- CA. Mandar Joshi

Setting up Ventures Abroad & Joint Sector

Projects

Doing Business Abroad

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 India’s 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.

Why do Companies invest in overseas

business?

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

Ways to Set up Business abroad

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.

Benefits from setting up business

overseas

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)

Joint Sector Projects - Concept

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

Objectives of Joint Sector Projects

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 70-75 per cent of the resources by the private promoters and general public.

Why Government prefer Private

Sector?

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 Private sector would respond?

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

Working of PPP engagement

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

Joint Venture

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 partner’s 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.

Management Contracts

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

Build Own Operate

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.

Financing to Joint Sector Projects

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.

Joint Sector Enterprises in India

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.