Mritunjay Kapur, country MD, Protiviti, the world’s largest independent business and risk consulting firm, speaks to The Strategist, about issues on which JVs have tended to trip
* Increased competition and the ‘non-compete’ agreement: Typically, a JV is between two seasoned players who want to come together to bring and grow a brand new entity. There’s a ‘sharing perspective’ why partners come together to form an entity that can grow a particular business. It’s when JVs start to do well that one partner might start thinking that it can enter the market on its own. A liberalised regime is making that even easier in India compared to 15 years ago, when there were stringent rules. In splits, companies need to check on the ‘non-compete’ agreement.
* Governance structure: One needs to understand just how the risks will be managed (if at all). There has to be understanding on the money that promoters are taking for various transactions and whether the government rules and regulations are dealt with and followed properly. Global investors can find it tough to have faith in transactions etc given that they deal in a local market.
* Schedule of technology transfer path: Indian partners may be concerned that they are getting outdated R&D and technology from their partner. This is critical, especially when there is a global player that can come with a wealth of technological expertise (something that Indian counterparts can benefit with) and there can be times when Indian companies might wonder if they are being shown the right technology path by the partner. At what cost the technology will be transferred, will it be transferred at all, these are questions that can be raised.
* Performance parameters: There can be contrary views between companies on various issues such as profitability, cash flow into the company — which partner is putting how much and why. Another important parameter is the gestation period where partners sometimes are confused on how much time needs to be invested in the JV entity for it to grow.
* Exit clauses: What’s the commitment when — and if — the market doesn’t function according to expectation. In this case, if one wants to exit, it needs to look at the legal issues: right of first refusal, right of first offer (to safeguard interests and prevent business to be sold off to competitors once the JV ends), details on intellectual property rights, trademarks etc (vital in pharma industry where patents are critical; or media industry where channel logos are so important), the lock in period for partnership (in infrastructure and real estate, where foreign investors pump in money, government regulations stipulate a lock-in period of three years at the very least).
Mritunjay Kapur
Country managing director, Protivity Consulting