance and the protection of interests. Entities considering such collaborations should thoroughly analyze the specific demands of their projects and select a structure that matches with their objectives while also complying with Indian legislation.

While the Companies Act levies compliance requirements, restrictions, guidelines, and ancillary requirements which would apply to joint ventures being effectuated in India, the Partnership Act presents the legal structure on individuals/entities entering partnerships. In order to fructify and to ascertain a business structure, the entities and/or individuals are dealt with a prerequisite to evaluate the conditions including but not limited to formulation of a business plan and determination of the prospective business, rights of parties, any restrictive covenants, place of incorporation or business, whether a new entity will be incorporated, profit sharing between the parties, exit/termination clauses, jurisdiction for the purpose of resolution of disputes amongst the parties.

Indian companies are required to ensure adherence to the regulatory guidelines laid out in order to avoid any legal complications, however, it is imperative to note that a comprehensive legal framework is amiss which provides clarity in provisions for joint ventures, investments, restructuring, rights and obligations with respect to such arrangements and investments thereof. Undoubtedly the requirement persists for the formulation of a robust mechanism which lays down control over such investments in joint ventures and routes the partnerships of entities like joint ventures, and thereafter facilitates and monitors transparent and efficient joint venture investments and effective partnerships in the Indian ecosystem.

[1] Section 4 of Indian Partnership Act, 1932;

[2] Section 7 of Indian Partnership Act, 1932;

[3] Section 8 of Indian Partnership Act, 1932;

[4]MANU/SC/0564/1995;

[5]MANU/SC/0739/2011.