FCA Neeraj Bhagat

Neeraj BhagatLiaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time, and unsure of how the country’s liberalizing FDI caps will affect their business.

In contrast to other business structures, LOs allow foreign companies to establish a light footprint in India while keeping their financial, legal, and administrative commitments low.

Normally, Liaison Office are registered in India for specified/limited purpose and when such purposes are achieved, either LO may want to get registered as subsidiary of Indian company or do not want to continue its operations in India. In either case, Liaison Office closure is mandatory.

This article is intended for those foreign companies who had a registered place of business in India in the form of LO, but want to close such company in India. We discuss the compliances to be done for the same under the provisions of Companies Act, 2013 and RBI guidelines, along with the provisions of Foreign Exchange Management Act.

Also Read- Options for foreign companies setting up business in India

A. Application with AD Category – I bank

For the closure of the liaison office and allowing of the remittances of the winding up proceeds, a request has to be submitted to the designated Authorized dealer category-1 bank by the liaison office or the nodal office representing the offices in the country. The application request has to be submitted with the following documents-

1. Copy of the approval by the Reserve Bank or the Authorized Dealer category-1 bank for the establishment of the liaison office.

2. Auditors certificate:

  • Indicating the manner in which the remitted amount has come to the country and a statement regarding the assets and liabilities and also the manner of disposal of these assets.
  • Confirming that the liabilities in the country including arrears of gratuity and other benefits to employees etc. of the office has been paid
  • Confirming that no income from source outside India has remained un-repatriated to India.

3. A confirmation from the foreign entity who has established the liaison office in the country that no legal proceedings against the office are pending in the Indian courts and there is no legal hindrance to the remittances.

4. A report from the Registrar of Companies regarding the compliance of the provisions of Companies Act,2013 in case of winding up of the liaison office, wherever applicable. For this report to be given, a board resolution has to be passed by the parent company for closing the liaison office in India which should also mention the date of closure of liaison activities by the office. The employment contracts have to be terminated timely with full and final settlements and at last a board resolution of the liaison office is required which will empower the authorized persons to file an application in an e-form with the Registrar of Companies and take its approval.

5. The Annual Activity Certificates has to be filed for the closure which should be ensured by the Authorized Dealer category-1 bank.

6. Certificate from the statutory Auditor that no tax liabilities are pending .

7. Any other document/s, specified by Reserve

For the closure of the liaison office and allowing of the remittances of the winding up proceeds, a request has to be submitted to the designated Authorized dealer category-1 bank by the liaison office or the nodal office representing the offices in the country. The application request has to be submitted with the following documents-

1. Copy of the approval by the Reserve Bank or the Authorized Dealer category-1 bank for the establishment of the liaison office.

2. Auditors certificate:

Bank of India/AD Category-I bank while granting approval.

meeting business architect office team plan

B. Remittance of winding up proceeds

Remittance of winding up proceeds i.e. remittance of assets of liaison office established in India shall be governed by the guidelines issued under Foreign Exchange Management (Remittance of assets) Regulations. Designated AD Category-I bank may allow remittance of winding up proceeds after receiving application of closure of liaison office along with the documents mentioned above.

Further, it may allow remittance of winding up proceeds in respect of offices of banks and insurance companies, after obtaining copies of permission of closure from the sectoral regulators along with the documents mentioned above.

Obligations on the part of Designated AD Category -1 Bank

AD banker has to ensure that the LO/ BO had filed their respective Annual Activity Certificates with AD Bank for the previous years in respect of the existing Liaison / Branch Office.

At the end, designated AD Category – I bank will report to the Reserve Bank (the Regional Office Closure of such BO / LO has to be reported by the designated AD Category – I bank to the Reserve Bank (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO / LO have been scrutinized and found to be in order. If the documents are not found in order or cases are not covered under delegated powers, the AD Category – I bank may forward the application to the Reserve Bank, with their observations, for necessary action. All the documents relating to the BO / LO operations may be retained by the AD Category – I bank for verification by the internal auditors of the AD / inspecting officers of the Reserve Bank.

It is important to note the significance and importance of designated authorized dealer category-1 banks as they are the most important intermediary through which the liaison office is created and the business is carried out. Following the procedural norms of these entities thus becomes important if a business has to be conducted through the way of liaison office.

MCA Compliance:

Return of alteration in the documents filed by foreign company

A foreign company has to file eForm FC-2 with Registrar of Companies and a copy is routed to concerned RoC of the respective state by the system in case of cessation of place of business in India. It is required to be filed within 30 days of closure of LO.

Interpretation of law

Whether it is mandatory for the foreign company to follow the provision of Chapter XX (Winding up) for closure of place of business as mentioned in section 391(2) of Companies Act 2013?

As per the language of section 391(2), it states that for closure of any place of business in India by foreign Company required to follow the provisions of Chapter XX (Winding up). But the same has been clarified by the Ministry of Corporate Affairs in its 01/2017 circular.

Thus, considering the provisions of Section 391(2) and MCA Circular, one can opine that the provision of winding up for closure of place of business in India shall be applicable only in case when foreign Company has issued prospectus of IDR’s pursuant to the provision of chapter XXII of CA, 2013.

About the Author

Author is Neeraj Bhagat ,FCA helping foreign companies in setting up business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. He is also founder of Neeraj Bhagat & Co. Chartered Accountants , a Chartered Accountancy firm established in the year 1997 with its head office at New Delhi and can be reached at info@neerajbhagat.com.

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Qualification: CA in Practice
Company: Neeraj Bhagat & Co.
Location: New Delhi, New Delhi, IN
Member Since: 28 Feb 2019 | Total Posts: 73
Neeraj Bhagat & Co. is helping foreign companies in opening up of Liaison/ Branch Office in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat is the founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered View Full Profile

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