The document discusses key aspects of joint ventures including:
1) It defines a joint venture as a strategic alliance between two or more firms to share resources and capabilities.
2) It covers classification of joint ventures under Indian law and primary goals such as extending market reach.
3) Key factors involved in structuring a joint venture deal are discussed such as understanding FDI rules, conducting due diligence, and obtaining necessary regulatory approvals.
3. Joint Ventures
• Joint venture is a strategic alliance in
which two or more firms create a
legally independent company to share
some of their resources and
capabilities to develop a competitive
advantage. The parties agree to
create a new entity by both
contributing equity, and they then
share in the revenues, expenses, and
control of the enterprise.
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4. Classification
• A typical Indian Joint Venture is where:
– Two parties (individuals or companies), incorporate a
company in India. Business of one party is transferred to
the company and as consideration for such transfer, shares
are issued by the company and subscribed by that party.
The other party subscribes for the shares in cash
– The above two parties subscribe to the shares of the joint
venture company in agreed proportion, in cash, and start a
new business
– Promoter shareholder of an existing Indian company and a
third party, who/which may be individual/company, one of
them non-resident or both residents, collaborate to jointly
carry on the business of that company and its shares are
taken by the said third party through payment in cash 4
5. Invest in a U.S company with a
services fulfillment subsidiary in
India
Direct investment in Indian company
from destination like Mauritius &
Financial Investor Cyprus
(FII or FVCI)
Direct Investment in Indian company
through a venture Capital fund which
is registered under SEBI
Investing in
India Branch office
Operate as a
Foreign Liaison office
Company
Strategic Project office
Investor
Joint venture
Operate as an
Public
Indian Company
Wholly owned
Subsidiary
Private
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6. Primary Goal to start a JV
• Extend the Market reach
• Get access to needed information and resources
• Build credibility with a particular target market
• Access new market which is inaccessible without the
partner
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8. Key factors involved in JV
• Early considerations
• Understanding FDI rules
• Conducting appropriate due diligence
• Structuring the joint venture vehicle
• Company formation
• Obtaining regulatory licences and approvals
• Employee issues
• Taxation and duties
• Protecting intellectual property rights (IPR)
• Joint venture documents
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9. Government Approvals
• All the joint ventures in India require governmental approvals,
if a foreign partner or an NRI or PIO* partner is involved
• The approval can be obtained from either from RBI or FIPB
(Foreign Investment Promotion Board). In case, a joint venture
is covered under automatic route, then the approval of
Reserve bank of India is required
• In other special cases, not covered under the automatic route,
a special approval of FIPB is required
Investment limits.xlsx
*Person of Indian Origin: For investments in immovable properties A foreign citizen (other than a
citizen of Pakistan, Bangladesh, Afghanistan, China, Iran, Bhutan, Sri Lanka, or Nepal) is deemed
to be of Indian origin if, (i) he held an Indian passport at any time, or (ii) he or his father or paternal
grand-father was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955
(57 of 1955) 9
10. Deal Structuring-Key Consideration
Choice of Funding Operational
Investment options Synergies
Jurisdiction
Vehicles
(Taxability of)
Equity
Dividends Regulations
Preference
Tax
Capital Gains
considerations
Convertible
Debt
Interest on
Debt Funding Differential
Rights
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11. Choice of Jurisdiction
• Taxability of
– Distribution of Dividends
• In Indian context, any Jurisdiction is tax neutral due to the fact
that DDT @ 16.995% is levied upon the distributing company
– Capital Gains
• Capital Gains would arise upon the sale of the investment in
India. Thus, this aspect concerns the exit option for the
investor.
• In the Indian context, gains made on the sale of investment
attracts a capital gain tax of 20% if the holding period of the
asset is less than 3 years and 10% if the holding period
exceeds 3 years. In view of the same, the investment can then
be structured through a holding company set up at a location
where such gains are exempt. 11
12. Choice of Jurisdiction
• Taxability of
– Interest on Debt funding
• Interest on debt funding is a very critical part of the entire
transaction
• The tax deductibility of these expenses is critical, since this
would result in a considerable amount of savings
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13. Choice of Jurisdiction
Income Israel Mauritius Singapore Netherlands Cyprus
Stream
Dividends Nil* Nil* Nil* Nil* Nil*
Capital Taxable in Exempt in Exempt in Exempt in Exempt in
Gains India@ India India India if India
21.12%(long subject to holding is
term
limitations less than
&42.23%(Sho
rt term on amount 25%
Interest Withholding Withholding Withholding Withholding Withholding
tax @ 10% Tax tax @ 15% tax @ 10% tax @ 10%
@21.15%
*Dividend Distribution Tax is payable by the Indian company @ 16.995% 13
14. Investment Vehicle
• The choice of investment vehicle is largely based on the
regulations and the tax considerations existing in the country
where the target company is situated
• The overall guiding principle would
be that the investment vehicle qualifies to claim treaty benefit
under the tax treaty between India and the relevant
jurisdiction
• The choice of investment vehicle would be considered at 2
levels :
– Jurisdiction Level
– Indian Level(Country of the target Company)
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15. Investment Vehicle
• Jurisdiction level Parameters
– Ease of formation and administration
– Ease of Exit
– Local Regulatory(non-tax considerations)
– Tax treatment in the country of residence
– Tax differentiators vis-à-vis tax treaties with India.
This becomes critical due to the fact that
the same income not be taxed twice under two
different jurisdictions
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16. Investment Vehicle
• Indian level Parameters
– FDI restrictions in India based on the sectoral caps
in place
– Regulatory registrations and administration
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17. Taxation and duties
• The impact of tax treaties and agreement
between various countries and the optimum
use of offshore finance centers and tax
havens is critical for structuring a transaction
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18. Funding Options
• The funding options available for the structuring would vary
depending upon the present structure of the company and
the availability of debt. The normal options available would be
Equity, Preference, Convertible Debt and Differential Rights
apart from the structured funding options. These would vary
based on :
– The investor's preference for dividend or liquidation or both
– Prevailing Indian exchange control laws, which do not permit foreign
equity investment beyond a certain level in certain sectors
– The investor may wish to get disproportionate voting rights on its
investment in return for the strategic value such investor may bring to
the table
– Restrictions placed by the Indian corporate and securities laws with
respect to equity shares which may not suit the commercial
understanding between the parties
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19. Equity
• Most sectors have been opened up for foreign investment
and, hence, no approvals from the government of India are
required for issue of fresh shares with respect to these sectors
• The tax implications are as under :
– Dividends
• Dividends can be freely repatriated under exchange regulations
• Transfer to reserves before declaring dividends
• Dividends not taxable in hands of shareholders
• The domestic company must pay dividend distribution tax (DDT) at
the rate of
16.995% (15% plus surcharge of 10% and education cess of 3%)
– Capital
• Repatriation of funds not possible, as equity capital cannot be
withdrawn during the life-span of the company, except in the case
of a buy-back of shares 19
20. Preference Capital
• Preference shares (except foreign through fully convertible)
are considered as debt and has to be issued in conformity
with ECB guidelines/caps
• Tax Implications
– Dividends
• On fully convertible, can be repatriated but the maximum rate is capped
• On any other type needs to confirm to the all-in-cost ceiling prescribed in
the ECB
guidelines
• Tax Implications same as Equity shares
– Capital
• No company can issue preference shares that are either non-redeemable,
or are redeemable after 20 years from the date of their issue
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21. Example
• Following is an example of a possible capital structure that
can be arrived at a deal by a foreign investor who is taking
into account exit options and is investing 20 billion INR in a
wholly owned subsidiary
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22. Example
• Parameters to be considered for Capital Structure
– Different classes of shares in smaller amounts facilitate exit
through buy back of an entire class of shares as against
pro-rata buy back from all investors in the same class
– Share premium can be utilized for buy back of shares
under the Indian corporate laws in the absence of profits
– 100% of the CCPS can be bought back in a single year
unlike equity shares where there is a limit of 25% per year
– CCD's facilitate exit and also improve IRRs through regular
flow of interest
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23. Hutch-Vodafone Deal
• On February 12 2007, HTIL sold its 67%
interest in Hutchison Essar to a
subsidiary of Vodafone for a total
consideration of US$10.7 billion, to be
satisfied in cash
• Vodafone will assume net debt of
approximately US$2.0 billion,
estimated as at 31 January 2007
• The consideration represents a
premium to HTIL's telecom assets in
India and unlocks substantial value of
its investment in the country 23
24. Hutch Vodafone Deal
• Hutchison International, a non-resident seller and parent
company based in Hong Kong sold its stake in the foreign
investment company CGP investments Holdings Ltd, registered
in the Cayman Islands, which in turn held shares of Hutchison
Essar (the Indian company) to Vodafone, a Dutch non-resident
buyer. The deal consummated for a total value of $11.2 billion,
which comprised a majority stake in Hutchison Essar India
• In the light of this, the Revenue issued show-cause to Vodafone
asking for an explanation as to why Vodafone Essar (which was
formerly Hutchison Essar) should not be treated as an agent
(representative assessee) of Hutchison International and asked
Vodafone Essar to pay $1.7 billion as capital gains tax.
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25. Hutch Vodafone Deal
• Controversy
– The whole controversy in the case of Vodafone is about
the taxability of transfer of share capital of the Indian
entity
– Generally the transfer of shares of a non-resident company
to another non- resident is not subject to tax in India
– But the revenue department is of the view that this
transfer represents transfer of beneficial interest of the
shares of the Indian company and, hence, it will be
subject to tax
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26. Hutch Vodafone Deal
• Vodafone’s argument
– Vodafone's argument is that there is no sale of shares of
the Indian company and what it had acquired is a company
incorporated in Cayman Islands which in turn holds the
Indian entity. Hence the transaction is not subject to tax in
India
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27. Hutch Vodafone Deal
• Ruling favoring Vodafone • Ruling favoring Revenue
– Revenue would be left with – Revenue authorities can go
little choice but to propose an ahead and assess the agent for
amendment of the tax recovery of various tax
legislation to include the liabilities on transactions of the
concept of beneficial non- resident entity, including
ownership in the definition the capital gains tax liability on
of 'transfer‘ the transfer of beneficial
– Given the volume of cross- ownership of the Indian entity
border deals involving Indian – This would mean any
companies, the Revenue transaction happening
taking this step is not far- anywhere in the world would
fetched be subject to tax in India, if
nexus with India is proved
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