Semiconductors, often just called ‘chips’, are the building blocks of modern technology, powering everything from smartphones to military equipment. These tiny devices have become cornerstones of global power and influence, driving geopolitical and economic competition. Unlike other partnerships and joint ventures (“JVs”), the semiconductor space has its own unique set of considerations, which go beyond the usual ones, like setting up the entity, equity contribution, right and obligations of parties and exit terms.
This blog covers essential aspects of semiconductor design, manufacturing, supply chain, distribution, licensing, intellectual property, and data security when forming a partnership in this field.
Key Considerations for Semiconductor partnerships / JVs
Regulatory Approvals:
The Government of India (“GoI”) has established the India Semiconductor Mission (“ISM”) to address the issue of global semiconductor shortage and encourage manufacturers to set up semiconductor facility in India. The GoI has issued four schemes: (a) Semiconductor Fab; (b) Display Fab; (c) Compound Semiconductor and Semiconductor ATMP; and (iv) Design Linked Incentive (DLI), under the ISM, which is the nodal agency, responsible for carrying out technical and financial appraisal of the applications received, recommending selection of applicants and performing other responsibilities as assigned by the Ministry of Electronics and Information Technology (MEITY) from time to time.
Supply chain security, export control and sanctions:
India controls the export of sensitive goods and technologies to prevent misuse through the Special Chemicals, Organisms, Material, Equipment and Technologies (“SCOMET”) list[1]. SCOMET list items (including semiconductor related ones with potential military applications) require government authorisation for export.
Semiconductor partnerships must address continuity and security of supply chains into their agreements. Further, given global tensions and sanctions, especially with bordering countries like China, JV agreements should have clauses detailing procedures for eventualities such as one party being restricted from accessing key markets or technologies.
To streamline supply chain, India signed as one of the 14 participants of the Indo-Pacific Economic Framework for Prosperity (“IPEF”)[2], which stands on the four pillars of trade, supply chains, clean economy and fair economy. India has committed to all pillars except ‘trade’, for which it retains observer status.
Intellectual Property (“IP”):
JVs must ensure clear agreements on ownership, use and protection of IP, especially if proprietary technology or brand value is being contributed by the group. Further, if one of the partners to the JV is transferring proprietary technology to the JV, licensing terms should be clearly defined, including limitations on use, sub-licensing and territory of the license. Additionally, JVs must ensure that ownership and registration of patents, trademarks and software copyrights are addressed. Agreement must include mechanism to handle potential IP infringement, including indemnification and dispute resolution clauses.
Confidentiality and Data Security:
Since parties to a JV often exchange sensitive technical information, robust non-disclosure agreements (NDAs) are essential and should extend beyond the life of the JV to protect trade secrets and proprietary information.
Additionally, compliance with the Information Technology Act, 2000 (“IT Act”), and proposed data protection regulation, i.e., Digital Personal Data Protection Act, 2023 (“DPDP Act”), becomes critical, particularly if the JV will handle user data, process payments, or operate in industries like financial services.
Further, provisions for implementing cybersecurity measures to protect the JV’s digital assets – including secure infrastructure, data encryption, and threat monitoring – must be incorporated.
Software Development and Licensing (if applicable):
For technology, determining ownership of the source code developed during the project is crucial. Also, it is necessary to use Escrow Agreements to ensure access to source code even if the JV dissolves. Further, for businesses using open-source software (“OSS”), it becomes necessary to comply with OSS licenses. For tech businesses offering cloud-based services, Software as a Service agreements must cover aspects like data access, service level agreements (“SLAs”) and uptime guarantees.
R&D and Innovation:
If the JV involves collaborative research and development (“R&D”), clear terms, including non-compete clauses, must be laid out in the Joint Development Agreement, addressing ownership of the resulting IP, milestones, and R&D funding.
Service Level Agreements:
For tech JVs providing services such as cloud computing or IT infrastructure, SLAs should define performance metrics, and remedies and penalties for downtime / non-performance, which could affect the JV’s reputation and financial stability.
Technology Outsourcing and Vendor Agreements:
In the event, the JV plans to outsource certain functions like development and IT support, precautions must be taken to ensure that these vendor agreements comply with the tax laws and cross-border data regulations for offshore outsourcing and must include robust terms for performance, confidentiality, audit and IP rights.
Exits and Post-JV Considerations:
JV agreements must clearly state the handling of shared or jointly created IP upon dissolution of the JV or exit of a party. Terms such as IP reversion clauses, non-compete clauses, clauses restricting/ allowing post termination use/ transfer of IP by either of the parties must be incorporated.
India’s Approach towards Self-Reliance
Collaboration & Partnerships:
India has been fostering partnerships with countries such as the United States, Japan, South Korea and Taiwan to establish uninterrupted supply chain. India is a member of the Quad Alliance, along with the US, Japan and Australia, aimed at redefining the semiconductor supply chain.
Schemes and Incentives:
GoI’s Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India was notified on December 21, 2021, at an outlay of INR 76,000 crore ($9.5 billion). In addition to the GoI schemes, states such as Maharashtra, Gujarat and Andhra Pradesh offer incentives/ schemes to attract investments and incentivise long-term, committed players to develop the semiconductor space.
[1] SCOMET List updated as on September 2, 2024 (available here).
[2] Australia, Brunei, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam & USA.
