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Structuring Joint Ventures

(Note: This is a mandatory portion of the syllabus)

A foreigner may invest in India either by incorporating a new company or through purchasing shares of an existing company.

1. Joint venture by incorporating a new company

A company may be incorporated as a private company or as a public company.  A private limited company is required to have minimum paid-up capital of INR 100,000 and a minimum of 2 directors and 2 shareholders (shareholders can also become directors in the company).  In case of a public company, the minimum paid-up capital required is INR 500,000 and a minimum of 3 directors and 7 shareholders are required.  
 Public companies are required to comply with more formalities and are subject to more restrictions as compared to private companies.  Private companies are exempt from various compliance requirements under the Companies Act, 1956 and, therefore, are easier and less expensive to operate in view of compliance requirements.

2. Joint venture by acquisition of shares of an existing Indian company

Subject to the prevalent FDI policy, a foreign entity can invest in an existing Indian company by i) purchase of shares from existing shareholders or by ii) subscription of shares in a fresh issue.In either case, existing shareholders may have pre-emptive rights, that is, shares sold by an existing shareholder or fresh shares issued to an investor are sometimes required to be first offered to the existing shareholders, an a new buyer can buy those shares only if such right is not exercised by existing shareholders.


These pre-emptive rights are typically provided in the articles of association of the Indian company and the Companies Act (in case of public companies). These can be addressed by (i) taking ‘waiver letters’ from existing shareholders, or (ii) by obtaining a power of attorney to deal with the shares from the existing shareholders or by (iii) in case of public companies, a special resolution of the shareholders.


NOTE:The choice of the mode of investment is primarily made on the basis of the intended beneficiary of the investment by the foreign investor. While the beneficiary in case of a share purchase are the shareholders purchasing selling the shares, in case of a fresh issue the Indian company would receive the payments in lieu of the shares.


3. Options for structuring a joint venture/ subsidiary in India

The amount of shareholding that a foreign investor has in the Indian company also corresponds in some measure to the amount of ‘control’ or ‘restrictions’ that he can impose on the governance of the company. In some cases, FDI policy or sectoral regulations may specify caps on permissible percentage of shareholding in certain sectors.

In addition, governance rights are also dependent on the rights granted to various shareholders by a shareholders agreement or a joint venture agreement. For example, minority shareholders may be granted veto rights in certain circumstances, pursuant to a shareholders agreement or joint venture agreement.

Even when there is freedom to contractually specify the rights of investors, promoters can use the shareholding percentage that the investor proposes to acquire as a relevant factor in negotiating his governance rights under the shareholders agreement. 


For example, the rights granted under a shareholders agreement to an investor acquiring 49% shares will significantly differ from those granted to an investor acquiring 15% shares of the same company.


We have set out below the key rights attached to various shareholding levels as per the Companies Act. Making variations to these is possible through a shareholders agreement (assuming the variations are within the terms of the FDI Policy and applicable sectoral regulations).

Please note that these are statutory rights under the Companies Act and cannot be given away through contracts. However, parties usually create additional rights through shareholders agreements, which are letter incorporated into Articles of the company.

(a) Less than 10% stake

By default, joint venture partners having less than 10% stake will only be able to block the convening of meetings if they are convened at a notice which is shorter than the period specified under the Companies Act. Where an annual general meeting of a company is required to be convened at a shorter notice (than that prescribed under the Companies Act), all shareholders must consent to such shorter notice. In the case of any other meeting of the shareholders, shareholders holding at least 95% of the share capital of the company must agree to a shorter notice.

(b) 10% or more

A shareholder holding 10% or more shares of a company has the right to make an application to Company Law Board alleging oppression and mismanagement in the affairs of the company. Such an application can be made on the basis that an action taken by the management is oppressive to the shareholder or prejudicial to the interests of the company or to public interest.

Shareholders holding 10% or more of the voting paid up capital of the company are also entitled to requisition an extraordinary general meeting, demand for a poll and can challenge before a court, any resolution of the company varying their rights. However, the shareholder will not have adequate representation at a meeting of the shareholders to pass or block any resolution. 

26% - 49%

Where the member's shareholding is more than 25% and less than 50%, the member will not be able to pass resolutions proposed by it at a meeting on its own.  However, no special resolution can be passed unless the member votes in favour of such resolution at the meeting of the shareholders.  In other words, the shareholder can always block a special resolution.

50% (When the shareholders have an equal number of shares in the company)

This is a common but not highly recommended option as the likelihood of deadlock is much higher than in other options. This could severely hamper even the day to day operations of the company.


(e) 51% - 74%

An ordinary resolution has to be passed by a simple majority of the members present and voting at a general meeting. Hence a member holding more than 50% will have the power to pass and block ordinary resolutions.

75% to less than 100%

A special resolution can be passed only upon favourable vote by a majority of not less than three-fourths (75%) of the members present and voting. Hence a shareholder holding 75% or more shares in a company can pass a special resolution on its own.


(g) 100% (wholly owned subsidiary)   

A foreign company can also incorporate a wholly owned subsidiary in India. If a foreign company intends to incorporate a wholly owned subsidiary, it can appoint another shareholder to hold the shares of the subsidiary as its nominee, as a minimum of two shareholders are required to be members of a private company under Indian law.




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