Prerequisite to notify on creation of joint ventures

By Kshitij Sancheti and Vijay Aggarwal, Seth Dua & Associates
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Calculated in terms of market access, regulatory horizon, local target, business diversification and tax implications, joint ventures (JVs) have been viewed as the most strategic entry route to the Indian economy.

The JV has progressed in leaps and bounds as a synergetic business alliance where counterpart resources are leveraged to deliver cutting edge performance.

Kshitij Sancheti Partner Seth Dua & Associates
Kshitij Sancheti
Partner
Seth Dua & Associates

Regulatory considerations have emerged as playing a significant role in the JV at every stage. The Competition Act, 2002, empowers the Competition Commission of India to regulate combinations – namely, mergers, acquisitions and amalgamations – subject to meeting jurisdiction thresholds set out in the act. Notably, sanction from the commission is mandated for such combinations in the manner prescribed under the act and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations).

However, the definition of combinations under the act does not refer to the JV. There had been no transparency regarding the triggering circumstances. Thus, clarity as to the state of affairs that would act as a catalyst was vital.

The commission has released a key clarification in its frequently asked questions (FAQs) so as to curb the ambiguity in the matter. The FAQs clarify that, “if one or more enterprises transfer its assets to a joint venture company, then the formation of joint venture is treated as a notifiable combination, provided that jurisdictional thresholds are met after applying the principle of attributability”.

This clarification implies that, if the creation of a JV involves a “transfer of assets” and meets the prescribed threshold, prior approval of the commission will need to be obtained, as recommended under the Combination Regulations. As a result, the commission will prima facie consider the JV including asset transfers as deemed acquisition of control over transferred assets through the medium of the JV.

Included in the FAQs is the following example: ABC Pvt Ltd and PQR Pvt Ltd enter into a JV agreement for the creation of a JV company, say, XYZ Pvt Ltd, and the transaction includes transfer of certain assets to XYZ from ABC. The commission will treat this as ABC acquiring control over the assets of PQR through the medium of the JV, i.e. XYZ.

In this illustration, the value of assets is to be determined by taking the book value of the assets, in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of proposed combination falls, as reduced by any depreciation, and the value of assets is to include intellectual property rights as well as other commercial rights, if any.

Vijay Aggarwal Partner Seth Dua & Associates
Vijay Aggarwal
Partner
Seth Dua & Associates

In a concrete example, the commission in the year 2015 had received a notice from three parties – JJDC, Ethicon and Google – relating to the formation of a JV called Warren Robotics. The proposed combination involved the intention to transfer certain assets (including intellectual property and related assets) from the parties to the JV and met the prescribed threshold. The commission accordingly regulated the proposed combination and ensured that the proposal was not likely to have an appreciable adverse effect on competition in India.

In view of the fact that the FAQs mention the asset transferring JV as a notifiable combination, it follows that where asset transfer is not involved, market participants may not be required to notify the commission.

Also, owing to the earlier confusion, market participants have been notifying the commission only in the case where a JV is formed by transfer of “revenue generating” assets (i.e. a brownfield JV). However, the FAQs do not draw any distinction between the transfer of “revenue” and “non-revenue” generating assets. Thus, entities intending to enter into either a brownfield or a greenfield JV are mandated to notify the commission for regulatory purposes.

Thus, the commission has now indicated its stand as a watchdog in the proposed formation of a JV involving asset transfer. It has also clarified the reason for its stand and has brought certainty in the regulation.

Kshitij Sancheti and Vijay Aggarwal are partners at Seth Dua & Associates.

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