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| Management Control |
| Based on the provisions of the Companies Act, shareholders can have five levels of management control: |
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Portfolio ventures (25% or less holding), which offer no veto rights and reflect a ‘passive’ status |
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Minority ventures (25-49% holding), which give blocking powers over matters to be decided by special resolutions (matters requiring 3:1 majority) |
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Consensus ventures (50% holding), giving blocking powers in all decisions |
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Majority ventures (51-75% holding), giving powers in all decisions except on matters requiring special resolutions |
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Controlling ventures (more than 75% holding), giving a sweeping hand in all affairs of the company, not different from a wholly owned subsidiary. |
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The Companies Act requires special majority in respect of items such as change of name, changes in Memorandum Objects and Articles of Association, etc. However, even in minority ventures, foreign investors can ensure adequate control of their interests through powers to nominate a fixed number of Directors on the Board, and through other specific clauses in the Articles of Association.
Under the present investment regulations, 100% foreign ownership is now possible in all but a few ‘sensitive’ industries. Therefore, ownership and management control are becoming less serious issues, and the rationale for a joint venture company is increasingly becoming an issue of choice and investment strategy instead of being stipulated by investment ceilings.
Several high-profile joint ventures in India have failed in the past, ending in a sell out/ exit of one of the venture partners. The causes include: |
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Difference in management culture and business policy |
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Disagreement over core issues and strategy |
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Change of international priorities of parent company |
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Overestimation of partners’ strengths and market potential |
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Complexities of the Indian market |
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Inability of partners to bring in requisite financial resources |
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Deadlocks arising from inadequate management control |
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Lack of transparency and undisclosed personal gains from the venture |
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Exiting a joint venture is not always simple. The absence of a clearly defined exit route in the joint venture agreement and in the articles of the company has, perhaps, been the major failing in joint venture preparations in the past.
Foreign investment regulations discourage multiple ventures in the same or allied fields in India: prior approval, with due justification, is required in case a foreign company already having a joint venture/technical collaboration or even trademark licensing agreement seeks to establish a new venture in India in the same field of activity. Exemptions apply available in case of defunct or sick ventures. |
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