Negotiation Aspects in Joint Ventures

 This article includes the following aspects of a JV ·      Need for a JV·      Negotiation Aspects-44 nos·      Need for separate financial monitoring of JV in financial books·      Activities(including unethical) that can affect the business adversely  Need for a JVCompanies opt to go for a JV for considerations such as below.·       Gaining a competitive edge by the speedy introduction of newer/innovative products, mainly when the product development time cycles (in-house) are very large and technology not available in the country.·       Obtaining faster access to export markets and becoming a Global player·       Strategic sharing of synergies amongst the JV partners and leveraging each other’s strengths.·       To have a quantum jump in the quality of products and services.·       To reduce costs through newly acquired technology, shared infrastructure, economies of scale, and joint procurement.·       Risk sharing amongst JV partners in case of market uncertainties, economic conditions, and regulatory changes imposing new demands on the company.·       Resource sharing, including financial burden and sharing market infrastructure, assets, and capabilities.  Negotiation AspectsThis article highlights key aspects that must be negotiated, in the context of a Product manufacturing and selling company, with the potential - shortlisted JV partner. AA. Technical= 8 aspectsBB Financial & commercials=13 aspectsCC Management & Control=8 aspectsDD Legal =15 aspects Aspect to negotiateDetailed Negotiation points w. r. tAA-Technical Aspects  1.Technology for -Designs, Drawings & specifications for End Products -(specific models)  1.1 End products1.2 Bill of materials for each assembly/sub-assembly1.3 Assembly operations sequence1.4 Assembling equipment & tools, jigs, fixtures1.5 Inspection & testing equipment & gauges1.6 Quality assurance plans,1.7 Quality Standards  1.8 inspection checklists for end products1.9 Software package/solution for layouts/assembling2. Technology for -Designs, Drawings & specifications for: Manufacturing & Engineering Processes (for specific models) 2.1 Inhouse manufactured  assemblies, and items2.2 Bill of materials for each assembly/sub-assembly      including consumables2.3 Aggregates & Parts manufacturing process sheets      Including  bought out parts2.4 Manufacturing equipment, & tools, jigs, fixtures2.5 Inspection & testing equipment & gauges for      aggregates and BOM/Parts2.6 Quality assurance plans,2.7 Quality Standards  and2.8 Inspection Checklists or aggregates and parts2.9 Software package/solution for manufacturing 3. Technology for -Designs, Drawings & specifications for : After-sale service support (specific models)  3.1 After-sale service  parts as per supply conditions3.2 After-sale service manuals with videos, and images for dismantling and reassembly3.3 Spares manuals3.4 Service tools3.5 Software package/solution3.6 Standard hours or minutes for rendering service3.7 Software package/solution for rendering after sale service4.Language in Design, drawings and specificationsEnglish or any other 5. Scope of JV-Access to Market: ·      Overseas market /country restrictions ·      Use of sales & distribution network of JV partner6.Scope of JV -Access to Supply chain: ·      Overseas suppliers, Contractors, and service providers.·      Covenants on brand names·      Covenants on sourcing of BOM parts etc.7.Scope- of Supply of SKD, CKD, BOM parts and spares by JV to Indian partner ·      Lists ,Year wise overall Plans for supplying Quantities  of sets and values ,duration.·      Covenants /Period up to which SKD/CKD must be procured from JV8.Scope of JV -Supply of Equipment For manufacturing & Quality control, Jigs, fixtures, gauges  etc by JV·      Lists ,Year wise overall Plans for Quantities/values  & duration BB Financial & commercials  1.Lump sum knowhow Fee as per scope  on Design, drawings & specifications for:       ·      End Products·      Manufacturing & Engineering·      After-sale service  parts·      Complete package2.Pricing -Supply of -Inhouse produced or assembled by JV -% mark up above costs  or Methodology/logic/Algorithm ·      SKD/CKD/BOM Parts, Spares·      Equipment, Jigs/fixtures, Gauges·      Software solutions3.Pricing -supply by JV of -Bought out material-% mark up above costs incurred by overseas JV partner ·      SKD/CKD/BOM Parts, Spares·      Equipment, Jigs/fixtures, Gauge·      After sale spares·      Sales promotion materials 4.Free Trainings overseas /India ·      Scope/Types ·      No of persons·      Duration/man-days5. Taxes & Imports duty  ·      Imports duty including IGST·      Withholding taxes·      Any taxes overseas 6. Royalty ·      % Of Net sales (Net of localised items)·      Duration·      When due or Frequency of payment7. Expatriate  emoluments  ·      Function wise-positions or levels and durations, reimbursements8.Payment remittance methods( for each type of remittance): ·      LC ·      Document through bank or·      On line·      And so on 9. Payment terms for different remittances: ·      Lumpsum fee·      Royalty·      Imports of SKD/CKD/BOM Parts, Spares·      Imports of Equipment, Jigs/fixtures, Gauges·      Imports of After sale spares·      Imports of Sales promotion materials10.Currency·      USD or as applicable 11. Trainings·      Free and chargeable rates ,duration, location, India vs overseas 12. Man day rate beyond-free training days:  ·      Level wise rates /emoluments & stay charges 13. Funding: Participation Plans ·      Capital·      Working capital,·      ExpensesCC Management & Control  1. Equity participation ·      % of total equity or·      Capital to be inducted into the country by potential JV2. Organisation structure of JV post signing   ·      No of Board members·      Key positions to be manned by whom: MD, CEO, CFO, COO, Chief of sales/marketing, Chief of Purchase, HR Chief  and so on3. Pricing formula for export to JV from Indian partner:-% mark up above costs  or Methodology/logic/Algorithm   ·      End Products·      Aggregates, sub -assemblies of bill of materials/parts manufactured by Indian partner & exported to JV·      After-sale service spares  as above·      Tools, jigs, fixtures, service tools etc4.Exports -to JV from Indian partner-Covenants/restrictions:  ·      End products or·      Aggregates or BOM Parts·       Countries 5. Schedule of activities: ·      Pert chart/Timelines starting from MOU/JV signing till 1st product roll out and sale. 6.  Warranty terms:  ·      Duration,·      Excluded items,·      Payment credit or FOC (free of cost) replacement,·      Replacement time-free or against fresh purchase order in case of credit 7 IT & system support:  Hardware & software solutions to be acquired vis a vis.·      Network design and security ,cloud·      Technical aspects·      Financial & commercial aspects·      Management & control aspects·      Legal aspects 8. Processes for Settlement of claims: related to defective  or short supplied or debit notes  ·      Bought out  material·      SKD/CKD/BOM Parts, Spares·      Equipment, Jigs/fixtures, Gauge·      After-sale spares·      Sales promotion materialsDD-Legal aspects  1a) Statutory approvals & regulations in India·      The Companies Act 2013  ·      0r LLP Act 2008)·      FEMA,1999·      RBI Regulations·      Foreign trade policy·      The foreign corrupt practices Act’1977·      SEZ related(if applicable)·      Labour laws (several of these) 1b) Overseas related regulations·      JV Formation & JV Operations- Liabilities of the shareholders, Approval from the board, shareholders, or both, appointing directors, auditors etc·      Types of permitted capital, Debt-equity etc·      Profits/dividend repatriation- Limits, documentation, taxation·      Copyrights, trademarks, IPRS·      Acquisition& transfer of assets, Repatriation of funds·      Minimum capital requirements from JV foreign investors, Time frame for Paid-up Capital for foreign investor·      Pricing of shares- Guidelines for equity, compulsory convertible preferential shares, other instruments·      Reporting requirements·      Imports & Exports related2. Agreements to be signed:Drafts & finer points·      JV agreement·      IP transfer agreement·      Share purchase agreement·      Employment agreement 3.Warranties Details to be worked out in consultation with legal team/consultants4. Notice period As above5.Jurisdiction As above6. Laws of the country As above7  Exit clause As above8. Conflict  resolution mechanism As above9. Covenants As above10. Remedies for breach As above11. Confidentiality As above12 Dissolution As above13. Changes to Agreements to be signed by As above14. Duration of JV: Years from the date of MOU or Agreement signing As above15 and so on Any other pointsAs above    Need for Separate accounting entries for a JV in ERP  environments·      In large organizations, with many verticals, JV may be signed and operational in specific Business units for specific end products/models.·      In order to monitor the operations and financial performance of JV ,it is essential that unique F&A systems are put in place.·      ERP Software like SAP- has specific provisions for such financial transactions related to JV operations vis a vis:§  Executing Transactions in JV books§ Developing configuration tables§  Developing master data tables§  Authorisation objects for accessing JV data ERP related F&A related monitoring & controls that must be built in Software solution JV aspectFew descriptions applicable for JV financial  controlTransactions·      Creating, editing, editing, Viewing JV·      Posting Account documents of JV e.g. Journal entries, Revenue distribution, costs allocation·      Displaying JV Accounting documents·      Reports related to JV Configuration tables·      JV Company codes·      JV Account categories·      JV Account types Master data tables·      Profit center for JV·      Company code assignment for JVAuthorisation Objects for controlled Access·      Joint operations -account assignment·      Joint operation Budgets·      Joint operation actuals Important Fields·      Equity group for JV·      GL accounts used for JV   Activities(including unethical) that can affect the business adversely §  The alignment of mutual goals, interests, and expectations of potential JV partners is not done comprehensively before starting negotiations as an “MOU,” causing delays in finalising terms and conditions.  §  Evaluation of technology, its absorption methodology, and scope of JV is not done comprehensively ( through visits to the manufacturing sites of potential JV partners or & resource network places & discussions)by technical specialists as also a review of alternate emerging new technologies.  §  Financial & commercial evaluation is also inadequate due to insufficient due diligence leading to weaker negotiation.§  Inadequate market intelligence about the experience of other existing JV partners regarding JV support§  An inadequate internet search about JV partner about its financial health, products, market, market share, profitability, management profiles, etc§  Prior Board members’ /MD’s inputs are neither taken/nor incorporated by the negotiating team.§  Lack of mutual trust amongst JV partners§  Legal/Statutory complexities are not discussed threadbare during negotiations leading to delays and disputes.