Cross-border joint ventures (JVs) are a powerful way for Indian businesses to expand internationally, giving them access to local markets, infrastructure, technology, and expertise while sharing operational risks with a foreign partner. However, poorly structured arrangements can result in the gradual loss of strategic influence, even when your capital investment remains significant. This article explains how to structure a cross-border JV so that you retain operational and strategic control, drawing on legal provisions, corporate governance best practices, and risk-mitigation strategies.

In this article, CA Manish Mishra talks about Structuring Cross-Border Joint Ventures Without Losing Control.

The Cross-Border JV Model

A cross-border JV is a business arrangement between parties from different jurisdictions who agree to collaborate, typically by contributing capital, assets, technology, or expertise, to operate a new or existing entity. In India, such ventures can take the form of:

• Equity JVs: Formation of a new legal entity (commonly a private limited company) with ownership divided between partners.

• Contractual JVs: Partnerships based on contracts without creating a separate entity, often used for project-based collaborations.

• Limited Liability Partnerships (LLPs): Offering flexibility and limited liability, though their acceptance varies by jurisdiction.

For Indian participants, these arrangements are governed domestically by the Companies Act, 2013, Limited Liability Partnership Act, 2008, Foreign Direct Investment (FDI) Policy, and Foreign Exchange Management Act (FEMA) regulations relating to overseas direct investment (ODI).

Choosing the Right Legal Structure

The JV structure determines how profits, decision-making powers, and exit rights are allocated. Equity-based JVs offer long-term commitment and clear ownership rights but require careful drafting of shareholder agreements to protect minority rights. Contractual JVs, while more flexible and less capital-intensive, rely entirely on enforceable agreements, which may present challenges in international enforcement.

From a regulatory standpoint, outbound investments from India must comply with FEMA (Overseas Investment) Rules, 2022 and sectoral caps/restrictions under the host country’s investment laws. In certain jurisdictions, foreign ownership is restricted in sensitive sectors like defence, telecom, and energy.

Safeguarding Control Through Governance Provisions

Control in a JV is not determined solely by shareholding percentage. Even with a minority stake, strategic and operational influence can be maintained by embedding strong governance rights in the JV agreement and constitutional documents of the JV entity. Key provisions include:

• Reserved Matters: Specifying certain critical decisions (e.g., change in capital structure, mergers, major borrowings, appointment/removal of key management, change in business scope) that require unanimous or supermajority consent.

• Board Composition and Voting Rights: Ensuring the right to nominate a fixed number of directors, coupled with weighted voting rights or veto powers for key resolutions.

• Quorum Clauses: Making attendance of your nominee directors mandatory for valid board or shareholder meetings, preventing decisions from being passed in your absence.

These provisions must be enforceable both under Indian law and the host country’s corporate legislation, requiring careful legal review in both jurisdictions.

Drafting a Complete Shareholders’ Agreement (SHA)

The Shareholders’ Agreement is the backbone of JV governance. A robust SHA should cover:

• Capital Contribution and Funding Mechanisms: Stipulating initial capital commitments, subsequent funding obligations, and consequences for default.

• Dilution Protection: Including pre-emptive rights and anti-dilution clauses to ensure your percentage ownership is not reduced by new share issues without your consent.

• Dividend Policy: Defining profit distribution timelines and thresholds to ensure a steady return on investment.

• Transfer Restrictions: Incorporating rights of first refusal (ROFR), tag-along, and drag-along clauses to manage changes in shareholding.

• Deadlock Resolution: Laying out mechanisms such as mediation, arbitration, “Russian Roulette,” or “Texas Shoot-Out” clauses to resolve irreconcilable disputes without dissolving the JV.

The SHA should be consistent with the Articles of Association (AoA) of the JV company to ensure enforceability against third parties.

Regulatory and Tax Compliance in Cross-Border JVs

Indian companies must consider compliance obligations under multiple regimes:

• FEMA and Overseas Direct Investment (ODI) Rules: These govern investment limits, reporting requirements (Form ODI), and sectoral approvals for outbound investments.

• Income-tax Act, 1961: Transfer pricing rules under Sections 92–92F apply to transactions between the JV and related parties; Sections 9 and 195 address withholding taxes on cross-border payments like royalties and technical fees.

• Double Taxation Avoidance Agreements (DTAAs): Help minimise tax leakage on dividends, royalties, or service payments, and reduce the risk of triggering a Permanent Establishment (PE) in the partner’s jurisdiction.

Tax structuring should consider both jurisdictions to optimise after-tax returns and ensure compliance with the OECD’s BEPS measures and the host country’s anti-avoidance provisions.

Intellectual Property (IP) Safeguards

In technology-driven JVs, IP ownership and usage rights must be addressed clearly:

• Clearly distinguish between pre-existing IP (owned before the JV) and foreground IP (developed during the JV).

• Specify ownership, licensing terms, royalties, and restrictions on IP use outside the JV’s scope.

• Ensure IP protections are registered in both India and the host jurisdiction, factoring in differences in local IP laws.

Failure to secure IP rights upfront can lead to disputes, leakage of proprietary know-how, and loss of competitive advantage.

Structuring Exit Mechanisms Without Losing Value

Every JV should have well-defined exit routes to protect the investor’s value. Common methods include:

• Put and Call Options: Allowing a partner to sell or buy shares at pre-agreed valuations under specified circumstances.

• Buy-Back Clauses: Enabling repurchase of shares if the other partner breaches obligations.

• IPO Provisions: Facilitating public listing as a mutually beneficial exit strategy.

Valuation methodologies whether independent valuation, formula-based, or market-linked must be specified to avoid disputes during exit.

Dispute Resolution in International JVs

In cross-border joint ventures, disputes can be complex due to differing legal systems and jurisdictions. To ensure neutrality and efficiency, international arbitration is preferred over court litigation. Popular forums include the International Chamber of Commerce (ICC), Singapore International Arbitration Centre (SIAC), and London Court of International Arbitration (LCIA). The Shareholders’ Agreement (SHA) should clearly state the governing law, arbitration forum, and a neutral seat of arbitration, which determines procedural rules and ensures impartiality. Arbitration awards are easier to enforce internationally under the New York Convention, which India and over 160 countries have ratified. This framework provides certainty, enforceability, and neutrality, making it a vital dispute resolution strategy for safeguarding interests in international JV arrangements.

Maintaining Strategic Oversight Post-Incorporation

In an international joint venture, having strong legal agreements is only the first step to retaining control. True influence comes from active and ongoing involvement in the venture’s operations. Indian investors should conduct regular operational and financial audits to verify compliance, track performance, and detect risks early. Appointing trusted nominees to key management roles such as finance, compliance, or operations ensures that day-to-day decisions reflect agreed strategies.

Setting up joint committees for critical areas like business planning, technology development, and regulatory compliance helps maintain collaborative decision-making. Additionally, implementing regular reporting protocols and structured performance reviews keeps both partners accountable. These mechanisms ensure that the JV’s actions remain aligned with long-term strategic goals and prevent gradual erosion of influence.

Conclusion

A cross-border JV offers access to new markets and shared resources but also carries the risk of strategic dilution if control mechanisms are weak. The key to retaining control lies in carefully selecting the legal structure, embedding protective governance rights, aligning agreements with regulatory compliance, safeguarding IP, and ensuring ongoing operational oversight. With these safeguards, Indian businesses can achieve sustainable international expansion while protecting their strategic and financial interests.

Frequently Asked Questions (FAQs)

Q1. What is a cross-border JV?

Ans. A partnership between entities from different countries to share resources, investment, and risks, governed by Indian and host-country laws.

Q2. How can I retain control with a minority stake?

Ans. Use governance rights like reserved matters, veto powers, and board nominations in the SHA and AoA.

Q3. Why is a Shareholders’ Agreement important?

Ans. It safeguards rights on capital, voting, dividends, share transfers, and dispute resolution, preventing strategic loss.

Q4. How should IP be managed in a JV?

Ans. Define ownership, licensing, and usage restrictions clearly, and register IP in both jurisdictions.

Q5. Which Indian rules apply to overseas JVs?

Ans. FEMA Overseas Investment Rules, 2022, FDI policy, RBI reporting, and Income-tax Act transfer pricing rules.

Q6. How can disputes be resolved effectively?

Ans. Use international arbitration with a neutral seat and ensure enforceability under the New York Convention.