CS Shikha Mehra

CS Shikha Mehra♣ INTRODUCTION:

Procedural requirement for setting up Branch office or Representative office outside India is not such a big deal as it seems to be. However it requires a lot of enthusiasm who want to set up their offices abroad and have such ability to succeed in the most adverse circumstances.

Technically, No prior permission of Reserve Bank of India is required to open offices (trading or non-trading) abroad or post representatives abroad by Indian firms/companies.

♣ CONDITIONS:

a. BO/RO should be conducting normal business activities of the Indian company.

b. Overseas branch shall not enter into any contract or agreement in contravention of the FEMA Act, rules or regulations.

c. Overseas office (trading/non-trading)/branch should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank.

d. Any funds rendered surplus should be repatriated to India

e. Audited financials of BO/RO needs to be submitted to AD bank

♣ GENERAL TERMS AND CONDITIONS FOR OPENING THE OFFICES ABROAD:

a. The overseas office should not create any financial liabilities contingent or otherwise for the head Office in India.

b. Exchange released by the authorized dealer should be strictly utilized for the purpose(s) for which it is released. The unused exchange may be repatriated to India under advice to the authorized dealer.

c. The details of bank account opened in the overseas countries should be promptly reported to the authorized dealer.

d. The approval granted for the purpose should be made valid for 6 months from the date thereof, within which time the applicant should open its overseas office or post representative abroad. In case the overseas office is not opened or the representative is not posted abroad within this period, intimation in writing to the effect should be sent to the authorized dealer immediately after expiry of 6 months period. Fresh application for release of exchange should be submitted to the authorized dealer as and when the overseas office is desired to be opened.

e. Profits, if any, earned by the overseas office/s should be repatriated to India.

f. The following statements should be submitted by the applicant to the authorized dealer:

  • A statement showing details of initial expenses incurred together with suitable documentary evidence, wherever possible, within three months from the date of release of exchange for that purpose.
  • Annual account of trading/non-trading office abroad duly certified by statutory Auditors/Chartered Accountants.

♣ TEMPORARY SITE/PROJECT OFFICES ABROAD:

Indian firms/companies executing contracts/projects abroad with the approval of the appropriate authority are permitted under a general permission granted by Reserve Bank to set up site/project offices abroad provided that such offices are maintained out of project receipts and remittances from India are not required. These offices are required to be closed down and surplus foreign exchange earnings repatriated to India after completion of the project.

♣ PROHIBITED SECTORS:

Indian parties are prohibited from investing in a foreign entity engaged in real estate activities.

NOTE: Construction activities or development of townships are not prohibited.

The foreign entity should not be engaged in buying and selling of real estate or instruments that relate to rights in real estate.

Investment in foreign banks can be done only with the prior approval of Reserve Bank of India.

In addition, activities that are illegal in host country are prohibited. Further, the law does nowhere mentions about prohibition of investing in an activity that is illegal in India but legal in host country.

The list of Transactions which are prohibited under Foreign Exchange Management (Current Account Transactions) Rules, 2000 as per Schedule –I are as follows:

  1. Remittance out of lottery winnings
  2. Remittance of income from racing/riding, etc or any other hobby.
  3. Remittance for purchase of lottery tickets,banned/ proscribed magazines, football pools, sweepstakes, etc
  4. Payment on commission of exports made towards equity investment in JV/WOS abroad of Indian companies
  5. Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
  6. Payment of commission on exports under Rupee State Credit Route, except commission upto 10% of invoice value of exports of tea & tobacco
  7. Payment related to “Call Back services” of telephones
  8. Remittance of interest income on funds held in Non –Resident Special Rupee (Account) Scheme.

♣ INVESTMENTS UNDER AUTOMATIC APPROVAL ROUTE

Investment by persons resident in India does not need any approval in any of the following cases:

A. Under Liberalized Scheme by individuals up to USD 250,000 per annum

B. Under General Permission for funds held in foreign currency accounts

C. Under Automatic Approval Route – not exceeding 400 per cent of net worth

A. Liberalized Scheme

Under this Scheme, Authorised Dealers (Banks dealing in foreign exchange) freely allow remittances by resident individuals up to USD 250,000 per financial year (April-March) for any permitted current or capital account transactions or a combination of both. The facility is available to all resident individuals including minors. Resident individuals are also permitted to acquire and hold immovable property using this scheme. In addition, the scheme may be used to purchase shares (of listed companies or otherwise) or debt instruments or any other asset outside India without prior approval of the Reserve Bank.

Resident individuals are allowed to set up Joint Ventures / Wholly Owned Subsidiaries outside India for bona fide business activities outside India within the limit of USD 250,000. It should be noted that, with effect from February 2015, the limit includes all foreign exchange used by an individual in a financial year. So, if an individual buys foreign exchange for travel or treatment abroad, the amount so bought will be deducted from the overall limit.

The facility is not available for making remittances directly or indirectly to Bhutan, Nepal, Mauritius and Pakistan.

For undertaking transactions under the Scheme, resident individuals need to submit a small two-page application-cum-Declaration Form . It is mandatory to have PAN number to make remittances under the Scheme.

B. General Permission

General permission is granted to persons resident in India for purchase/ acquisition of securities in the following manner:

a) Out of funds held in RFC Account

b) As bonus shares on existing holding of foreign currency shares; and

c) When non permanently resident in India, out of their foreign currency resources outside India

However, this permission is also granted to sell shares so purchased or acquired.

C. Automatic Approval Route

Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for making overseas direct investments in a Joint Venture / Wholly Owned Subsidiary (JV / WOS) abroad. The Indian Party should approach an Authorized Dealer Category – I bank for effecting the remittances towards such investments.

Further “Indian Party” includes any of the following:

  • A company incorporated in India
  • A body created under an Act of Parliament
  • A partnership firm registered under the Indian Partnership Act, 1932
  • A limited liability partnership incorporated under the Limited Liability Partnership Act,2008

Conditions for direct investment under the Automatic Route are as under:

  • The Indian Party can invest up to 400% of its net worth (as per the last audited Balance Sheet) in JV / WOS for any bonafide activity permitted as per the law of the host country. The ceiling of 400% of net worth will not be applicable where the investment is made out of balances held in the EEFC (Exchange Earner’s Foreign Currency) account of the Indian party or out of funds raised through ADRs/GDRs
  • The Indian Party is not on the Reserve Bank’s exporters’ caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL) / RBI or any other credit information company as approved by the Reserve Bank or under investigation by the Directorate of Enforcement or any investigative agency or regulatory authority; and
  • The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorized dealer (bank) to be designated by the Indian Party. The total financial commitment of the Indian party, in all the Joint Ventures / Wholly Owned Subsidiaries put together, shall not exceed 400% of the net worth of the Indian party as on the date of the last audited balance sheet.

♣ RBI APPROVAL ROUTE:

Prior approval of the Reserve Bank is required in all other cases of direct investment abroad. For this purpose, application together with necessary documents has to be submitted through a bank dealing in foreign exchange.

Enterpreneurs are allowed to set up JVs / WOS outside India with the prior approval of the Reserve Bank subject to satisfying the eligibility criteria.

For this, an application in form ODI may be made to the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Overseas Investment Division, Central Office, Amar Building, 5th Floor, Fort, Mumbai 400 001, through their bank.

♣ Eligibility Criteria:

i. That Indian party should fall under the category of “Status Holder” in terms of Foreign Trade Policy.

ii. The bank is satisfied that the exporter is KYC (Know Your Customer) compliant and is engaged in the proposed business.

iii. Exporter has proven track record i.e. overdue exports do not exceed 10 per cent of the average export realization of previous three financial years

iv. The exporter has not come under adverse notice of any Government agency like Directorate of Enforcement, CBI and does not appear in the exporters’ caution list of the Reserve Bank or in the list of defaulters to the banking system in India.

v. The amount of investment outside India does not exceed 10 per cent of the average export realization of the preceding three financial years or 200 per cent of the net owned funds of the firm, whichever is lower.

♣ REMITTANCE OF FUNDS TO BO/RO ABROAD:

A firm or a company or a body corporate registered or incorporated in India (hereinafter referred to as ‘the Indian entity’) may open, hold and maintain in the name of its office (trading or non-trading) or its branch set up outside India or its representative posted outside India, a foreign currency account with a bank outside India by making remittances from India for the purpose of normal business operations of the office/branch or representative.

Conditions:

a. the overseas branch/office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity;

b. the total remittances made under this sub Regulation by the Indian entity, to all such accounts in an accounting year shall not exceed:

  • 1 per cent of such average annual sales/income or turnover where the remittances are made to meet recurring expenses of the branch or office or representative;
  • 2 per cent of the average annual sales/income or turnover during last two accounting years of the Indian entity, where the remittances are made to meet initial expenses of the branch or office or representative,;and

c. the overseas branch/office/representative shall not enter in any contract or agreement in contravention of the Act, Rules or Regulations made there under;

d. the account so opened, held or maintained shall be closed,

  • if the overseas branch./office is not set up within six months of opening the account, or
  • within one month of closure of the overseas branch/office, or
  • where no representative is posted for six months.

and the balance held in the account shall be repatriated to India;

Provided further that the restriction contained in clause (b) of the first proviso shall not apply in a case where

  • the remittances to the account maintained under this sub Regulation are made out of funds held in EEFC account of the Indian entity, or
  • the overseas branch/office is set up or representative posted by a 100% EOU or a unit in EPZ or in a Hardware Technology Park or in a Software Technology Park, within two years of establishment of the Unit.

♣ REMITTANCE OF FUNDS BY AUTHORISED DEALER (BANKS):

AD banks in India are permitted to remit funds for

a. Initial Expenses:

Remittance up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher

b. Recurring Expenses:

Remittance up to ten per cent of the average annual sales/income or turnover during the last two financial years

♣ PROCEDURE:

The Indian firm/companies should submit applications to their bankers (authorized dealers) in Form OBR along with the particulars of their turnover duly certified by their auditors and also a declaration to the effect that they have not approached/would not approach any other authorized dealer for the facility being applied for. The application form OBR needs to be filled in with necessary details along with supporting documents.  After which the foreign exchange is released by the authorized dealer (bank).

Documents to be submitted along with the Form OBR (Click here to download Form OBR)

  • Correspondence, if any, in original together with photocopies regarding the arrangement made in foreign country for posting of representative/establishment of branch/office.
  • Bank certificates, in form BCX (certificate of export), together with photocopies thereof for the immediately preceding four calendar half years in support of export realizations.

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