Corporate Law Newsletter – Zombie joint ventures (“JVs”) – the legal and strategic challenges of unwinding dormant cross-border joint ventures

1. Introduction

India’s corporate landscape is facing a silent problem, cross-border joint ventures that no longer serve their commercial purpose but continue to exist on paper. These so-called “Zombie JVs” linger in a state of regulatory and strategic limbo- inactive and yet not being fully disengaged.

Several JVs were formed during earlier waves of foreign investment, when shared control and local partnerships were viewed vital for market entry. However, shifts in strategy, ownership, and regulation have left these entities dormant and unwinding them raises legal and operational challenges including but not limited to, how to resolve deadlocks when neither partner is engaged, how to handle residual liabilities or IP, and how to navigate FEMA constraints when assets and/ or capital cross borders. For foreign investors and Indian partners alike, the challenge lies not only in ending a venture, but in doing so effectively and without reopening old disputes.

Comprehensive public data on Indian cross-border JVs that lie dormant is elusive, however, estimates suggest that globally around 60-70% of joint ventures terminate after the initial ‘honeymoon’ phase. In the Indian context, statistics indicate that about 50 major India-inbound JVs have unravelled in the past six years, most within a 10-year lifespan.

It is pertinent that while public data captures only formal dissolutions or exits, a significant number of joint ventures remain in a grey zone, neither active nor officially wound up. These dormant entities rarely appear in statistics but continue to exist on paper and as mentioned earlier often holding residual assets, licenses, or regulatory obligations.

Terminating a joint venture is rarely as straightforward as signing an exit deed and moving on. Once a JV has gone dormant or fallen into deadlock, even basic corporate actions such as appointing directors, approving accounts, or authorizing dissolution become unfeasible without mutual consent. Many such entities are caught in procedural limbo because the governance mechanisms designed to ensure joint control also make unilateral action difficult.

From a legal overview, the hurdles are layered. The Indian Companies Act, 2013 read with the rules thereof, requires shareholder and board approvals for winding

up or voluntary strike-off, but where one partner is unresponsive, resolutions cannot be validly passed. Contractual obligations including confidentiality, non-compete, and technology licence clauses that survive termination continue to bind the parties. Regulatory clearances under the Foreign Exchange Management Act, 1999 (“FEMA”), tax, and labour laws often hinge on joint certifications or filings, creating a compliance hurdle when one side has effectively disengaged.

Adding to the complexity, dormant JVs can become attractions for legacy claims from unpaid vendors, former employees, or tax authorities with liabilities that well past even operations ceasing. The reputational and legal exposure of leaving such entities “half-dead” often outweighs the cost of a clean exit.

Unwinding a dormant JV reveals how much legal residue remains even after commercial life has ended, which parties often disregard in the first instance of entering onto the JV. These entities may still hold bank accounts, licenses, intellectual property, or contracts that have quietly outlived their purpose. The first challenge is identifying who is responsible for what, particularly when directors or authorised signatories have changed and one partner is unresponsive.

Legacy liabilities can and do surface in unexpected forms: unfiled tax returns, employee claims, vendor disputes, or environmental clearances tied to past operations and because liabilities in India attach to the company not to its level of activity even a dormant JV can become the target of enforcement action.

Intellectual property is another main focal point which parties tend to entirely overlook when entering into the JV. Determining ownership of jointly developed intellectual property, trademarks, or know-how can be contentious, especially when one partner continues to use the technology elsewhere. Without a clear exit agreement, rights can remain frozen in the JV, blocking both sides from future use or commercialisation.

Then there is the matter of regulatory clean-up. Dormant entities must still file with the Registrar of Companies and the Reserve Bank of India under FEMA, particularly when they hold foreign investment. Pending filings, overdue accounts, or unclosed bank accounts can delay dissolution and attract penalties. Even voluntary liquidation under the Insolvency and Bankruptcy Code, 2016 requires updated filings and no-dues certificates from multiple authorities, a cumbersome process where the JV has been inactive for years.

For these reasons, many foreign investors prefer to restructure or transfer assets before formal winding-up. Yet this, too, requires careful navigation of pricing

guidelines, valuation rules, and FEMA permissions often making the ‘exit’ phase longer and more expensive than the JV’s active life itself.

A clean unwinding through voluntary liquidation or strike-off requires regulatory comfort at various stages. Even if the partners agree to dissolve the entity, the repatriation of funds to the foreign shareholder must occur at a fair value certified by a chartered accountant and any write-off of investment or dues can trigger additional scrutiny. The Reserve Bank of India has in recent years tightened oversight on such cases, especially where round-tripping or undervaluation could be alleged.

In contrast, restructuring for instance, converting the JV into a wholly owned subsidiary by one partner or transferring the foreign stake to a new Indian shareholder may be smoother but still requires adherence to FEMA pricing guidelines and timely filings.

Ultimately, the FEMA aspect revels the broader truth and the most essential aspect of entering into a JV, the hardest part of a cross-border JV is not the formation but the exit, which is why a well-drafted JV agreement that anticipates disengagement, includes pre-agreed valuation methods, and provides for regulatory cooperation can make the difference between a swift closure and a lingering ‘zombie’ on the balance sheet.

In conclusion, the real takeaway from India’s ‘Zombie JV’ problem, especially for legal counsel, isn’t just about cleaning up dormant entities it’s about preventing them in the first place. This is the exact reason why, though painful at the beginning, we must stress to Clients and even impose where necessary, the importance of a well-drafted JV agreement. A well-structured JV agreement should build in practical off-ramps buy-sell provisions that can actually be exercised, clear triggers for termination, valuation mechanisms that don’t require a fresh negotiation, and clauses on cooperation for regulatory filings and FEMA compliance.