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 Kolkata, West Bengal.
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 Kolkata, West Bengal 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 Kolkata, West Bengal- 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 Kolkata, West Bengal, the process of entering a JV, and its pros and cons for a business.
West Bengal is prominently known as the city of joy for its elated personification of culture, enthralling love, hidden mystery, and mouthwatering sweet delicacies. It is located along the Bay of Bengal in the eastern part of the country. This state shares the international boundary with Nepal and Bhutan in the north, Bangladesh in the east, and national boundaries with Odisha in the South-west, Jharkhand in the West, and Bihar in the North-West, Sikkim in the North, and Assam in the North-East. West Bengal is 4th in terms of population and 13th in terms of area in India. The state’s capital is Kolkata, the 3rd largest metropolitical city and the 7th largest in terms of population in India. As per the demographics, Bengalis are the main ethnic group comprising most of the population. There are many languages spoken in this region, but among them, majorly spoken languages are Bengali and English.
West Bengal possesses two world heritage sites and is the country’s 7th most visited tourist destination. This state owns a peerless and diverse geographical division with numerous natural assets, stretching from the Darjeeling mountains of the Himalayans north to the Gangetic plain south. The state shares the ultimate rhythm from exquisite and quiet beaches of the coastal plain to the world’s largest Delta(Sunderbans), which is also known for providing a natural abode for the scarce wild species of Royal Bengal Tigers. This state is known for its traits in unfolded and untold mysteries, rich cultural heritage architecture with the blend of fine arts and embroidery, brilliant folk festivals, traditional customs and rituals, delicious cuisines, and many pleased specialties about this magical land. This state has the ultimate vision to form the home of legendary freedom fighters, sinners, saints, poets, and many others concentrated as the cultural and intellectual hub since pre-colonial times.
The economy of West Bengal is based on agricultural production and small and medium-sized business models. The proportion of Agricultural land in Bihar state is the highest among all Indian states, and this state significantly contributes to India’s Rice harvest. After the economic stagnation for years, in 2020-21, the economy of West Bengal is the 6th largest in the country in terms of gross state domestic product (GSDP). It has India’s 20th highest GSDP per capita. West Bengal state has the 28th highest ranking among the Indian States on Human Development Index. Other service sectors such as trade, finance, insurance, and other related activities have also shown significant growth in the past few years.
Capital- Kolkata
Top Business Idea in West Bengal
As per the study and statistics performed in 2015-16, West Bengal is the 6th largest state (around 140.56 billion USD) that majorly contributes to the Indian economy’s GDP. This state has immense potential in the field of startup vision. Also, the state facilitates robust connectivity to the rest of India by making it one of the most demanding and lucrative platforms for initiating a profitable and productive business. Given below are the list of a top business idea that can bring a change to the realm of the business ecosystem:-
Quick Service Restaurant Business
People of this region of India are real food lovers as the recent study and research show that there is considerable growth in the number of fast-food lovers among the people living in the urban towns and cities of West Bengal. As per the region’s requirement, you should set up or buy a franchise of famous and reputed fast-food brands such as Chickblast, Kathi Junction, KFC, Dominos, etc., in the venture of the pertaining industry.
Florist shop Business
The flower-selling business has seen credible growth in the past few years, especially in West Bengal. However, there are mainly two reasons. The first reason is an increase in the purchasing power of the young generation and the second reason is citizens of this state are religiously hyped. Merely all the festivals in west Bengal are celebrated with pomp and joy, but the inclusion of flowers can fulfill the main essence of the celebrations. Companies like Ferns and Petals, Floralis, etc., offer franchise opportunities in West Bengal. Thereby building a profitable and cost-effective business idea with an optimistic future.
Diagnostic Center Business
A person who has an experience in the field of laboratory science can establish or set up a diagnostic center business idea with a considerable capital amount. These Diagnostic Center business with pathology is one of the most productive and lucrative businesses in the field of medicine and the pharms industry. The awareness of the physician and the increase in the patient’s requirements to take high-quality care services in West Bengal have increased the demand for the best quality diagnostic center. Many companies like Apollo, Thyrocare, etc., are offering franchise opportunities for the investors as per the ease of doing business.
The startup ecosystem in West Bengal
Startups have entered every expected corner of the country. Hence, by breaking many cultural biases and helping the economy to grow. The government of West Bengal has come up with an initiative to facilitate the startup to access the various required resources of the Startup Eco-System in the state. The Startup Bengal initiative majorly assists in stimulating an entrepreneurial environment in the state. The main objective of this initiative is to create an enabling environment to inspire the youth of this state and encourage them to engage with all stakeholders and investors of the Startup to strengthen the start-ups.
A comprehensive startup initiative will support the startups at all stages. These entrepreneurship programs must be added to the curriculum or syllabus of the educational institutions to foster youth to come up with new innovative business ideas. In the past few years, this state has set an example in building an environment that consistently registers new organizations throughout the state. Creating a vibrant and proper framework, including coaching by using the existing business associations like the Indian Institute of Management (IIM) Calcutta, Indian Institute of Technology (IIT) Kharagpur, Council of Scientific and Industrial Research (CSIR) labs in West Bengal, etc., thus the entrepreneurs and investors are the crucial assets as they are an essential tool for economic development and creating job opportunities throughout the state.
Types of Joint Ventures in Kolkata, West Bengal
i. Equity-based Joint Ventures in Kolkata, West Bengal-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 Kolkata, West Bengal–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 Kolkata, West Bengal-Further, JVs in Kolkata, West Bengal 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 Kolkata, West Bengal 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 Kolkata, West Bengal
The key factors to determine the structure of a joint venture in Kolkata, West Bengal 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 Kolkata, West Bengal (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 Kolkata, West Bengal?
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 Kolkata, West Bengal?
Joint ventures in Kolkata, West Bengal can be complicated arrangements, but they offer strong advantages to businesses, some of which include-
Pros of Entering Joint Venture in Kolkata, West Bengal
i. Combined strengths & expertise in Kolkata, West Bengal– 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 Kolkata, West Bengal – 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 Kolkata, West Bengal– 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 Kolkata, West Bengal– 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 Kolkata, West Bengal– 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 Kolkata, West Bengal– 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 Kolkata, West Bengal– 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 Kolkata, West Bengal– 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 Kolkata, West Bengal– 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 Kolkata, West Bengal
However, some JVs in Kolkata, West Bengal 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 Kolkata, West Bengal- 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 Kolkata, West Bengal- 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 Kolkata, West Bengal- 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 Kolkata, West Bengal- 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 Kolkata, West Bengal- 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 Kolkata, West Bengal- 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 Kolkata, West Bengal- 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 Kolkata, West Bengal
Every joint venture in Kolkata, West Bengal 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 Kolkata, West Bengal 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 Kolkata, West Bengal
While some joint ventures in Kolkata, West Bengal 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 Kolkata, West Bengal 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.