Establishment of Branch/Liaison/Project Office or any Place of Business in India by Foreign Entities

ESTABLISHMENT OF BRANCH OFFICES/LIAISON OFFICE/PROJECT OFFICE/ANY PLACE OF BUSINESS IN INDIA BY FOREIGN ENTITIES

Recently, India has been growing at an unprecedent pace which has aroused a keen interest among foreign entities to establish their operations in India and tap into one of the largest and fastest growing market, and have access to some of the best human resources in the world. Also, we have seen a surge of foreign interest in Indian economy. The Government of India and Reserve Bank of India has brought the option of establishing branch office, liaison office, project office or any other place of business in India by foreign entities formulating required provisions in Foreign Exchange Management Act, 1999.

DEFINITIONS:

‘Branch Office’ in relation to a company, means any establishment described as such by the company.

‘Liaison Office’ means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

‘Project office’ means a place of business established by a foreign company in India provided it has secured from an Indian company, a contract to execute a project in India but excludes a Liaison Office, and

1. the project is funded directly by inward remittance from abroad; or
2. the project is funded by a World Bank or the International Monetary Fund or similar other body; or

• the project has been cleared by an appropriate authority; or

1. a 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.

‘Any other place of business’ includes Site office and branch office on ‘stand-alone basis’.

REQUIREMENTS FOR ESTABLISHMENT:

A branch office, liaison office, project office or any other place of business in India of a foreign entity can be established by adhering to the following requirements:

Eligibility Criteria:

Requirements	For Branch Office	For Liaison Office
Profit making track record	immediately preceding 5 financial years	immediately preceding 3 financial years
Net Worth	> USD 100,000 or equivalent	> USD 50,000 or equivalent

Note: If a person resident outside India that is not financially sound and are subsidiaries of other companies, then it may submit a Letter of Comfort in the format given under Annex A Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 from their parent company subject to the condition that the parent company satisfies the prescribed criterion for net worth and profit.

For establishment of a project office in India, the foreign Company has to be eligible as per the definition given hereinabove.

Application form

A person resident outside India desiring to establish a branch office or a liaison office or a project office or any other place of business in India shall submit an application in Form FNC (As per Annex C of Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016) to an Authorised Dealer Category-I bank.

Authorised Dealer Category-I bank shall grant approval as per the directions and/or guidelines issued by the Reserve Bank in this regard and such approval is valid for a period of 6 months.

Validity period of liaison offices:

Type of entities	Validity Period	Further Extension
Entities engaged in construction and development sectors and which are Non-Banking Finance Companies	2 years	Not allowed. The office has to be closed down or be converted into a Joint Venture / Wholly Owned Subsidiary in conformity with the extant Foreign Direct Investment policy
Any other entities except above	3 years	3 years

ACTIVITIES PERMITTED:

For a branch office in India of a person resident outside India

i. Export/import of goods.

ii. Rendering professional or consultancy services.

iii. Carrying out research work in which the parent company is engaged.

iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

v. Representing the parent company in India and acting as buying/ selling agent in India.

vi. Rendering services in Information Technology and development of software in India.

vii. Rendering technical support to the products supplied by parent/group companies.

viii. Representing a foreign airline/shipping company. 

For a liaison office in India of a person resident outside India

i. Representing the parent company / group companies in India.

ii. Promoting export / import from / to India.

iii. Promoting technical/ financial collaborations between parent / group companies and companies in India.

iv. Acting as a communication channel between the parent company and Indian companies.

PRIOR APPROVAL:

Any application from a person resident outside for opening of a branch office or a liaison office or a project office or any other place of business in India shall require prior approval of Reserve Bank in the following cases where:

a. the applicant is a citizen of or is registered/incorporated in Pakistan;

b. the applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a liaison, branch or project office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;

c. the principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting:

Provided that in the case of proposal for opening a project office relating to defence sector, no separate reference or approval of Government of India shall be required if the said non-resident applicant has been awarded a contract by/ entered into an agreement with the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings.

d. The applicant is a Non-Government Organisation, Non-Profit Organisation, Body/ Agency/ Department of a foreign government.

Such applications shall be forwarded to the Reserve Bank, Foreign Exchange Department, Central Office Cell, New Delhi by the Authorised Dealer Category-I bank and be considered in consultation with the Government of India. 

EXCEPTIONS FROM ESTABLISHMENT REQUIREMENTS:

No branch office or a liaison office or a project office or any other place of business by whatever name called shall be opened without prior approval of the Reserve Bank except:

• A banking company resident outside India if such company has obtained necessary approval under the provisions of the Banking Regulation Act, 1949.
• An insurance company resident outside India if such company has obtained necessary approval under the provisions of the Insurance Regulatory and Development Authority Act, 1999.
• A company resident outside India willing to establish a branch office in the Special Economic Zones (SEZs) to undertake manufacturing and service activities, subject to the conditions that:
  • o such branch offices are functioning in those sectors where 100% FDI is permitted;
  • o such branch offices comply with Chapter XXII of the Companies Act, 2013; and
  • o such branch offices function on a stand-alone basis.

SUBMISSION OF ANNUAL ACTIVITY CERTIFICATE (AAC) BY BRANCH OFFICE/LIAISON OFFICE: 

AAC shall be submitted:

• on or before September 30 alongwith the audited financial statements including receipt and payment account, in case the annual accounts of the office are finalized with reference March 31

• within 6 months from the due date of the Balance Sheets in case the annual accounts of the office are finalized with reference to a date other than March 31, the AAC along with the audited financial statements.

• By Branch Office/Liaison Office Concerned in case of sole Branch Office/Liaison Office

• By the nodal office of the Branch Office/Liaison Offices, in case of multiple Branch Office/Liaison Offices- a combined AAC in respect of all the offices in India

• to the Authorised Dealer Category-bank and the Director General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002.

• In Annex-D of Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016.

COMPLIANCE REQUIREMENTS UNDER COMPANIES ACT, 2013:

Any foreign entity establishing its place of business in India by way of Branch office, liaison office, project office or any other place of business shall be treated as foreign company as defined under section 2(42) of the Companies Act, 2013 which says:

A foreign company is a company or body corporate incorporated outside India having a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

Such foreign companies shall be governed by the provisions of:

(i) Chapter XXII of the Companies Act, 2013

(ii) Companies (Registration of Foreign Companies) Rules, 2014

Every foreign Company is required to file Form FC-1 to the Ministry of Corporate Affairs within 30 days of the establishment of its place of business in India. 

(The author of this article is a Practicing Company Secretary located at New Delhi and can be reached at ankitasinglaandassociates@gmail.com)

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. No part of this document should be distributed or copied without express written permission of the author.