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Requirements and Restrictions

 

Largely, any foreign entity can set up a joint venture in India; however, some entities may face restrictions as provided under the FDI Policy and FEMA, with respect to certain sectors where foreign investment is still prohibited and there are other prerequisites for investment. Commercial arrangements (such as exercising put and call options) generally provide for the protection of party interests. However, the extant FDI Policy and RBI notification in relation to pricing guidelines for instruments with optionality clauses categorically prohibit such exercising of an optionality clause by a foreign investor at an ‘assured return’. Similarly, exercising other exit options (such as IPOs in India) requires fulfilment of certain conditions, such as the minimum requirement of promoters’ contribution towards the post-IPO capital and minimum lock-in requirements. It may be pertinent to note that, if the joint venture company is converted into or is incorporated as a public company, it will be required to list its shares on the stock exchange and to comply with all the formalities and compliances of SEBI, which is the stock market regulator in India.

 

However, with the introduction of the Bankruptcy Code, supplemented by the Delhi High Court’s recent rulings in Cruz City 1 Mauritius Holdings v Unitech Limited and NTT Docomo Inc v Tata Sons Limited, it can be seen that disputes raised by foreign investors have been treated favorably, as it has been settled that, subject to compliance with the terms of the joint venture agreement, the claims of the foreign investors with respect to any assured return on exit of the foreign party in lieu of the damages suffered, would be enforceable in India and would not be treated as a violation of the FDI Policy and other related laws.

 

The focus has now also shifted on reviving stressed assets in the economy. The Bankruptcy Code has provided new fora of opportunities for joint ventures to acquire stressed assets, for instance the Arcelor Mittal and Nippon Steel & Sumitomo Metal Corporation joint venture for acquiring Essar Steel. While there is great interest from several players for making investments in stressed assets and debt, including private equity funds, the uncertainty of the process under the Bankruptcy Code has led to limited cases of active participation in the bidding process by joint ventures.

 

Several legislative and judicial developments in the past year have directly impacted the functioning of joint ventures in the country. Steps have been taken by the government to harmonize extant laws by way of amending the Bankruptcy Code and the Companies Act in the past year. The recent Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations 2017 have also brought about significant changes in, inter alia, investment routes, instruments, procedure and reporting process, etc.