Business Collaborations

The key characteristics of equity-based joint ventures are as following:

a.There is an agreement to either create a new entity or for one of the parties to join into ownership of an existing entity b. Shared Ownership by the parties involved c. Shared management of the jointly owned entity d. Shared responsibilities regarding capital investment and other financing arrangements.

e.Shared profits and losses according to the Joint Venture Agreement.

Renewable Power ltd is advised accordingly.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2024, Q. 3(c) (Syllabus 2022).

Foreign collaboration is a mutual co-operation or a business understanding, between one or more resident and non-resident entities. Therefore, in a foreign financial collaboration, the inflow of foreign investment takes place in the domestic (host) country.

In this process, the foreign company lends finance by:

a)Purchasing ownership shares: Here, foreign company purchases ownership shares of the domestic company and in return gets the dividend for these shares.

b)Giving long-term loans: Here, foreign company gives long-term loans to the domestic company and in return gets interest from these loans.

c)Giving credit facility: Here, foreign company gives credit facility to the domestic (native) company. The native company uses this credit facility to purchase raw-materials, plant and machinery.

Thus, in foreign financial collaboration, there is an inflow of finance from developed countries to developing countries. Hence, foreign financial collaborations help the developing countries more than the developed countries.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2026, Q. 4(d) (Syllabus 2022).

The following objectives of the foreign collaboration were discussed by the directors of XYZ Appliances Pvt. Ltd:

The main intention/ prime goal or objective of foreign collaboration is to:

1.Improve the financial growth of the collaborating entities.

2.Occupy a major market share for the collaborating entities.

3.Reduce the higher operating cost of a non-resident entity.

4.Make an optimum and effective use of resources available in the resident entity’s country.

5.Generate employment in the resident entity’s country.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 1(c) (Syllabus 2022).

Objectives of Foreign Collaboration The main intention/ prime goal or objective of foreign collaboration is to:

•Improve the financial growth of the collaborating entities.

•Occupy a major market share for the collaborating entities.

•Reduce the higher operating cost of a non-resident entity.

•Make an optimum and effective use of resources available in the resident entity's country.

•Generate employment in the resident entity's country.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 4A(iv) (Syllabus 2022).

Following are the differences Between Equity-Based Joint Venture and Contractual Joint Venture

1.Nature of the Entity

•Equity-Based Joint Venture:

m A separate legal entity is created, usually a limited liability company, distinct from the parties involved.

m The entity owns the resources contributed by the parties.

•Contractual Joint Venture:

m No separate legal entity is created. The joint venture operates based on a contractual agreement between the parties.

m The parties do not share ownership of a business entity.

2.Ownership and Investment

•Equity-Based Joint Venture:

m Shared ownership of the newly created entity.

m Parties contribute capital or other resources and own equity in the company.

m Profits and losses are generally shared in proportion to the capital contribution.

•Contractual Joint Venture:

m No shared ownership of an entity; the focus is on collaboration rather than equity.

m The parties may bring money, technology, or materials, but ownership of these inputs remains with the contributing party unless otherwise agreed.

m Profits and losses are shared according to the contractual agreement, which may not be tied to the capital contribution.

3.Management and Control Equity-Based Joint Venture:

m Shared management responsibilities The parties usually have a say in the management and operation of the joint venture entity.

m The level of control each party exercises is often nproportional to their equity stake, though exceptions can exist.

•Contractual Joint Venture:

m Control is exercised according to the terms of the contract, rather than ownership.

m The degree of control each party has is defined by the contractual agreement, and may not be equal or proportional to contributions.

4.Duration and Scope

•Equity-Based Joint Venture:

m Typically formed for a long-term business relationship or a wide scope of activities.

m The entity can continue indefinitely, subject to the agreement of the parties.

•Contractual Joint Venture:

m Often used for specific projects, narrow tasks, or a limited period.

m The relationship may be temporary, terminating upon completion of the agreed-upon task or project.

5.Regulatory Considerations

•Equity-Based Joint Venture:

m The creation of a separate legal entity involves more regulatory scrutiny and legal formalities m It may be used in cases where foreign direct investment is permitted.

•Contractual Joint Venture:

m Simpler to establish as it doesn’t involve creating a new entity.

m Useful in scenarios where regulatory or legal constraints prevent the establishment of a new legal entity, such as restrictions on foreign ownership.

6.Examples

•Equity-Based Joint Venture:

m A multinational corporation and a local company forming a joint entity to operate in a new market.

•Contractual Joint Venture:

m A franchise agreement where the franchisee operates a business using the franchisor’s brand and systems without creating a new joint entity.

These distinctions highlight the different legal, financial, and operational implications of choosing between an equity based or contractual joint venture.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2024, Q. 4(a) (Syllabus 2022).

Essential components of a Joint Venture (JV) Agreement In India, there is no legally prescribed format of a Joint Venture Agreement. However, in actual practice, the Agreement contains the following components:

a)Description (Nature of the Agreement)

b)Parties (full description of the parties to the Agreement)

c)Recitals (states the situation as it existed prior to the execution of this Agreement; It is also used to convey the intention of the parties)

d)Operative Part (defines the rules for the future; typically consists of name and constitution of the new entity being set up, equity investments, rules relating to loans by either party, activities to be undertaken, role of each party, constitution of the Board, names of the Chairman and Managing Director and their powers, duties, etc. matters to be decided by consensus, managerial remuneration, milestones to be reached and plan of action)

(e)Legal aspects:

i.Amendments of the JV Agreement ii. Duration of the JV iii. Termination iv. Dispute resolution by amicable consultation and/or Arbitration mechanism/Alternate form of Dispute Resolution.

v.Courts of particular State (in India) or Country (where the JV partner is foreign entity) that will have the jurisdiction in the event of dispute vi. Confidentiality and Non-Disclosure Agreement vii. Non-compete clause viii. Indemnification ix. Procedure for execution.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 3(c) (Syllabus 2022).

Advantages of Special Purpose Vehicle (SPV)

The biggest advantage of SPV is that it helps in separating the risk and freeing up the capital. As a result, the SPV and the sponsoring company are protected against risks like insolvency, which may arise during the course of operation. The SPV also allows securitisation of assets without disturbing the managerial relationship.

Under the arrangement, any predictable income stream generated by secure assets can be securitised.

(a)Ownership of Assets – An SPV allows the ownership of a single asset often by multiple parties and allows for ease of transfer between parties.

(b)Minimum Statutory Requirement – Depending on the choice of jurisdiction, it is relatively cheap and easy to set up an SPV.

(c)Clarity of documentation – It is easy to limit certain activities or to prohibit unauthorised transactions within the SPV documentation.

(d)Tax benefits – SPVs are often used to make a transaction tax efficient by choosing the most favourable tax residence for the vehicle. SPVs are method of financial engineering schemes which have as their main goal, the avoidance of tax. Some countries have different tax rates for capital gains and gains from property sales.

(e)Legal protection – By structuring the SPV appropriately, the sponsor may limit legal liability in the event that the underlying project fails.

(f)Accounting Reasons – Debts raised through SPV are not reflected in the balance sheet of the sponsor. It reflects a pleasant picture and enhances the debt raising ability of the sponsor.

Losses incurred by SPV are not shown in the balance sheet of the sponsor, so it helps to maintain a healthy picture of the sponsor in the eyes of its stakeholders.

(g)The key advantage is that it helps in separating the risk and freeing up the capital. As a result, the SPV and the sponsoring company are protected against risks like insolvency, which may arise during the course of operation.

(h)The SPV also allows securitization of assets without disturbing the managerial relationship.

Under the arrangement, any predictable income stream generated by secured assets can be securitized.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 4(c) (Syllabus 2022).

Benefits of Special Purpose Vehicle (SPV)

(a)Ownership of Assets — An SPV allows the ownership of a single asset often by multiple parties and allows for ease of transfer between parties.

(b)Minimum Statutory Requirement — Depending on the choice of jurisdiction, it is relatively cheap and easy to set up an SPV.

(c)Clarity of documentation — It is easy to limit certain activities or to prohibit unauthorised transactions within the SPV documentation.

(d)Tax benefits — SPVs are often used to make a transaction tax efficient by choosing the most favorable tax residence for the vehicle. SPVs are method of financial engineering schemes which have as their main goal, the avoidance of tax.

(e)Legal protection — By structuring the SPV appropriately, the sponsor may limit legal liability in the event that the underlying project fails.

(f)Accounting Reasons — Debts raised & losses incurred through SPV are not reflected in the balance sheet of the sponsor so it reflects a pleasant picture and enhances the debt raising ability of the sponsor.

(g)Separation of Risk: The key advantage is that it helps in separating the risk and freeing up the capital. As a result, the SPV and the sponsoring company are protected against risks like insolvency, which may arise during the course of operation.

(h)Securitization of assets: The SPV also allows securitization of assets without disturbing the managerial relationship. Under the arrangement, any predictable income stream generated by secured assets can be securitized.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2023, Q. 2(b) (Syllabus 2022).

Special Purpose Vehicle (SPV)are mostly formed to raise funds from the market. Technically, an SPV is a company. It has to follow the rules of formation of a company laid down in the Companies Act. Like a company, the SPV is an artificial person. It has all the attributes of a legal person. It is independent of members subscribing to the shares of the SPV. The SPV has an existence of its own in the eyes of law. It can sue and be sued in its name. The SPV has to adhere to all the regulations laid down in the Companies Act. Members of an SPV are mostly the companies and individuals sponsoring the entity. An SPV can also be a partnership firm.

The company, as distinguished from an SPV, may be called a general-purpose vehicle. A company may do many things which are mentioned in the memorandum of association (MoA) or permitted by the Companies Act. An SPV may also do the same, but its scope of operation is limited and focused. If it is not so, the SPV had better be called a company. The MoA is quite narrow in the case of an SPV. This is primarily to provide comfort to lenders who are concerned about their investment.

PART II

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 4A(v) (Syllabus 2022).

Essential Features of a Shareholders’ Agreement (SHA)

Some of the key issues that must be kept in mind while drafting the SHA are summarised below:

(i)The business of the new company/LLP;

(ii)Manner and extent to which resources (financial, manpower, technology, etc) will be brought in;

(iii)Provisions relating to allotment and transfer of shares;

(iv)Constitution of the Board of Directors/Designated Partners;

(v)Manner in which decision making will take place (majority vote or consensus);

(vi)Decision regarding the Chairman and Managing Director of the entity; their rights, duties and responsibilities;

(vii)Persons responsible for managing finances, marketing, production, etc.;

(viii)Dividend distribution policy;

(ix)Term of office of the nominated directors, the manner of their appointment and changes among them;

(x)Valuation of the company at the time of separation;

(xi)Dispute resolution mechanism.

The above examples are indicative and are not exhaustive.

Accordingly, SPM Ltd. and BRB Ltd. are advised on the key issues that must be kept in mind while drafting the Shareholder’s Shareholders’ Agreement (SHA) and ensure that the SHA aligns with the Articles of Association (AoA) of BNPM Ltd

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, June 2025, Q. 3(b) (Syllabus 2022).

The Collaboration referred in the given question is Vertical Collaboration. Vertical Collaboration is a collaboration wherein the business collaborates with companies in its supply chain either upward and/or downwards (its suppliers and/or distributors). Vertical collaboration often allows businesses to minimize risk in the supply chain and obtain lower prices in exchange for long-term commitment.

Benefits derived by each partner:

ABC Infra Ltd. (Construction Company)

•Gains access to specialized marketing expertise without building an internal team.

•Enhances brand visibility and customer engagement.

•Focuses on its core competency such as designing and building eco-friendly homes.

•Reduces promotional overhead through shared strategic execution.

XYZ Marketing (Marketing Agency)

•Gains a high-value client and expands its portfolio in the real estate sector.

•Earns revenue through service contracts or performance-based incentives.

•Builds domain expertise in sustainable housing marketing.

•Strengthens its market position by associating with an environmentally conscious brand.

Source⁠​‌​‌‌​‌​⁠: ICSI Guideline Answers, December 2025, Q. 2(c) (Syllabus 2022).