Establishment of Branch/ Liaison/Project Office in India by Foreign Entities

Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) in India by Foreign Entities

India has largest and fastest developing market in the world and has finest human resource in the world. India is also promoting foreign entity to setup his BO/LO/PO in India.

♦ Branch Office: Brach office can carry same activities which are done by its holding Company but Branch office is not permitted to do manufacturing activities.

♦ Liaison Office means a place of business to act as a channel of communication between the principal place of business or Head Office 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 in India to represent the interests of the foreign company executing a project in India but excludes a Liaison Office.

♦ Site Office means a sub-office of the Project Office established at the site of a project but does not include a Liaison Office.

♦ Stand-alone basis means such branch offices would be isolated and restricted to the Special Economic Zone alone and no business activity/ transaction will be allowed outside the Special Economic Zones in India which includes branches/subsidiaries of its parent office in India.

GENERAL CRITERIA OF APPLICANT

An applicant a person resident outside India for opening of a BO/LO/PO in India shall require prior approval of Reserve Bank of India and shall be forwarded by the AD Category-I Bank who shall process the applications in consultation with the Government of India, in the following cases:

√ The applicant is a citizen of or is registered/incorporated in Pakistan;

√ 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 BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;

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

√ However, Government approval has already taken by the concerned Ministry/ regulator, in that situation there is not required of RBI approval. [Notification No. FEMA 22(R)(2) dated January 21, 2019 and AP (DIR Series) Circular No. 27 dated March 28, 2019.]

√ If applicant is NGO, NPO, Body/ Agency/ Department of a foreign government and they engaged in partly or wholly in any activities covered under FCRA, 2010 and has obtained a certificate of registration under Foreign Contribution (Regulation) Act, 2010. In that situation there is no need to take further permission under FEMA 22(R). [Notification No. FEMA 22(R) (1)/2018 – RB dated August 31, 2018 and AP (DIR Series) Circular No 20 dated February 27, 2019.]

TRACK RECORD

Non-resident entity applying for a BO/LO in India should have a financially sound track record

Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called].

PROCEDURE FOR REGISTRATION

♦ After satisfy the above mentioned criteria the applicant shall submit the application in form FNC to designated AD Category – I bank along with following documents:

• Copy of the Certificate of Incorporation / Registration and Memorandum of Association and Articles of Association attested by the Notary Public in the country of registration

[If the original Certificate is in a language other than in English, the same may be translated into English and notarized as above and cross verified/attested by the Indian Embassy/ Consulate in the home country].

• Audited Balance sheet of the applicant company for the last three/ five years in case of branch office/liaison office respectively

[If the applicants’ home country laws/regulations do not insist on auditing of accounts, an Account Statement certified by a Certified Public Accountant (CPA) or any Registered Accounts Practitioner by any name, clearly showing the net worth may be submitted]

• Bankers’ Report from the applicant’s banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank.
• Power of Attorney in favour of signatory of Form FNC in case the Head of the overseas entity is not signing the Form FNC.

♦ AD Category-I bank shall after exercising due diligence in respect of the

• applicant’s background, and
• satisfying itself as regards adherence to the eligibility criteria for establishing BO/LO/PO,
• Past of the promoter,
• nature and location of activity,
• sources of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for establishing BO/LO/PO in India.

♦ before issuing the approval letter by the AD Category-I bank, Copy of the Form FNC along with the details forward to the General Manager, RBI for allotment of Unique Identification Number (UIN) to each BO/LO.

TIME PERIOD OF APPROVAL LETTER

BO/LO/PO shall be opened within six month from the date of approval letter, which is granted by AD Category I bank.  After completion of six month the approval shall be lapsed.

In case non-resident entity is not able to set up the office within the time frame due to reasons beyond its control, the AD Category-I bank may grant extension of time for a further period of six months.

Any further extension of time shall require the prior approval of Reserve Bank of India.

VALIDITY PERIOD

The validity period of a Liaison Office (LO) is generally for three years. But in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only.

ESTABLISHING BRANCH OFFICE (BO) IN THE SPECIAL ECONOMIC ZONES (SEZS)

There is a general permission to non-resident companies for establishing BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions that:

• such BOs are functioning in those sectors where 100% FDI is permitted;
• such BOs comply with Chapter XXII of the Companies Act, 2013; and
• such BOs function on a stand-alone basis.

OPENING OF BANK ACCOUNT BY BO/LO/PO

An LO may approach the designated AD Category I Bank in India to open an account to receive remittances from its Head Office outside India. It may be noted that an LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India. The permitted Credits and Debits to the account shall be:

I. Credits

a. Funds received from Head Office through normal banking channels for meeting the expenses of the office.

b. Refund of security deposits paid from LO’s account or directly by the Head Office through normal banking channels.

c. Refund of taxes, duties etc., received from tax authorities, paid from LO’s bank account.

d. Sale proceeds of assets of the LO.

II. Debits

a. Only for meeting the local expenses of the office.

b. A BO may approach any AD Category-I Bank in India to open an account for its operations in India. Credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office and any legitimate receivables arising in the process of its business operations.

c. Any foreign entity except an entity from Pakistan who has been awarded a contract for a project by the Government authority/Public Sector Undertakings or are permitted by the AD to operate in India may open a bank account without any prior approval of the Reserve Bank.

ANNUAL ACTIVITY CERTIFICATE BY BO/LO/PO

The Annual Activity Certificate (AAC) submitted at the end of March 31 each year along with the required documents by the following:

• In case of a sole BO/ LO/PO, by the BO/LO/PO concerned;
• In case of multiple BOs / LOs, a combined AAC in respect of all the offices in India by the nodal office of the BOs / LOs.

Annual Activity Certificate (AAC) submitted to:

♦ In case of LO/BO:- To the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi

♦ In case of PO:– only to the designated AD Category -I bank.

The designated AD Category – I bank shall scrutinize the AACs and ensure that the activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given.

REGISTRATION WITH POLICE AUTHORITIES

Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO/LO/PO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.

REMITTANCE OF PROFIT/SURPLUS

BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the AD Category-I bank:

– A certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year.

– A Chartered Accountant’s certificate

AD Category – I bank can permit intermittent remittances by POs pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction, subject to the following:

– The PO submits an Auditors’ / Chartered Accountants’ Certificate to the effect that sufficient provisions have been made to meet the liabilities in India including Income Tax, etc.

– An undertaking from the PO that the remittance will not, in any way, affect the completion of the project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.

CLOSURE OF BO/LO/PO

Requests for closure of the BO / LO/ PO and allowing the remittance of winding up proceeds of BO / LO/ PO may be submitted to the designated AD Category – I bank along with the following documents:

– Copy of approval for establishing the BO/ LO/ PO.

– Auditor’s certificate

– Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending

– A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013

– The designated AD Category – I banks has to ensure that the BO / LO/ PO had filed their respective AACs

– Any other document/s, specified by Reserve Bank of India/AD Category-I

About the Author

Author is CS Manish Kumar is partner of MSD & Associates, a company secretaries firm based in New Delhi. CS Manish Kumar advice foreign companies in opening up of Liaison/ Branch Office in India and complying with various corporate laws applicable to foreign companies while set up a business in India. For any query email at [email protected]

Declaration:

This write up is intended to start academic discussion and sharing knowledge. It is not intended to be a professional advice therefore Author accepts no responsibility whatsoever and will not be liable for any losses, claims or damages which may arise because of the contents of this write up.