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Foreign and local investors face numerous regulatory hurdles when embarking on joint ventures in India and Taiwan

Guide to foreign joint ventures in India

Foreign direct investment (FDI) inflows into India have witnessed a steady rise, from USD36 billion during the financial year 2013 to 2014 to USD81 billion (provisional) in 2024 to 2025, because of an investor-friendly policy, under which most sectors are open for 100% FDI through the automatic route (without government approval). According to a recent press release, more than 90% of the overall FDI inflow is received under the automatic route.

Cross-border joint ventures (JVs) have long served as vehicles for foreign investment, while also fostering local innovation. In recognition, the government has increased the FDI limits in sensitive sectors such as defence and telecoms. More recently, the 2025 Union Budget also increased the FDI limits in the insurance sector from 74% to 100%, for companies that invest their entire premium in India.

Forms of JVs

JVs can be created by contract or by incorporation. A JV structure implies the creation of a separate legal entity or participation in the capital of an existing entity by an investor, as per the contractual agreement between the parties concerned. Each party has a contribution that is assimilated and designated under the arrangement. The other form does not involve a separate legal entity. Instead, a co-operation agreement or strategic alliance contract captures the responsibilities of the interested parties.

Legal framework

In terms of the FDI policy, foreign investment is permitted in Indian companies and limited liability partnerships. However, international investors typically prefer to invest in Indian companies.

A JV company with foreign investment would be required, among other things, to comply with the following laws and regulations:

1. 1. Companies Act, 2013. For matters relating to incorporation, registration and compliance;
   2. FDI policy and the Foreign Exchange Management Act 1999 regulations (FEMA). To determine sectors, modalities and restrictions for FDI, and remittance of funds into or out of India;
   3. Income Tax Act, 1961, related rules and applicable double taxation avoidance agreement. To determine the tax implications for the JV and the foreign investor on account of dividends, royalties and income from capital gains; and
   4. Competition Act, 2002. To determine whether the acquisition of a stake in an Indian company would trigger the requirement to seek prior approval from the Competition Commission of India on account of applicable thresholds relating to turnover and asset base.

Key considerations

Investment conditions. As previously mentioned, foreign investors are permitted to invest up to 100% in the equity of an Indian company under the automatic route in most sectors. Foreign investment in a few sectors, such as lottery business, casinos, atomic energy and railway operations, is prohibited.

In certain sectors deemed strategically important by the government, foreign investment is permitted subject to sectoral caps (maximum limit of foreign equity) and other specified conditions depending on the sector. For instance, such conditions may inter alia include the requirement of obtaining prior government approval, security clearances, transfer of technology, mandatory reporting of changes in foreign shareholding and sourcing norms. Such conditions may significantly impact a foreign investor’s plans for establishing a JV in India. Since 2020, FDI from countries sharing a land border with India is permitted only with prior approval from the government. If the ultimate beneficial owner (UBO) of the proposed investment in India is situated in or is a citizen of any such country, prior government permission is required. This has led to recent increased scrutiny of JV partners and their UBOs. Any investment made in violation of this requirement is deemed null and void and may require complete repatriation of the foreign capital.

Funding and related issues. An Indian JV is permitted to issue “equity instruments” to its overseas investor. Equity instruments include equity shares and convertible preference shares or debentures. Any non-convertible/partially convertible or optionally convertible preference share or debenture is treated as debt and is subject to relevant FEMA guidelines.

Investment by a foreign investor in an Indian company is subject to the following pricing norms:

1. 1. For shares of a listed entity. The price is determined as per the relevant regulations of the Securities and Exchange Board of India (SEBI); and
   2. For shares of an unlisted entity. Fair value is determined on an arm’s length basis (not less than that offered to Indian shareholders) and duly certified by a chartered accountant or a SEBI-registered merchant banker or a practising cost accountant.

Indian entities may issue equity instruments to foreign JV partners against a swap of equity instruments (including swap of equity instruments of foreign companies), import of capital goods, machinery or equipment, and as adjustment against pre-operative or pre-incorporation expenses, subject to the guidelines for each specified form of consideration set out in the FEMA master directions.

For the transfer of equity instruments between an Indian resident and a foreign investor, up to 25% of the total consideration may be paid by the buyer on a deferred basis within 18 months from the date of the definitive agreement. Where the total consideration has been paid, the seller may furnish an indemnity for an amount not more than 25% of the total consideration for a period not exceeding 18 months from the date of the payment of the full consideration.

Compliance. All investments by a foreign JV partner in an Indian company, whether through subscription to equity instruments issued by the company or by acquisition of shares from the Indian JV partner, have to be duly intimated in prescribed forms to the concerned authorised dealer banks (banks authorised by the Reserve Bank of India) within stipulated periods. Similar intimation is required to be filed at the time the foreign investor sells its stake to a resident entity or individual. Non-compliance may impede or delay future transactions, such as capital infusion, exits or buyouts, involving foreign investors.

Other relevant issues

Due diligence. The Indian regulatory landscape, business practices and socio-political scenario may differ significantly from an investor’s home jurisdiction. It is imperative that the investor carefully considers key aspects of the due diligence report to determine valuation, conditions precedent and subsequent, governance structure, indemnity obligations and exit options.

For example, litigation in India tends to be lengthy and, depending on the sector, the target entity may have a significant number of pending cases. In employee matters, Indian law provides for certain safeguards to workers who are not in the senior management category. Any transition or change in their benefits requires careful consideration.

Real estate. Acquisition of real estate in India can be a procedurally complex and time-consuming process, with no central registry of land records. Depending on the location of the property, a purchase or lease may require co-ordination with multiple authorities, increasing transaction time.

Dispute resolution, governing laws. Arbitration, including foreign-seated arbitration, is generally the preferred method of dispute resolution in agreements concerning Indian JVs. Foreign arbitral awards are enforceable in India with limited grounds for a challenge. Parties may choose foreign law as the governing law of the JV agreement.

Repatriation of profits and investment. There is no limitation on the amount of profits that may be repatriated to the foreign JV partner. An Indian shareholder, purchasing shares held by the overseas partner, must comply with the previously mentioned pricing norms.

Enforcement of non-compete and non-solicit clauses. Non-compete and non-solicit clauses are enforceable during the term of the JV agreement. Indian courts have adopted a conservative approach to enforcing non-compete provisions after the termination of the JV agreement between parties. Such clauses may be held enforceable depending on the duration, geographical limitation and other factors. Non-solicit clauses post-termination are usually enforceable.

Kochhar & Co
202, Vios Tower, New Cuffe Parade,
Sewri Chembur Road, Wadala East, Mumbai-400 037,
Maharashtra, India
Tel: +91 22 6112 0700
Email: legal@mumbai.kochhar.com

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JV structures and regulations in Taiwan

Joint ventures (JVs) are a commonly adopted investment structure for foreign entities seeking to enter the Taiwan market and expand their business presence with local partners. Setting up a JV in Taiwan enables foreign and local investors to combine their capital, resources, expertise and market knowledge, as well as share risks and costs, while developing new technologies and markets jointly. Given that the establishment and operation of JVs could be subject to various local laws and regulations, foreign investors should be aware of the relevant rules to benefit from the competitive advantages.

Corporate forms

There are four types of companies in Taiwan:

1. 1. Unlimited liability company;
   2. Limited liability company;
   3. Unlimited company with limited liability shareholders; and
   4. Company limited by shares. For foreign investors, a company limited by shares is the most favourable form as it can be established by two or more shareholders, and the liability of each shareholder is limited to the amount of capital they have injected.

A JV partner may subscribe to preferred shares and enjoy dividend rights, voting power, veto rights, a specific number of board seats and/or a preferential conversion ratio. To strengthen the JV structure, a closely held company (which is also limited by shares but comprises no more than 50 shareholders) can stipulate share transfer restrictions in its articles of incorporation (AOI) to restrict any transfer of shares not in line with the agreement between the JV partners ab initio (from the beginning). Considering the prevalence of use of a company limited by shares, this article focuses on the major features of this particular corporate form.

Foreign investment approval

All inbound investments by foreign investors and investors from China (excluding Macau and Hong Kong) are subject to prior investment approval by the Department of Investment Review (DIR) of the Ministry of Economic Affairs (MOEA). In general, a foreign investor can freely invest in a JV company unless the JV company engages in any of the prohibited or restricted businesses on the “negative list” published by the government. A PRC investor may only invest in the permitted businesses on the “positive list” published by the government and is subject to review by the DIR.

When considering whether to approve foreign investment in the joint venture, the DIR will review the investor’s shareholding structure and the proposed business plan. The investment review department may request additional information, consult with relevant governmental bodies and/or conduct ad hoc reviews on a case-by-case basis to gain a comprehensive understanding of the investment and its impact. Depending on the size and complexity of the investment, the review process by the department typically takes one to two months for foreign investments.

Corporate governance

Under the Company Act, the board is entrusted with a wide range of power and authority over the daily business operation of the JV company, while shareholders retain the power to decide on certain matters prescribed under the Company Act.

Such matters include, for example, amendments to the AOI, capital reduction, liquidation and dissolution, and approval of a merger, sale of all or substantially all of the assets or spin-off. Except for the matters requiring shareholder approval under the Company Act, the operations of a company are, by and large, determined by the board.

Directors, while acting in the interest of the shareholders, owe fiduciary duties to the company. The board of a company limited by shares with two or more JV partners must comprise at least three directors, unless its AOI permits one or two directors acting in lieu of a board.

Each partner, as a corporate shareholder, may itself be elected as the director of the JV company and designate a representative to serve as its director representative and may replace such representative at any time. Alternatively, a partner may appoint a representative to be elected as a director of the company and serve in the representative’s personal capacity.

While a partner may appoint multiple representatives to be elected as directors or supervisors, its representatives cannot serve as a director and supervisor concurrently. If the partner’s representative has already been elected as a director, the supervisor appointed by the partner should be elected in his/her personal capacity to ensure the checks and balances.

Reserved matters

The Company Act prescribes a list of matters requiring a majority (majority vote from at least half of a quorum) or supermajority (majority vote from at least two-thirds of a quorum) approval at a shareholders’ or board meeting (reserved matters). In the past, JV partners could freely stipulate a higher quorum and voting threshold for a customised list of reserved matters under their AOI.

However, in 2019, the MOEA adopted a more conservative view that a company may stipulate higher quorum and voting requirements in its articles only for those reserved matters that are explicitly permitted under the Company Act. Hence, when formulating the reserved matters to be incorporated in the articles, JV partners should pay special attention and ensure compliance with the act.

Albeit with the above-mentioned, JV partners can still agree on the reserved matters in the JV agreements without reflecting them in the AOI. While the Company Act permits shareholders to enter into a voting agreement or establish a shareholder voting trust, in the event of a dispute, the court will examine whether the arrangement adheres to the corporate governance principles and the applicable laws and determine validity.

Deadlock

There are no specific statutory provisions addressing a deadlock between JV partners, which leaves the parties with wide discretion to resolve the dispute. In practice, deadlock resolution mechanisms are usually incorporated into the JV agreements, which typically include a cooling-off period, negotiations between executive officers of the partners, and buyout provisions.

If a consensus cannot be reached, the partners may choose to dissolve the JV company or exercise the call or put option as a last resort. However, without the adoption of preferred shares or closely held company, if a partner transfers shares to a third party in breach of the agreement in the event of a deadlock, such a transfer might still be valid due to the limitation of specific performance, and the non-breaching partner may only claim for damages and other remedies available under the agreement.

Dividend distribution

Under Taiwan law, a JV company may distribute dividends to its foreign JV partners either quarterly or annually, as stipulated under its AOI. Before paying dividends, the company should first make up any losses, pay taxes and set aside a legal reserve. In addition, dividends or bonuses cannot be paid if there are no surplus earnings.

In terms of tax, dividends distributed to foreign partners are subject to a 21% withholding income tax, or a lower rate if provided under an applicable tax treaty. Furthermore, profits of a company for the current year that are not distributed by the end of the following year will be subject to a 5% retained earnings tax. The amount paid as retained earnings tax cannot be offset against the income tax payable on the distribution of those retained earnings to the partners.

Exit of JV partners

Common exit strategies for a JV include a share buyback by the JV partner, a sale of shares to a third party or an initial public offering. If a foreign partner wishes to exit by selling its shares in the JV company, it should first obtain prior DIR approval for the transfer of shares. On closing of the share sale, where physical share certificates are issued, a securities transaction tax of 0.3% of the transfer price will be levied against the seller to be deducted and payable by the buyer.

Conclusion

Forming a JV could be a strategic and beneficial move for foreign investors to expand into a new geographical market such as Taiwan. Foreign investors should carefully assess, through due diligence, the potential financial, cultural, legal and regulatory challenges and risks involved in forming and operating a JV company.

This article serves as an introduction to the JV structure and regulations in Taiwan, while in-depth consultation with experts in the relevant fields would be advisable for foreign investors to make informed decisions.

LEE & LI
8F, No.555, Sec. 4, Zhongxiao E. Rd.,
Taipei 11072, Taiwan, R.O.C.
Tel: +886 2 2763 8000
Email: attorneys@leeandli.com

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