ESTABLISHMENT OF BRANCH OFFICE/LIASON OFFICE/PROJECT OFFICE IN INDIA BY A FOREIGN ENTITY

[ARUN KUMAR V K]

What is the criteria for establishing a liason office or branch office in India by a foreign entity?

A body corporate incorporated outside India (including a firm or other association of individuals), may open a Liaison Office (LO) / Branch Office (BO) in India subject to permission from the Reserve Bank of India (RBI) under provisions of Foreign Exchange Management Act, 1999.

Such foreign entity shall submit an application in Form FNC, which will be considered by Reserve Bank of India (RBI) under the following routes:

1. Automatic Route - If principal business of foreign entity falls under sectors where 100 % Foreign Direct Investment (FDI) is permissible under the automatic route.                   
2. Approval Route - If principal business of foreign entity falls under sectors where 100 % FDI is not permissible under the automatic route, applications by such entity is considered by RBI in consultation with the Ministry of Finance, Government of India.

What are the additional criteria considered by RBI before sanctioning BO / LO of a foreign entity?

1. Track Record:

• For BO - such entity should be profit making during immediately preceding five (05) financial years in its home country.

• For LO - such entity should be profit making during immediately preceding three (03) financial years in its home country.

2. Net Worth: Net worth [(total of paid-up capital plus free reserves) minus intangible assets as per latest audited Balance Sheet or financial statement certified by a Certified Public Accountant or any other Registered Accounts Practitioner].

• For BO - not less than USD 100,000 or its equivalent.

• For LO - not less than USD 50,000 or its equivalent

How is the application for establishing BO / LO processed?

Application for establishing BO / LO in India shall be forwarded by foreign entity through a designated AD Category - I bank to the General Manager, Foreign Exchange Department, Central Office Cell, RBI, New Delhi Regional Office, 6, Parliament Street, New Delhi - 110 001, India, along with following documents:

1. Certificate of Incorporation’s English version or MoA & AoA attested by Indian Embassy / Notary Public in the Country of Incorporation.

2. Latest audited Balance Sheet of the applicant foreign entity.

A Unique Identification Number (UIN) will be allotted to BO / LO established with RBI’s approval. The BO / LO shall also apply for Permanent Account Number (PAN) from the Income Tax Authorities on setting up offices in India and report the same in Annual Activity Certificate.

What are the permissible activities that can be carried out by a LO?

LO acts as a channel of communication between Head Office abroad and parties in India. It shall not undertake business activities in India and earn any income in India. Expenses of LO are met entirely through inward remittances of foreign exchange from Head Office outside India. The role of such offices is limited to collecting information about possible market opportunities and providing information about the Company and its products to the prospective customers. Permission to set up LO is initially granted for a period of 03 years and this may be extended from time to time by an AD Category I bank.

LO can undertake the following activities in India:

1. Representing in India the parent company / group companies.
2. Promoting export / import from / to India.
3. Promoting technical/financial collaborations between parent/group companies and companies in India.
4. Acting as a communication channel between the parent company and Indian companies.

Can foreign insurance companies and banks establish LO?

Yes, foreign insurance companies can establish LO in India after obtaining approval from Insurance Regulatory and Development Authority (IRDA).

Foreign banks can establish Liaison Offices in India only after obtaining approval from Department of Banking Regulation (DBR), RBI.

What are the permissible activities that can be carried out by a BO?

Foreign entities engaged in manufacturing or trading activities are allowed to set up BO in India with specific approval of RBI. BO should be engaged in the activity in which parent company is engaged.

Such BO is permitted to represent parent / group companies to undertake following activities in India:

1. Export / Import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work, in areas where parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
5. Representing parent company in India and acting as its buying / selling agent.
6. Rendering services in information technology and development of software in India.
7. Rendering technical support to products supplied by parent/group companies.
8. Foreign airline / shipping company.

What are the activities not permissible to be carried out by a BO?

1. Retail trading activities of any nature.
2. Manufacturing or processing activities in India, directly or indirectly.

What are the conditions for establishing a BO in Special Economic Zones (SEZs)?

General permission has been given by RBI to foreign companies for establishing BO in SEZs to undertake manufacturing and service activities. The general permission to such BO is subject to following conditions:

1. it is functioning in those sectors where 100 % FDI is permitted;
2. it complies with part XI of the Companies Act, 1956 (Section 592 to 602);
3. it function on a stand-alone basis.

Can foreign banks establish BO?

Yes, foreign banks do not require separate approval under FEMA, for opening BO in India. However, such banks are required to obtain necessary approval under provisions of Banking Regulation Act, 1949, from Department of Banking Regulation, RBI.

What is the procedure for undertaking additional activities by a BO / LO?

Application for undertaking activities in addition to what has been permitted initially by the RBI may be submitted through the designated AD Category -I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, justifying the need with comments of the designated AD Category - I bank.

What is the procedure for undertaking additional offices by a BO / LO?

Application for establishing additional BO / LO may be submitted through fresh FNC form, duly signed by authorized signatory of foreign entity in the home country to the RBI. However, documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents submitted earlier.

If number of Offices exceeds 04 (i.e. one BO / LO in each zone viz., East, West, North and South), the applicant has to justify need for additional office.

Applicant may identify one of its offices in India as Nodal Office, which will coordinate activities of all offices in India.

What are the procedure for closure of BO / LO?

During winding up of BO / LO the foreign entity has to approach the designated AD Category - I bank with the following documents:

1. Copy of RBI's permission/ approval from sectoral regulator(s) for establishing BO / LO.
2. Auditor’s certificate - a) indicating manner of arriving at remittable amount supported by a statement of assets and liabilities of applicant, and indicating manner of asset disposal; b) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of office have been either fully met or adequately provided for; and c) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
3. Confirmation from applicant that no legal proceedings are pending in any Court in India and there is no legal impediment to remittance.
4. RoC’s report regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of office in India.
5. Other documents, specified by RBI while granting approval.

Closure of such BO / LO has to be reported by designated AD Category - I bank to RBI (the Regional Office concerned for LO and Central Office for BO), along with a declaration stating that all necessary documents submitted by BO / LO have been scrutinized and found to be in order. If the documents are found not in order or consists of cases not covered under delegated powers, AD Category - I bank may forward application to RBI, along with their observations for necessary action.

What are the prerequisites for establishing a Project Office (PO) in India by a foreign entity?

RBI has granted general permission to foreign companies to establish PO in India, provided they have obtained a contract from an Indian company to execute a project in India, and

1. project is funded directly by inward remittance from abroad; or
2. project is funded by a bilateral or multilateral International financing agency; or
3. project has been cleared by an appropriate authority; or
4. company or entity in India awarding the contract has been granted term loan by a Public Financial Institution or a bank in India for the project.

If above criteria are not met, the foreign entity has to approach RBI, Central Office, for approval.