Setting up Ventures

Abroad & Joint Sector

Projects
- CA. Mandar Joshi

 Doing business abroad and growing internationally is an

essential part of a company's business expansion
policy.
It is governed by a company's aim to diversify its
commercial activities across national frontiers and
increase its competitiveness.
In India, global business is controlled by the
Government of Indias policy guidelines issued on 1969.
These guidelines defined the extent of participation of
Indian companies in projects abroad and were
subsequently revised and liberalized from time to time.

Doing Business
Abroad

 Better technology than India

Better Tax Benefits
Better market for the products of the company
Better business governance and environment
Business expansion
Better finance/ investor availment opportunities

Why do Companies
invest in overseas
business?

 The Indian companies can directly invest outside India

by way of contribution to the capital or subscribe to the
equity share capital of the oversea companies.
Indian companies can also form 100% Subsidiary
companies in foreign countries. While a wholly owned
subsidiary abroad means a foreign concern formed,
registered or incorporated in a foreign country in
accordance with the laws and regulations of that country
and whose entire capital is owned by an Indian entity.
Another option is that India based companies can form
Joint Ventures (JVs) in foreign countries. A joint venture
abroad means a foreign concern formed, registered or
incorporated in a foreign country in accordance with the
laws and regulations of that country and in which
investment has been made by an Indian entity.
Besides such direct investment, listed Indian
Companies can invest upto 25% of the net worth in
overseas companies that are listed on a recognized
stock exchange in that foreign country.

Ways to Set up
Business abroad

Greater Exposure
Overseas expansion increases the exposure to business, helping it
to create "global footprint. As a result, business gains greater brand
recognition throughout the world.
Untapped Markets
Indian business may offer products or services that are unavailable
in certain parts of the world but are in high demand. By expanding
your operation into these markets, you can establish a new base of
eager customers without the immediate threat of competition. The
nation's government may sweeten the pot by offering certain
incentives for setting up a business operation, as you'll provide a
boost to its economy and possibly create badly needed jobs. E.g.,
introduction of Indian Masalas in Middle East by Masala King Mr.
Dhananjay Datar.
Favorable Business Climate
A new country may offer more favorable economic conditions than
the home country. When recession or the implementation of
restrictive government polices make turning a profit more difficult,
expanding into an area that doesn't currently pose these challenges
can offer a more lucrative alternative. A new nation may offer an
economic climate that is more "business-friendly.
Tax Benefits
Tax benefits such as lower tax rates or double taxation avoidance
agreement (Tax Treaty)

Benefits from setting

up business
overseas

 The concept of joint sector wherein Government

and private entrepreneurs join hands to establish
new enterprises is indeed an old one.
Government and private sector enterprises come
together to initiate an undertaking for the mutual
benefits

Joint Sector
Projects - Concept

 Social control over Industries: Participation in the

ownership and management of enterprises jointly
with private entrepreneurs gives the state an
effective instrument of controlling monopolies,
concentration of economic power and business
malpractices
Development of Backward areas: Due to the
active role assigned to the state, joint sector
enterprises can be made to be located in relatively
industrially backward areas which would help in
achieving balanced regional development. This
was necessary because many of the backward
areas possess rich natural resources but risk
capital was not easily forthcoming.
Resource Mobilization: State participation to the
extent of 25 per cent or more in equity capital in
an enterprise would lead to the mobilization of 7075 per cent of the resources by the private
promoters and general public.

Objectives of Joint
Sector Projects

 For joint sector projects, Government prefers

private sector for efficiency in operation
Exploitation of resources to the optimum level
Professional way to conduct the undertaking
Pre-decided time frame of completing the project
& timely delivery of products
Cost efficiency problem can be shifted to the third
party

Why Government
prefer Private
Sector?

 Exploring the potential of the organisation to utilise the

resources
Financing can be easily obtained from public sector
Eased out rules and regulations for the undertaking
company
Opportunity to earn more profits
Opportunity to get linked with the public sector and get
more opportunities to work in joint sector projects
Tax Concessions

Why Private sector

would respond?

 PPP Public Private Partnership

Build Operate Own Transfer: Toll is the best example of
this model. Here the private entity meets the upfront cost of
design, construction and recurring cost of operations and
maintenance.
Capital infusion is available from public entity
Private entity runs the facility and recovers the cost from the
users of the facility
Government prescribes certain period for which the facility will
be operated by the private entity
On expiry of such period, the ownership of facility is transferred
to the government

Working of PPP
engagement

 In a PPP arrangement commonly followed in our

country (such as for airport development), the
private sector body is encouraged to form a joint
venture company (JVC) along with the
participating public sector agency with the latter
holding only minority shares.
The private sector body will be responsible for the
design; construction and management of the
operations targeted for the PPP and will also bring
in most of the investment requirements. The
public sector partners contribution will be by way
of fixed assets at a pre-determined value, whether
it is land, buildings or facilities or it may contribute
to the shareholding capital. It may also provide
assurances and guarantees required by the
private partner to raise funds and to ensure
smooth construction and operation.

Joint Venture

 A management contract is a contractual

arrangement for the management of a part or
whole of a public enterprise by the private sector.
Management contracts allow private sector skills
to be brought into service design and delivery,
operational control, labour management and
equipment procurement.
However, the public sector retains the ownership
of facility and equipment.
The private sector is provided specified
responsibilities concerning a service and is
generally not asked to assume commercial risk.
The private contractor is paid a fee to manage
and operate services.
Usually, the contract period is short, typically two
to five years.
Example: Adhar Card outsourcing to private
entities or PAN card agencies like NSDL

Management
Contracts

 In a BOO project, ownership of the project

usually remains with the Private entity.
The government grants the rights to design,
finance, build, operate and maintain the project
to a private entity, which retains ownership of
the project.
In BOO the private entity is usually not required
to transfer the facility back to the government.

Build Own Operate

 A critical question about joint sector project is

financing.
With government supporting them, private entities
undertaking the project can avail the finance from
the various PSU banks.
The bank such as Industrial Credit and Investment
Corporation
of
India
(ICICI),
Industrial
Development Bank of India (IDBI), UTI were
establish with the intention to finance these
projects.

Financing to Joint
Sector Projects

 Air India International started by Tata Sons Ltd,

government owned 49% share which was later
increased to 51% and further it was completely
taken over by the Government in 1953
In a few cases equity participation by foreign
enterprises in the public sector enterprises was
also allowed. Madras Fertilizers Ltd. for example,
was established as a joint enterprise in
participation with Amoco Inc. (USA) and National
Iranian Oil Co.(Iran). The same foreign companies
were partners in Madras Refineries Ltd too.
There are 123 domestic joint sector companies in
India and 58 companies operating in joint sector in
collaboration with foreign entity.

Joint Sector
Enterprises in India