Several challenges plague the operation of joint venture companies in India. As a result, the number of successful joint ventures in India, especially those involving a non-resident investing party, has declined.
Poor or inadequate due diligence
At the time of entering into a joint venture, Indian promoters have a tendency to ‘window dress’ either the business plan or the asset, and carefully steer the due diligence being undertaken by the incoming joint venture partner. In such instances, the incoming joint venture partner is not made aware of all the pending issues surrounding the business or the asset in question. Discovery of these at a later stage often leads to disputes between the joint venture partners, owing to which there is an increased trend in the market of conducting forensic due diligence on the prospective partner. Such diligence is conducted to run background checks and analyse anti-bribery and anti-corruption policies and practices, as may be applicable on the prospective partner, with the aim of, inter alia, avoiding any possible corporate fraud.
Business style in India
There are significant philosophical differences in the manner in which business is conducted overseas and in India. Some practices may lead to bribery and corruption-related issues, including but not limited to violations of the Foreign Corrupt Practices Act 1977 that hinder the governance of joint venture companies. In furtherance of the same, the Prevention of Corruption Act 1988, which governs anti-bribery and anti-corruption activities in India, was amended in 2018 to bring the provisions therein on a par with international practices. Certain types of companies in India are also required to invest in directors’ and officers’ liability insurance, covering any risks arising out of any claims against the directors or officers of the company for any breach of applicable laws, including laws pertaining to corruption and bribery.
Modes of corporate governance and mediation of disputes between the joint venture partners
A lack of good mechanisms and ethical standards to internally regulate the governance of the joint venture company can have severe consequences, especially for foreign investors. Therefore, to avoid governance issues and to ensure good governance, it is crucial for the joint venture parties to adopt a variety of checks and balances, such as incorporation of specialised committees consisting of representatives of the joint venture partners and independent advisers, to look into particular aspects of the business of the joint venture. The style in which the joint venture company is to be governed, while often legislated in the joint venture agreements, may not always be practical and feasible for the company to implement, for various reasons.
The Companies Act provides for a governance regime with stringent checks and balances, including material disclosures by the company and the key managerial personnel, so as to safeguard the interests of investors even in the absence of contractually agreed protections. The Companies Act recognises the concept of independent directors, who are not related or affiliated, whether directly or indirectly, with any joint venture partner, including the natural persons in control of a joint venture partner. Independent directors may also provide the joint venture company with the relevant expertise and experience for, inter alia, an independent perspective to help:
- resolve conflicts that may arise among the joint venture parties; and
- ensure compliance with applicable law.
Such independent directors also play a pivotal role in representing the collective interests of minority shareholders. Further, joint ventures in India should also consider establishing committees such as an audit committee, to fulfil the role of a company watchdog, with a say over crucial matters relating to the appointment of the auditors of a company, approval and subsequent modification of RPTs, scrutiny of inter-corporate loans and investments, valuation of undertakings and evaluation of internal controls and risk-management systems. Such committees make decision-making processes more efficient and transparent. Addressing disputes that arise between joint venture partners in a timely manner is essential to ensure that the operations of the joint venture company are not paralysed, owing to pending disputes between joint venture partners. Apart from appointing independent directors and forming committees, the joint venture partners could also consider developing a code of conduct and policies to govern conflicts, which should be comprehensive and clear, and provide for escalation mechanisms at appropriate stages.
The board of a company plays a pivotal role in its governance and decision-making process, and is authorised and empowered to do so by the Companies Act. It has the responsibility to comply with the laws that affect the company’s corporate governance structure, the ambitions of the promoters and the rights of stakeholders, all of which are reflected in the actions of the board. However, in the event the non-resident investing party appoints non-resident directors, then such directors are typically not involved in the day-to-day affairs of the joint venture company, since several powers for the ease of everyday working are delegated by the board to the executive management of the company. Hence, to retain more control over the day-to-day affairs of the company, such non-resident investing parties shall also appoint resident directors who can act as executive or whole-time directors and manage the daily operations of the joint venture company. Recently, joint venture entities have adopted creative arrangements with respect to the appointment of key managerial persons to ensure that every joint venture partner has a say in the day-to-day management of the joint venture. This includes the appointment of the chief executive officer by the joint venture parties on a rotational basis or designating different key managerial personnel by the joint venture parties. The Companies Act also provides onerous duties and corresponding liabilities for such key managerial personnel. Providing insiders with a whistle-blowing mechanism with safeguards against retaliation is an effective way in which concerns can be reported to the audit committee or the joint venture company’s board. The minority investor’s nominee on the board or the committee, as the case may be, would have sufficient awareness of any foul play at a very nascent stage and would enable the minority investor to take corrective action.
The Companies Act sufficiently discourages non-compliance. With the increased cost of non-compliance, including contraventions that result in imprisonment of the company’s officers and personal liability, provisions relating to investigation and the punishment of fraud, the Companies Act ensures that the aforementioned governance requirements are complied with, in letter and in spirit.
Kotak committee report and anticipated reforms in corporate governance
In 2017, the SEBI committee on corporate governance proposed some key recommendations with a view to enhancing the corporate governance standards of listed entities. These recommendations include, inter alia:
- the separation of roles of the chairperson and the managing director or chief executive officer;
- a requirement of 50 per cent of the total directors to be independent, which should also include at least one independent female director;
- an increase in the number of board and audit committee meetings;
- the provision of a transparent framework for regulating information rights of promoters with relation to significant shareholding and access to unpublished price-sensitive information; and
- half-yearly disclosures for RPTs.
Addressing the corporate governance issues and procedures recommended to streamline the governance practices of listed entities, a large number of recommendations proposed by the Kotak committee have been accepted by the SEBI, thereby amending major corporate laws in India and strengthening the very core of businesses.
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