Every entrepreneur looks for opportunities to increase its market reach and generate higher revenues in a short amount of time. While some may consider options such as acquiring a competitive business or business mergers as permanent solutions. Although, businesses looking for temporary solutions for business growth, may also consider entering into a joint venture in Chennai, Tamil Nadu.
A joint venture (JV) is a commercial arrangement entered between two or more business enterprises with an objective to combine their resources to gain a tactical and strategic edge in the market for a shorter period to pursue specific projects. In the Joint venture (JV), each party is accountable for the costs incurred and profits/losses earned due to the arrangement. However, the joint venture is a separate entity from the other business interests of its participants.
A joint venture has been a common phenomenon across the Indian business Industry for ages in India. They are used across business sectors whereby Indian parties agree to cooperate with other Indian parties/ies to form a domestic joint venture or where one party is an Indian and the other one is a foreign entity and a cross-border joint venture is formed. Joint ventures in Chennai, Tamil Nadu have brought tremendous success and growth in pursuance of such collaborations.
Some of the popular joint ventures in the country include names like Hindustan Aeronautics Ltd. (HAL), which has entered into various joint ventures with foreign companies like Rosoboronexport, Aviazapchast and Mikoyan-Gurevich (MiG) of Russia, British Aerospace and Rolls Royce Holdings Ltd of UK, Merlin-Hawk and Edgewood Ventures of the USA, Elbit Systems, Israel and Snecma of France. Similarly, the airline Vistara is a joint venture between India’s corporate giant Tata Sons and Singapore Airlines (SIA).
Joint Ventures in Chennai, Tamil Nadu- Meaning & Definition
Basically, a joint venture happens when two or more businesses agree to work with each other to combine their strengths and limit their shortcomings to fulfill any objective or complete any project, which is in the form of a mutual understanding between two or more participants established on commercial terms & conditions. Joint ventures are usually formed by two businesses with complementary strengths. For example, a technology company may enter into a partnership with a marketing company to bring an innovative business product into the market or a foreign company may enter a joint venture with a domestic company to enter a new market and sell their products in such domestic markets.
While each start-up continues to maintain a separate business structure and legal status, creating a new joint venture is a collectively owned entity that is at the arm’s reach of the parent companies. Any number of companies or individuals may collaborate to create a joint venture that could include all types of business structures including self-employed individuals, Limited Liability Partnerships (LLPs), and Limited companies.
Generally, Joint ventures are created with a limited time frame or a definite outcome, they could also be created for a continuing purpose that ideally benefits all the parties, helps business to expand and grow or provide an additional stream of revenue that had not been possible otherwise. They could combine larger and smaller companies to take on either one or several bigger, or smaller projects and deals.
But, joint ventures should not be confused with the merger as there are several fundamental differences between the two. Firstly, where there is the transfer of ownership effectuated between the partners in a merger, no ownership is transferred in a joint venture. Further, in case a merger deal happens, both the parties continue to carry out business operations as one single firm rather than two separate firms. On the other hand, a joint venture happens when two firms continue to carry out their business operations but form a separate entity.
Therefore, a joint venture could dramatically increase the scale of operations and reach of the business while reducing business risks at the same time. However, without proper knowledge, it could be riskier for start-ups and could cause harm to both the parties involved. Therefore, the article below provides all about joint ventures in Chennai, Tamil Nadu, the process of entering a JV, and its pros and cons for a business.
Tamil Nadu is popularly known as the ‘Land of Temples.’ It consists of more than 33,000 ancient and historical temples that are certainly built collectively through the Dravidian style of architecture. The state is located in the southern part of the Indian Peninsula. 26th January is celebrated as the Formation Day of Tamil Nadu. Tamil Nadu is the 10th largest in terms of area and the 6th largest in terms of population. Tamil Nadu shares its boundaries with Puducherry (Indian union territory) in the east, Kerala in the west, and Karnataka and Andhra Pradesh in the North, and also shares an international maritime border with Sri Lanka. This state provides shelter to the Tamil people andthe Tamil language is one of the oldest and longest-existing classical languages in the world. Demographically, this Tamil language is majorly spoken in the state and is also the official language of the state. As per the 2011 census, around 88% of the population of Tamil Nadu is Hinduism.
Tamil Nadu has all flavors of the tourist attraction. This state is a historically privileged home of various ancient and medieval pilgrimage sites. It has gigantic mountains in the Western Ghats, exhilarating waterfalls, flourishing and dense vegetation, enchanting beaches, impressive monuments, several sacred temples imprinted on the sculptures with the blend of the Dravidian Architecture, fabulous wildlife, etc. Tamil Nadu has numerous scenic spots, elegant scenarios, rich cultural heritage spots with a touch of spiritual essence, and unaffected and impressive diversity. Tamil Nadu consists of 5 UNESCO (United Nations Educational, Scientific and Cultural Organization) world heritage sites they are Mamallapuram Monuments, Thanjavur Brihadeeswarar Temple, Gangaikonda Cholapuram Brihadeeswarar Temple, Darasuram Airavatheeswarar Temple, and Nilgiri Mountain Railway.
The climate of Tamil Nadu state has mostly witnessed monsoon fails and thereby, later on, leads to droughts-prone areas when the monsoon failed. Tamil Nadu state consists of a wide range of national parks, wildlife sanctuaries, and biosphere reserves such as – the Sathyamangalam Tiger Reserve (the largest elephant population in India), Gulf of Mannar Biosphere Reserve (specialized in seaweed seagrass, coral reefs, salt marshes, and mangrove forests), Agasthyamala Biosphere Reserve, Anamalai and Mudumalai National Park and many more. The wildlife sanctuaries and biosphere reservesaim to protect the natural habitat and provide a favorable ecosystem for the endangered species. As per the latest survey, India has a human development index of 0.619, in which the contribution of Tamil Nadu state is 0.736 which is the highest among all the states in the country. Tamil Nadu is among the most literate state in India with a literacy rate of 80.33 percent. In the Economy of Tamil Nadu, the contribution of the agriculture sector plays a crucial role. Tamil Nadu is the leading producer of agricultural products and Tamil Nadu is the fifth largest producer of rice in India.
Capital- Chennai
Top Business Ideas in Tamil Nadu
Vanakkam! If you are thinking to start a business in Tamil Nadu? It is the best place to start a business. Here are some of the amazing business ideas in Tamil Nadu. As we know that Tamilnadu is India’s sixth-largest state, it is located at the southernmost tip of the country. It has a rich cultural heritage and mouth-watering South Indian cuisine. The state also has a rich agriculture sector. The Tamil Nadu State exhibits high economic liveliness and with a high Human Development index (with a literacy rate of around 80%), a good infrastructure, highly attractivewhich is the best in Asia, and it is also India’s leading and innovative knowledge hub. This provides a golden opportunity for entrepreneurs and investors to work on unique ideas for their businesses. Let’s check out the top business ideas available in Tamil Nadu: –
Poultry farming business
Poultry farming is one of the most profitable and cost-effectivebusinesses in Tamil Nadu. If you are thinking to start a small-scale business in Tamil Nadu then this is the best niche to start. In spite of the poultry farming appears to be a lucrativebusiness, but still many people fail because of a devoid of proper enterprise knowledge and business idea. Hence to receive the high returns with less small-scale investment, first, it is been strongly recommended to have a fair and standard knowledge of poultry farming business setup before starting the business. Bakery business
In the past few years, it has been witnessed that there is a consistent increase in the demand for bakery products in Tamil Nadu. Starting with the Bakery business is one of the best business ideas at present in Tamil Nadu. If you do like enjoying the baking stuff and have proper knowledge in this field. Then you should start the business with very small capital investment and you can expand it over time by promoting it. You need to provide the best possible stuffto the customer. However, starting a bakery business is getting more popular these days. It is because it needs very less initial investment. If your Bakery products satisfy the customer then sooner or later your business going to generate enough income.
Startup Ecosystem in Tamil Nadu
The Tamil Nadu state has been at the front line of the economic development of our country. Entrepreneurship and technological advancement with innovation has provided the perfect platform for the state. Hence to boost the existing potential of the Tamil Nadu state, the state government has launched a unique startup policy in 2018. The main motto of this policy is to turn Tamil Nadu into a global innovation hub and the most tested and preferred spot for startups and business ideas. However, The policy is valid only for a period of 5 years from 2018 to 2023. The main purpose of the startup and innovation policy of Tamil Nadu is to provide an enabling atmosphere to the investors, and entrepreneurs for the startup in the state. The main objective of this policy is to partner with the different educational institutions and investors to promote the startup ecosystem. They also care to provide incentives and necessary resources to the startups with mentoring and investing guiding mechanisms. They also focus on reducing the existing tax burden on the startups. Apart from this, they have decided to foster the growth of at least 5000 startups in the state.
Types of Joint Ventures in Chennai, Tamil Nadu
i. Equity-based Joint Ventures in Chennai, Tamil Nadu-Under an Equity-Based Joint Venture the parties to the JV create an independent legal entity following the mutual understanding between two or more parties. These parties or partners agree to provide investment or other resources by way of their contribution to the capital or assets of the corporate entity. This structure is an ideal choice for long-term, broad-based joint ventures, and includes joint venture companies and joint venture limited liability partnerships (LLPs).
ii. Contractual-based Joint Venture in Chennai, Tamil Nadu–Contractual-based Joint Venture (JV) does not require the creation of a new and independent legal entity to work on a specific project or for a special purpose. This type of agreement is favored in situations involving a temporary task or for a limited activity or where a joint venture needs to be established for a limited term or a franchisee enters into a Joint Venture agreement for just this one project, while both the businesses shall continue to carry on their work.
iii. Incorporated & Unincorporated JVs in Chennai, Tamil Nadu-Further, JVs in Chennai, Tamil Nadu could also be incorporated or unincorporated. In case a joint venture is incorporated in nature, it is recognized as a separate entity in the eyes of law in the form of any limited company (private /public) under the Companies Act, 2013 or a limited liability partnership under the Limited Liability Partnership Act, 2008, which could be established by way of setting up a new entity or investing in an existing entity.
However, in case the joint venture is unincorporated, they are more contractual and used by parties to meet their mutual business interests and enter into collaboration with one another for a common goal but prefer to remain loosely associated with the other parties. Unincorporated joint ventures in Chennai, Tamil Nadu could take the form of unregistered partnerships, strategic alliances, contractual joint ventures, and consortiums in general.
While the benefits of an incorporated joint venture over an unincorporated joint venture include separate legal status, limited liability for parties to the joint venture, perpetual succession, clear structure for accounting and governance, etc. the same benefits are not available in the case of unincorporated JV.
Key Considerations for entering into a Joint Venture in Chennai, Tamil Nadu
The key factors to determine the structure of a joint venture in Chennai, Tamil Nadu include a mixture of commercial considerations and regulatory requirements. The most common of them being-
i. The proposed business activities of the joint venture company in Chennai, Tamil Nadu (i.e. Manufacturing, project execution, services, or trading).
ii. The period for the proposed period of collaboration;
iii. Limitation of Liability exposure to the parties concerned subject to the nature of the business of the joint venture entities and the degree of risk associated with them;
iv. the proposed structure of management and the involvement of the parties to the
v. joint venture in the management of the JV;
vi. Proposed requirement of capital and flexibility for accessing financing options;
vii. Proposed exit mechanisms from the joint venture and ease of exit for the joint venture parties;
viii. Tax implications; and
ix. Regulatory compliances to be followed;
How to enter a Joint Venture in Chennai, Tamil Nadu?
i. The first step towards entering into a joint venture is through choosing the right partner that suits your business requirements which is a crucial tool of success for any JV.
ii. After one or more partners have been selected and agreed to enter into the venture, a memorandum of understanding (MoU) or a letter of intent is to be signed by the parties emphasizing the foundation of the future joint venture agreement.
iii. Then, an MoU must be entered by the concerned parties after consulting a CA firm in practice, who shall be versed in all applicable rules & regulations such as the Foreign Exchange Management Act 2000, the Companies Act, 2013, Income-Tax Act 1961, and all other rules, regulations, and procedures.
iv. A joint venture agreement must be acknowledged and signed by all the parties to the joint venture agreement that must include the following clauses-
- Applicable laws & regulations;
- Shareholding pattern;
- Composition of board of directors;
- Management Committee;
- Board Meeting, its venue & frequency
- General meeting, its venue & frequency
- The quorum for the validity of key decisions at board meetings;
- Transfer of shares;
- Dividend policy;
- Change of control & buy-out rights
- Restriction/prohibition on assignment;
- Non-compete restrictions;
- Confidentiality;
- Indemnity;
- Non-Disclosure of Information
- Jurisdiction for dispute resolutions;
- Termination criteria and notice.
- The exit of a Partner
- Dissolution of JV
v. Each party must carefully assess all the terms and conditions before signing the contract for which the cultural and legal background of the parties must be studied for negotiations.
vi. The JV union must obtain all the government and regulatory approvals and permissions within the specified period and then form a legal business entity under MCA guidelines which could be grouped into two classes – companies owned or controlled by foreign investors, and companies owned and controlled by Indian residents.
What are the pros & cons of entering into a Joint venture in Chennai, Tamil Nadu?
Joint ventures in Chennai, Tamil Nadu can be complicated arrangements, but they offer strong advantages to businesses, some of which include-
Pros of Entering Joint Venture in Chennai, Tamil Nadu
i. Combined strengths & expertise in Chennai, Tamil Nadu– An effectively established joint venture leverages both the parties to the joint venture by combining their collective strengths and diluting their weaknesses, helping them to get the best of both worlds.
ii. Temporary in nature in Chennai, Tamil Nadu – Joint ventures are usually created for a limited period, which means that they enjoy the flexibility to work for the period temporarily and could simply tie up and exit the joint venture if things do not work out.
iii. Diversification and scale in Chennai, Tamil Nadu– Joint ventures allow the partners to operate at larger scales than their possibilities, which means that they have access to better resources, technical knowledge, more effective distribution networks, and the ability to enter a new market without actually having to develop new products and services from scratch and expensing costs & time to the market.
iv. Pooled risk in Chennai, Tamil Nadu– Each business involved in the joint venture shares an equal proportion of risk with each party working towards a mutual goal. Thus, creating a joint venture could dilute the risks of losses that otherwise have to be sustained by a party alone for business failures.
v. New sources of revenue in Chennai, Tamil Nadu– Usually, smaller businesses often face difficulties due to limited resources and limited access to projects as compared to their competitors. Entering into a joint venture with a comparatively larger company could enhance its financial resources to help it grow dynamically over a short period. Also, the more extensive streams of revenue could provide the smaller firm with larger &diversified revenue streams.
vi. Intellectual property advantages in Chennai, Tamil Nadu– It is difficult for businesses to create advanced innovative technologies in-house always. Thus, entering into a JV with tech-efficient firms could help a business to get access to the IPRs without having to incur additional time or costs in the development of such assets or purchase licenses for use. Thus, a smaller innovative business with advanced technologies but limited funds and a large firm with access to financing could benefit each other through a joint venture for the development of
vii. Synergy benefits in Chennai, Tamil Nadu– Joint ventures could offer synergy benefits similar to those provided under mergers & acquisition deals, which may include either financial synergy causing a reduction in costs of capital or operational efficiency due to the two businesses working with each other. Similarly, parties to a joint venture could also enjoy economies of scale for their business.
viii. Improved credibility in Chennai, Tamil Nadu– Typically, it may take a long period for a business to grow its business and earn market credibility and a consumer base organically. However, entering into a joint venture with a business brand that has already established its goodwill in the market could help them to attain boosted market presence and credibility more quickly.
ix. Creating Barriers to competition in Chennai, Tamil Nadu– Finally, one of the key reasons for businesses to consider entering into a joint venture is through avoidance of competition and pricing pressure in the market. Creating collaboration with other start-ups could help them to set rigid barriers for competitors making it even more difficult to penetrate the marketplace.
Cons of Joint Ventures in Chennai, Tamil Nadu
However, some JVs in Chennai, Tamil Nadu may prove to be disadvantageous for the business causing a drain on resources and harming operations for both parent companies. Others may include-
i. Differences due to Culture clash in Chennai, Tamil Nadu- While it is common for a domestic company to enter a JV with a foreign business, some of them may struggle to reach an agreement due to cultural differences, processes, and approaches when two companies work together. Accordingly, differences in management skills and abilities, conflicting HR processes, and workplace cultures may make it harder for a JV to give fruitful results.
ii. Poor Decision Making in Chennai, Tamil Nadu- Trust is vital for any business relationship and any lack of trust could make decision-making more difficult if both parties need to sign off decisions ultimately leading to the failure of the business.
iii. Risk of dissemination of sensitive information in Chennai, Tamil Nadu- Since, there are high chances of the partners having access to sensitive business information that may include intellectual property or trade secrets, etc. Thus, this information lies at risk of being disclosed to any third party which may lead the other party to suffer heavy losses.
iv. Restriction in Flexibility in Chennai, Tamil Nadu- For every business to flourish in the area of its expertise, there is required of flexibility in its working structure. However, due to the higher risks of costs and expenses involved, the involved partner businesses lose the flexibility of work in their course of forming a new business entity.
v. Restricts other opportunities in Chennai, Tamil Nadu- Generally, a Joint venture agreement restricts the outside similar business activities of the companies involved, while the project is in progress, it limits the parties to look for other business opportunities.
vi. No Limited Liability in Chennai, Tamil Nadu- One of the biggest shortcomings of a joint venture is that an unincorporated structure has no means to offer protection of limited liability to the businesses involved.
vii. Uneven Involvement in Chennai, Tamil Nadu- Usually, it is seen that the parties to a Joint-venture share the same level of involvement in the project concerned. For instance, where one company in the JV is responsible for the production of goods while the other is accountable for sales & promotional activities, the responsibilities of each company differ from each other, thus it may create discontent among parties sometimes.
Joint Venture Compliance Requirements in Chennai, Tamil Nadu
Every joint venture in Chennai, Tamil Nadu must disclose and submit a report of its ultimate beneficial ownership under various applicable laws and regulations, especially under the provisions of the Companies Act, 2013 (the Companies Act) and the Prevention of Money Laundering Act, 2002 (PMLA), as applicable. Companies (Significant Beneficial Owners) Rules, 2018, envisages concepts of ‘beneficial interest’, ‘significant beneficial owner’, and ‘significant influence’ in the context of companies which is dependent upon factors degree of shareholding, voting rights, dividend entitlement, and power to participate in the financial and operating policy decisions of the company.
Further, joint ventures in Chennai, Tamil Nadu involving inflow & outflow of foreign exchange shall be subject to strict rules & regulations prescribed under the provisions of the Foreign Exchange Management Act, 1999 (FEMA) under the provisions of the Reserve Bank of India (RBI).
Exiting a joint venture in Chennai, Tamil Nadu
While some joint ventures in Chennai, Tamil Nadu are of continuing nature, most of them are for a defined period and come to an end once the objective of the agreement comes to an end. But, for a Joint venture to come to end smoothly, each one must have an effective exit strategy in place.
Exit Strategies are a key part of the JV agreement that includes the manner of sale of assets, buy-out strategies & rights by one partner from the other. It also includes the details of the notice period one party is required to give to the other if desired, resolution of disputes, and offering either party right of first refusal to buy the other partner out. Typically, there may be one or more reasons leading to the exit of a partner, including-
- On committing a serious breach of the agreement.
- Serious differences due to conflicts
- .Fulfilment of the purpose for which the JV was entered.
- Insolvency of the exiting partner
Thus, Joint Venture Agreements are an effective means to achieve business growth and enjoy business profits long term. The reasons behind forming a joint venture may be improving business operations, developing new products or services, entering new markets or access to greater capacity and resources, or better marketing & development channels. But, above all, provide companies with a platform to come together and pool their finances, ideas, and resources to develop a specific project one may have strong potential for growth and you may have innovative ideas and products while the other may have better finances or any other required resource.
However, the parties to Joint Venture in Chennai, Tamil Nadu must consider creating and signing a well-drafted agreement that governs the parties involved in the agreement including provisions for termination for default and making good the losses sustained by one party due to the other.
