Contractual Arrangement

The joint venture covered under this statement is governed on the basis of contractual agreement. Non-existence of contractual agreement will disqualify an organization to be covered in AS – 27. Joint ventures with contractual agreement will be excluded from the scope of AS – 23 only if the investment qualifies as subsidiary under AS – 21, in this case, it will be covered by AS – 21. Contractual agreement can be in the form of written contract, minutes of discussion between parties (venturers), articles of the concern or by-laws of the relevant joint venture.

Irrespective of the form of the contract, the content of the contract ideally should include the following points:

  • The activity, duration and reporting obligations of the joint venture.
  • The appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the venturers.
  • Capital contributions by the venturers.
  • The sharing by the venturers of the output, income, expenses or results of the joint venture.

The main object of contractual agreement is to distribute the economic control among the

venturers, it ensures that no venturer should have unilateral control. If contractual agreement is signed by a party to safeguard its right, such agreement will not make the party a venturer. For example, IDBI gave loan to the joint venture entity of L&T and Tantia Construction, they signed an agreement according to which IDBI will be informed for all important decisions of the joint venture entity. This agreement is to protect the right of the IDBI, hence just signing the contractual agreement will not make investor a venturer. Similarly, just because contractual agreement has assigned the role of a manager to any of the venturer will not disqualify him as venturer. For example, Mr. A, M/s. B & Co. and C Ltd. entered into a joint venture, where according to the agreement, all the policies making decisions on financial and operating activities will be taken in a regular meeting attended by them or their representatives. Implementation and execution of these policies will be the responsibility of Mr. A. Here Mr. A is acting as venturer as well as manager of the concern.

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