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 Bangalore, Karnataka.
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 Bangalore, Karnataka 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 Bangalore, Karnataka- 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 Bangalore, Karnataka, the process of entering a JV, and its pros and cons for a business.
Located in the South-Western region of India, Karnataka was formed in 1956 with the passage of the ‘State Reorganisation Act.’ Earlier the state was known as Mysore, but in 1973 it was renamed Karnataka. The bordering states of Karnataka are Goa, Maharashtra, Telangana, Andhra Pradesh, Tamil Nadu, and Kerala. Demographically Karnataka is the 8th largest state by population, with a population density of 319 people per square kilometer.
The sex ratio of the state is 973 females per thousand males. Kannad is the state’s official language, and the other minority languages spoken in Karnataka are Urdu, Konkani, Marathi, Tullu, Tamil, Telugu, Malayalam, Kodava, and Beary. Even there are some villages in Karnataka where Sanskrit is primarily spoken. The word Karnataka is derived from the Kannada words Karu and Nadu, meaning elevated land; some people also interpret the meaning of Karu Nadu as Black region. The state is called the black region because of the black cotton soil found in the Bayalu Seeme region of Karnataka.
The economy of Karnataka is the sixth-largest economy in India, and it ranks 9th in the state human development index of India. The state is the manufacturing hub for some of the largest public sector industries in India, including – Hindustan Aeronautics Limited, National Aerospace Laboratories, Bharat Earth Movers Limited, Bharat Heavy Electricals Limited, etc. – these public sector industries are based in Bangalore.
Besides this, many of India’s premier science and technology research centers, including – the Central Powers Research Institute, the Indian Space Research Organisation, Bharat Electronics Limited, and Central Food Technological Research Institute, are also headquartered in Karnataka. The majority of the silk industry in India also has its base in Karnataka. India is agricultural land and Karnataka is no exception in this case. Agriculture-related activities are the primary sources of income in Karnataka, as nearly 56% of the workforce in Karnataka is directly or indirectly engaged in agriculture or agriculture-related activities.
Capital- Bangalore
The startup ecosystem in Karnataka
With the sixth-largest economy in India, Karnataka has one of the most mature startup ecosystems in India; that’s why Bengaluru, situated in Karnataka, is known as the startup capital of India. The state government has taken multiple initiatives to encourage startups and build a conducive startup ecosystem in the state. Karnataka was the top performer in the startup ranking exercise 2018 conducted by the department of industrial policy and promotion.
In November 2015, the Government of Karnataka launched its startup policy. The key features of the policy are as follows: –
According to the startup policy of Karnataka, the government will assist in setting up TBIs in institutions of high learning.
The state government would support the private sector so that they can set up incubation centers and accelerators or expand existing facilities and operations.
According to the startup policy of the Karnataka government, the state shall maintain a list of common instrumentation facilities present across the state.
To encourage and set up a robust startup ecosystem, the state government provides funding in the form of a Grant-in-aid to innovators. The funding will be up to 50 lakh rupees and will be provided to the innovators and businessmen who need early-stage funding.
According to the startup policy of Karnataka, the new age incubation scheme that is currently in execution at engineering colleges will be expanded to all the professional & post-graduate institutions in tier-two cities.
Startup ideas in Karnataka
Food delivery business
Food delivery services are highly required in the urban areas of Karnataka. The state has a large working population that orders online food, thus expanding the scope of food delivery services. If you are good at managing people and organizing the workforce, then you should try your hands at food delivery services in Karnataka.
Translation agency
Karnataka is popularly known as the byte-basket of the country for attracting huge foreign investors. For sealing business deals, the investors meet with the companies, but language is a barrier. The inflow of investors for business deals has opened various opportunities for multilingual people. Translators are required to overcome the language barrier; thus, opening a translation agency is an ideal business idea in Karnataka.
Organic food business
People are getting more health-conscious daily, and they are looking for more organic foods and items, thus expanding the scope of the organic food business. To establish an organic food business in Karnataka, you need to grow good quality organic food and sell them to the suppliers. Organic farming is different from normal agriculture, so you have to invest extra money and effort in setting up an organic food business. Once this business is set up, you will make huge profits because nowadays, people are getting more health-conscious and do not mind spending extra money on organic food.
Food processing business
The state is predicted to become the leading food processing hub in India. The food processing industry of Karnataka is undoubtedly on the threshold of demand-led growth in the country. Karnataka has ten agro-climatic zones, and its land topography is also suitable for agriculture, making it one of India’s most agriculturally diverse states. More agriculture means a rise in demand for food processing units; thus, establishing a food processing business in Karnataka can help you make huge profits.
Disposable plates business
Today everything is made of plastic. Setting up disposable cutlery and plates built from banana leaves is a good business idea in Karnataka. Honestly, disposable cutleries and containers are part of our daily life; we use them regularly. Plastic cups and plates are heavily used; we use them even after knowing they harm our environment. People do want to bring a change, but they don’t know the alternative to plastic.
Karnataka has a lot of banana trees, which means that the raw material is locally available for setting up disposable plates and cutlery made from banana leaves. By setting up this business, you will make a profit and contribute to a cleaner and greener environment. This business needs a considerable amount of investment, but once it is established, it will help you make huge profits.
Types of Joint Ventures in Bangalore, Karnataka
i. Equity-based Joint Ventures in Bangalore, Karnataka-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 Bangalore, Karnataka–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 Bangalore, Karnataka-Further, JVs in Bangalore, Karnataka 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 Bangalore, Karnataka 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 Bangalore, Karnataka
The key factors to determine the structure of a joint venture in Bangalore, Karnataka 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 Bangalore, Karnataka (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 Bangalore, Karnataka?
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 Bangalore, Karnataka?
Joint ventures in Bangalore, Karnataka can be complicated arrangements, but they offer strong advantages to businesses, some of which include-
Pros of Entering Joint Venture in Bangalore, Karnataka
i. Combined strengths & expertise in Bangalore, Karnataka– 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 Bangalore, Karnataka – 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 Bangalore, Karnataka– 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 Bangalore, Karnataka– 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 Bangalore, Karnataka– 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 Bangalore, Karnataka– 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 Bangalore, Karnataka– 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 Bangalore, Karnataka– 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 Bangalore, Karnataka– 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 Bangalore, Karnataka
However, some JVs in Bangalore, Karnataka 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 Bangalore, Karnataka- 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 Bangalore, Karnataka- 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 Bangalore, Karnataka- 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 Bangalore, Karnataka- 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 Bangalore, Karnataka- 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 Bangalore, Karnataka- 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 Bangalore, Karnataka- 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 Bangalore, Karnataka
Every joint venture in Bangalore, Karnataka 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 Bangalore, Karnataka 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 Bangalore, Karnataka
While some joint ventures in Bangalore, Karnataka 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 Bangalore, Karnataka 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.
