Establishment of Branch / Liaison / Project office in India

Establishment of Branch office (BO), Liaison office (LO) or Project office (PO) in India

1. Introduction on the Establishment  of BO/LO/PO in India

(i) Eligible Foreign entities are permitted to establish BO, LO (Commonly known as Representative office) and PO in India under general or specific ‘approval’ route

(ii) Eligible Foreign Entities Includes 5 followings entities

(a) Foreign Companies

(b) Foreign Non Organizations (NGOs)

(c) Foreign Non Profit Organizations (NPOs)

(d) Foreign Bodies

(e) Foreign Departments

2. Permission for the Establishment of the BO/LO in India

(i) General Approval by the RBI (Commonly known as the ‘RBI’ Route)

• • Foreign eligible entities are required to file an application with the RBI through designated AD Category-I bank for establishing BO/LO in India in Form FNC under general approval route if foreign entity is engaged in the sector where 100% FDIs are permitted in India

(ii) Specific Approval by the Govt. of India (Commonly known as ‘Govt.’ Route)

• • Foreign entities are required to file an application with the RBI through designated AD Category-I bank for establishing BO/LO in India in Form FNC under specific approval route where the RBI is required specific approval from the concerned Ministry or deptt. of Govt. of India in the following circumstances.

(a) Establishment of BO/LO by the foreign NGOs, NPOs, Govt. bodies or Govt. deptt

(b) Applicant is registered/incorporated in Pakistan for establishing at ‘any’ place in India

(c) Applicant is registered/ unregistered entity in 7 Countries for establishing a BO/LO in J&K/ North East /Andaman and Nicobar Island

(ca) Bangladesh

(cb) Sri Lanka

(cc) Afghanistan

(cd) Iran

(ce) China

(cf) Hong Kong

(cg) Macau

(d) Principal business of the applicant is in 5 following Sectors

(da) Defense

(db) Telecom

(dc) Private Security

(dd) Information and Broadcasting

(de) Foreign entity is engaged in the sector where 100% FDIs are ‘not’ permitted in India

(iii) Establishment of the BO/LO by other Foreign Entities ‘Not’ Permitted in India

(a) Other Foreign entities Include the followings

(aa) Partnership firm

(ab) Association of Individuals

(ac) Proprietary Concern

(b) Hence ‘other’ Foreign entities are not permitted to establish a BO/LO in India

(iv) Mandatory Conditions for Approval under the RBI Route

(a) The RBI is required to consider 2 criteria’s

(aa) Track record

(ab) Net worth

(b) Track Record for established of BO/LO in India

(ba) For BO

• • • • Foreign entity should have profit making track record during immediate preceding 5 financial years in home country

(bb) For LO

• • • • Foreign entity should have profit making track record during immediate preceding 3 financial years in home country

(c) Net Worth for establishment of BO/LO in India

• • • Net worth to includes total paid up capital+ Free Reserves – Intangible Assets as per latest audited balance sheet or account statement as certified by Certified Public Account (CPA) or any Registered Account Practitioner

(ca) For BO

• • • • •  Minimum net worth should be USD 1 Lac in home country

(cb) For LO

• • • • • Minimum net worth should be USD 50 thousands in home country.

3. Application for Establishment of the BO/LO in India

(i) Submission of Application for Establishment of BO/LO in India

(a) (aa) Application for establishment of BO/LO should be forwarded by foreign entity to the RBI through designated AD Category-I bank for approval

(ab) Designated AD Category-I bank is required to obtain Unique Identification Number (UIN) from General Manager in charge, Foreign Exchange Department, Central office Cell, the RBI, New Delhi, Regional office, 6 Parliament Street, New Delhi- 110001 along with prescribed documents

(b) List of the Documents

• • English version of

(ba) Certificate of incorporation or registration and Memorandum and Article of Association (M&A) and also

(bb) Audited Balance Sheet as attested by Indian Embassy or notary public in country of registration Outside India

(c) Letter of the Comfort

• • Letter of Comfort (LOC) from parent company is to be submitted where applicant not satisfying the eligibility criteria likes track record and/or net worth.

(d) Due Diligence

• • Designated AD category-I bank is required to do due diligence relating to the followings

(da) Applicant background

(db) Antecedents of the promoter

(dc) Nature and location of activity

(dd) Source of fund

(de) Compliance with KYC norms before forwarding application along with comments or recommendations to the RBI for obtaining UIN number and approval.

(ii) Allotment of the UIN

• •  The RBI is required to allot a unique Identification Number (UIN) to the BO/LO

(iii) Allotment of the PAN

• • BO/LO is required to obtain a PAN from the Income Tax Authorities in India

4. Permitted and Not Permitted (Prohibited) Activities for the LO in India

(i) Permitted Activities for the LO in India

(a) Representing in India on behalf of parent company or the group companies

(b)Promoting the export or import from India

(c) Promoting technical or financial collaborations between parent or group companies and entity in India

(d) Acting as communication channel between parent entity and entity in India

(ii) Not Permitted (Prohibited) Activities for the LO in India

(a) Not permitted to undertake any business activity in India

(b) Not permitted to earn any income in India

(c) Not permitted to incur any expenses other than through direct inward remittances in foreign exchange from Head office as located outside India

5. Foreign Insurance Company, Foreign Bank or Foreign Law Firm for establishing LO

(i) LO of the Foreign Insurance Company in India

• • Foreign Insurance company is permitted to establish a LO after obtaining of approval from Insurance Regulatory and Development Authority (IRDA) as set-up in India in addition to the RBI.

(ii) LO of the Foreign Bank in India

• • Foreign bank is permitted to establish a LO after obtaining of approval from department of Banking Operations and Development (DBOD) of the RBI in India

(iii) LO of the Foreign Law Firm in India

• • Fresh permission or renewal for LO of Foreign law firm is not permitted. However already approved are permitted to continue till date of its expiry.

 6. Extension of Approval of a LO Permitted in India

(i) Designated AD Category – I bank is permitted to extend the validity of LO for maximum period of 3 years from the date of expiry of original or extension where applicant has also complied the following terms and conditions

(a) LO should have submitted the Annual Activity Certificates (AACs) for ‘all’ previous year

(b) LO should have maintained an account with designated AD Category -I bank is in accordance to terms and conditions as stipulated in approval

(ii) Extension is to be granted by AD Category-I bank within 1 month from date of request under intimation to the RBI along with reference number of original approval letter and UIN

(iii) Extension of Validity of the LO of Insurance entity and Bank in India

• • Application for extension of validity of period of LO of insurance entity and bank is to be submitted to IRDA and DBOD respectively

7. Permitted and Non-Permitted (Prohibited) Activities for the BO in India

(i) Manufacturing or Trading Activities Permitted for the Parent Entity/Group Companies ‘Outside’ India

• • Companies incorporated outside India and also engaged in manufacturing or trading activities ‘Outside’ India are permitted to set up BO in India to represent the parent or group companies and also to undertake following ‘business’ activities in India. Hence BO is ‘not’ permitted for manufacturing or trading activity in India.

(a) Export or Import of goods and procurement of goods for export and sale of goods after import is permitted on wholesale basis

(b) Rendering of professional or consultancy services

(c) Carrying out research work in which parent company is ‘already’ engaged

(d) Promoting for technical or financial collaborations between Indian companies and parent company or group companies

(e) Representing the parent company or group companies in India

(f) Rendering of Services for information technology and development of software in India

(g) Rendering of technical support to the products as supplied by parent company or group companies

(h) Operating the foreign airline or shipping activities in India.

(ii) Retail Trading Activities ‘Not’ Permitted in India

• • Retail trading activities are not permitted by a BO in India

(iii) Manufacturing or Processing Activities ‘Not’ Permitted for the BO in India

(a) Manufacturing or processing activities are not permitted for BO in India

(b) However permitted through incorporation of a subsidiary company in India

(iv) Remittances against Profits by the BO

(a) BO is permitted to remit Outside India against profits ‘after’ payment of taxes

(b) Following documents are to be submitted for the remittances

(ba) Certified copy of audited balance sheet and profit and loss account of the BO in India

(bb) Certificate from Chartered Accountant certifying the manner of arriving remittable profit and also entire remittable profit is earned from ‘permitted’ activities by BO and also profit not include a profit on revaluation of assets of the BO in India

8. Establishment of the Project Office (PO) Permitted in India

(i) Project Office (PO) by the Foreign Entities

(a) The RBI has granted general or specific ‘approval’ route to the foreign companies to establish a PO in India

(b) However PO should secure a contact from Indian entity to execute a project in India

(c)(ca) Project should be funded by inward remittance from Outside India ‘or’

(cb) Project should be funded by bilateral or multilateral International Financing Agency ‘and’ also

(cc) Project should be cleared by an appropriate authority in India ‘and’ also

(cd) The Indian Entity as awarding the contract should obtain a term loan from Public Financial Institution or bank for the project in India

(d) In absence of the above mentioned, under the para (a) to (c) foreign entity is required to obtain a specific permission from the RBI through designated AD Category – I bank in India.

(ii) Bank Account for the PO

• • Designated AD category I bank can open ‘non’ interest bearing foreign currency account for the PO in India ‘after’ satisfaction of the followings terms and conditions

(a) PO should be established with general or specific ‘approval’ route from the RBI ‘and’ also from appropriate project sanctioning Authority

(b) Contract should be specifically provides for the payment in foreign currency only.

(c) PO is permitted to open 2 foreign currency accounts only with the same designated AD category-I bank one in USD and other in non USD

(d) Permissible debits to the account are to be project related expenditures and permissible credits to the account are to be foreign currency receipts from foreign entity only.

(e) Designated AD Category-I bank is required to ensure that permissible debits and credits are allowed in the Foreign currency account and also account should be 100% scrutinized by Concurrent Auditor of bank

(f) Foreign currency account should be closed at time of completion of project

 (iii) Remittances by the PO

• • Designated AD Category-I bank is permitted to remit by the PO as pending winding up or completion of project after satisfaction of the followings terms and conditions

(a) PO should obtain an auditor certificate relating to payment of all liabilities including income tax

(b) PO should submit an undertaking as remittance will not affect the completion of project in India and also shortfall of fund to complete the project ‘if any’ will be received through inward remittance from outside India

(iv) Inter Project Transfer of the Fund

• •  Prior Approval from the RBI is required for inter project transfer of fund in India

(v) Reporting to the RBI by PO in India

(a) Foreign entity is required to furnish the followings details within 2 months from the date of establishment of PO to the RBI through Designated AD Category -I bank in form FNC

(aa) Name and address of the foreign entity

(ab) Reference number and date of letter against the contract awarded in accordance to Regulation No. 5(ii) of Notification No. FEMA 22/2000-RB, dated May 03, 2000

(ac) Particulars of authority as awarding the project or contract to the PO

(ad) Total amount of the contract

(ae) Address, e-mail and telephone number of the PO

(af) Tenure of the PO

(ag) Brief detail of the project undertaken

(ah) Name of designated AD Category – I bank for the opening of foreign currency account in USD and ‘non’ USD

(ai) Undertaking that the PO is eligible to avail General Permission in accordance to Regulation No. 5(ii) of Notification No. 22 dated May 03, 2000 read with Notification No. 95 dated July 02, 2003.

(b) PO is required to submit a certificate from Chartered Accountant showing the status of the project and also confirming that the accounts of PO are audited and activities as undertaken are in accordance to general or specific permission by the RBI

9. Special Provisions for the BO/LO/PO in India

(i) Purchase of the Immovable Property in India by BO/LO/PO

(a) BO or PO in India is permitted to purchase of immovable property if necessary or incidental to carry on the activities of the BO/PO as case may be

(b) Payments for the purchase of immovable property are to be made out of the foreign inward remittance through normal banking channel only

(c) Declaration is to be submitted to the RBI in Form IPI within 90 days from the date of acquisition of the immovable property

(d) This property can be mortgaged with a bank as security for the borrowings.

(e) Sale proceeds of the property on winding up are to be repatriated with approval from the RBI

(f) However an approval from the RBI is also required for acquisition of immovable property by an entity incorporated in the 10 countries

(fa) Pakistan

(fb) Bangladesh

(fc) Sri Lanka

(fd) Afghanistan

(fe) China

(ff) Iran

(fg) Neal

(fh) Bhutan

(fi) Hong Kong

(fj) Macau

(g) (ga) LO from ‘any’ country is not permitted to acquire an immovable property in India

(gb) However LO from ‘any’ country is permitted to an acquire immovable property on lease ‘not’ exceeding 5 years

(ii) General Conditions for the BO/LO

(a) Entities from Nepal is permitted to establish a LO but not permitted to establish a BO in India

(b) BO/LO is required to open non-interest bearing INR current account in India

(c) Approval from the RBI is required to transfer of assets to subsidiaries or other BO

(d) Term deposit exceeding 6 months are not permitted against temporary surplus funds of the BO/ LO

(e) However term deposits are not permitted to a shipping or airline Company working in India

(f) Regularization of BO/LO is required if established pre FEMA i.e before 1999

(iii) Additional Reporting to Police for New Setting up BO/LO

• • Following ‘additional’ reporting’s are required for setting up of BO/LO

(a) Submit a report containing certain information’s within 5 working days of BO/LO become functional to the Director General of Police (DGP) of the State/Union Territory

(b) Same report is to be submitted on annual basis to DGP along with AAC in India

10. Miscellaneous Provisions for the BO/LO in India

(i) Establishment of a BO in SEZs

(a) The RBI has granted general permission to the foreign companies for establishing of a BO or unit in SEZ area to undertake the manufacturing and service activities

(b) General permission is available after satisfaction of the followings terms and conditions

(ba) Unit should be functioning in sector where 100% FDIs are permitted

(bb) Unit should comply provisions under the Section 380 to 386 of the Companies Act, 2013

(bc) Unit should function on standalone basis only.

(ii) Winding up of a BO in India

• • BO is required to approach AD Category -I bank along with documents mentioning under closure of the BO for remittance of winding up proceeds Outside India

(iii) Application for Additional establishment of BO/LO in India

(a) Application for additional BO/LO is to be submitted to the RBI through designated AD Category -I Bank where specific approval is required for establishing of a BO/LO

(b) Fresh FNC form is to be submitted for an additional BO/LO

(c) However documents are not to be re-submitted where there is no change in ‘already’ submitted documents

(d) Justification for the additional BO/LO is to be submitted where BOs/LOs are exceeding by 4 in number in India

(e) Applicant is to be required to identify one office as nodal office to coordinate the activities of all offices in India

(iv) Submission of Annual Activity Certificate (AAC) for BO/LO in India

(a) BO/LO is required to submit an AAC as on March 31 up to September 30 of each year to the followings

(b) (ba) Designated AD Category-I bank in India

(bb) DGIT (International Taxation) New Delhi

(bc) DGP of the State/Union Territory

(c) (ca) AAC is also to be submitted by the BO/LO or

(cb) By the Nodal office where multiple BO/LO are existed in India

(d) Designated AD Category -I bank is  required to scrutinize the AAC to ensure that activities undertaken by BO/LO are in accordance to terms and conditions of the RBI

(e) Designated AD Category -I bank is required to report to the RBI where statutory auditors have given the negative comments / reports

(v) Closure of the BO/LO

• •  BO/LO is required to submit the followings documents at time of closure of the BO/LO

(a) Copy of approval for establishing of the BO/LO in India

(b) Certificate from the statutory auditors for computation of remittable amount

(c) NOC from the Income Tax authority for remittance

(d) Undertaking from the applicant that no legal proceeding is pending in any court in India

(e) Report from the ROC relating to compliance of provisions of the Companies Act, 2013

(f) Any other document as specified at time of granting an approval

(vi) Role of Designated AD Category – I Bank at time of Closure of the BO/LO

(a) Designated AD Category- I bank is required to ensure that the BO/LO has submitted all the AACs

(b) Also to report to the RBI along with a declaration stating that all necessary documents as submitted by the BO/LO are scrutinized and found in order.

(vii) Approval by the RBI for establishment of a LO

(a) Generally the RBI is taking approximately 40 days in granting a permission for establishment of a LO in India

(b) Generally the RBI is granting a permission for maximum period of 3 years

(c) Generally the RBI is permitting an extension for maximum period of 3 years ‘each’ time

(d) LO is required to close the establishment in India once original or extended approval is expired. However LO is permitted to convert the establishment into a Joint venture or wholly owned subsidiary company in India

(viii) Registration and Annual filings for the BO/LO with the MCA

(a) BO/LO is required to register with the ROC within 30 days from the day of it establishment through filing of e-form FC-1

(b) BO/LO is required to file e-form FC-3 and FC-4 for reporting the financial statement and annual return respectively.

11. Conclusion on Establishment of BO/LO/PO in India

(i) Establishment of a BO/LO is permitted under the head

(a) General permission (‘RBI’ approval route) and specific permission (‘Govt.’ approval route)

(ii) Hence certain restrictions are existed where specific permission is required like

 (a) Parent entity is located in 8 countries i.e. Pakistan and China ‘etc.’

(b)4 Sensitive sectors i.e. defense ‘etc.’

(c) NGOs and NPOs

(d) Sector where 100% FDIs are ‘not’ permitted in India

(iii) BOs/LOs are ‘not’ permitted for carrying ‘many’ activities in India. Hence establishment of Domestic (subsidiary) company in India is a solution for the ‘not’ permitted activities in India.

(iv) Establishment of a PO is permitted in India ‘after’ satisfaction certain terms and conditions

(v) BOs/POs are permitted to purchase the immovable properties for necessary purposes only. Hence LOs are ‘not’ permitted to purchase the immovable properties in India. However LO is permitted to take on lease for a maximum period of 5 years

(vi) BOs/LOs/POs are permitted to close their establishment ‘after’ satisfaction of the certain terms and conditions

(vii) BOs/LOs are required to submit AAC ‘annually’ to the following offices. Hence PO is not required to submit AAC

(a) Designated AD Category- I Bank

(b) DGIT

(c) DGP

Disclaimer : – The contents of this presentation are solely for informational purpose. Neither this presentation nor the information contained herein constitutes a contract or will form the basis of a contract.  The material contained in this presentation does not constitute/substitute professional advice that may be required before acting on any matter. While every care has been taken in the preparation of this presentation to ensure its accuracy at the time of publication, Satish Agarwal assumes no responsibility for any errors which despite all precautions, may be found herein. In no event shall we be liable for direct or indirect or consequential damages, if any, arising out of or in any way connected with the use of this presentation or the information contained herein.

(Author can be reached at email address [email protected] or on Mobile No. 9811081957)