By Krishna Sharan MishraCompany Secretary & Trade Marks Attorney

+91-9884041418; krishna@ksmassociates.netwww.ksmassociates.net

INBOUND FOREIGN COLLABORATIONS

AND

OUTBOUND FOREIGN COLLABORATIONS

Structuring of Inbound Joint Ventures

◦ Foreign Direct Investments (FDI)◦ Foreign Technology Agreements◦ Foreign Investment through GDRs/ADRs/FCCBs◦ Foreign Investment through Preference shares◦ Foreign Investment through convertible debentures

Stages of JVs

◦ To decide whether Equity JV or Contractual JV◦ Negotiate a JV Agreement◦ Drafting of JV Agreement

Automatic Route Within prescribed sectoral caps No approval of RBI/CG required Invst in equity/fully convertible pref shares/deb In new ventures/existing companies

Approval Route (Government Route) Proposals requiring Industrial Licence Foreign Invst of >24% in equity of SSIs. No bar if

status given up alongwith 50% export obligation. Existing venture/tie up in India by Foreign

collaborator in the same field of Investee Indian Co If investor is OCB If in excess of sectoral caps/non-permitted sectors

Prohibitions: Investment in any form prohibited in 5 sectors; in

the form of FDI, is prohibited in 10 sectors OCBs (meaning Company/firm/society/other

corporate body with 60% of NRI holdings (Trusts included) can make only with prior approval of RBI (if otherwise under automatic route)/CG(if otherwise under govt route)

Citizens/entity of Pakistan cannot make investments in India

Citizens/entities of Bangladesh only with FIPB approval

Automatic Approval Where lump sum payments do not exceed USD 2 mn. Royalty limited to (i) 5% for domestic sales (ii) 8% for

exports; total payment not to exceed 8% of sales over 10 years (no restriction on duration for payt by WOS to its offshore parent company).

Period of royalty payment does not exceed 7 yrs from commencement of production OR 10 yrs from date of agreement, whichever is earlier.

If for use of brand name (without technology transfer) then royalty not to exceed 2% for exports & 1% for domestic sales

Approval Route (Government Route) Proposals requiring Industrial Licence Items of manufacture reserved for SSIs Existing venture/tie up in India by Foreign collaborator in

the same field of Investee Indian Co Proposals not meeting parameters for automatic approval

Eligible Payments Payment for technical knowhow fees/design & drawing/

engineering services/royalty Payt for hiring of foreign technicians/deputation of Indian

technicians abroad/testing of indigenous raw materials, products, indigenous technology in foreign country are not covered (being regulated by separate RBI procedures)

Imports of P & M and raw materials not covered.

NEGOTIATING A JV AGREEMENT

DRAFTING OF JV AGREEMENT

IMPORTANT CLAUSES

KINDS OF RESTRICTIVE PRACTICES

Purpose of JV Well defined objective Understand, identify and define

Contributions by parties Parties are more than a passive investor in JV Hence range of possible contributions broader Include finance, services, tangible & intangible

property rights, functional expertise, experience, contacts, obtaining supplies/customers

Capital Structure Includes determination of share capital,

borrowings, debentures, pref shares

Management, Control & Administration Includes determination of Board structure; key

officers; voting rights; reserved matters

Continuity of JV Includes pre-emption rights; identification of

new partner; compensations while pulling out

Issue of further Capital Important to maintain proportion of capital

contributed Hence, unanimous consent of Board

Operational Issues The JV agmt should provide for the manner in

which operational issues are to be dealt with Issues like borrowing, expansion, diversification,

dividend policy, investment in other companies.

Difficult to prepare a universally applicable set frame of terms and conditions

Factors to be kept in mind:Capability of Collaborator; clear definitions of technical terms; Quality control; payment of royalties, rates, calculation; force majeure; training of personnel by collaborator; arbitration clause; payment of interest on delayed payments.

Information contained in the presentation is for general guidance. The application and import of laws can vary widely based on specific facts involved. The presentation doesn’t constitute professional advise from the Author. The presentation should not be used as a substitute for consultation with professional

advisors. Before making any decision or taking any action, you should take professional advice.