Establishment of place of business in India by foreign entity- Key Provisions

Establishment Of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) Or Any Other Place Of Business In India By Foreign Entities

INTRODUCTION:

In the present globalized scenario, where majority of businesses are operating internationally, it is inevitable for global players to set up place of business in various countries across the globe. In India setting up of place of business by foreign entity is governed by the provisions of FEMA. 1999. In this article, we will discuss the key provisions pertaining to establishment of place of business in India by foreign entity.

Applications from foreign companies (a body corporate incorporated outside India, including a firm or other association of individuals) for establishing Branch Office/ Liason Office/ Project Office, hereinafter referred to as BO/PO/LO, in India shall be considered by the AD Category-I bank as per the guidelines given by Reserve Bank of India (RBI).

PRIOR APPROVAL IN CERTAIN CASES:

An application from a person resident outside India for opening of a BO/LO/PO in India shall require prior approval of Reserve Bank of India in the following cases:

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

2. 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;

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

In the case of proposal for opening a PO 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 Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings. No separate approval is required from Reserve Bank of India for such cases only.

4. The applicant is a Non-Government Organization (NGO), Non-Profit Organization, Body/ Agency/ Department of a foreign government.

Such applications may be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi – 110 001 who shall process the applications in consultation with the Government of India.

TRACK RECORD REQUIREMENT:

The non-resident entity applying for a BO/LO in India should have a financially sound track record. The requirement of track record is as under:

NOTE:

An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) (Annex A) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.

PROCEDURE FOR APPLYING:

• The application for establishing BO / LO/ PO in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category – I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the LOC.
• The AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each BO/LO.
• On receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO/LO in India.
• An applicant that has received a permission for setting up of a BO/LO/PO shall inform the designated AD Category I bank as to the date on which the BO/LO/PO has been set up.
• The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO/LO/PO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse.

OTHER PROVISIONS:

• The validity period of an LO is generally for three years, except 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.
• The validity period of the project office is for the tenure of the project.
• There is a general permission to non-resident companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India.
  

GENERAL PERMISSION FOR SETTING UP BO IN SEZ:

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.

CLOSURE OF BRANCH OFFICE:

In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the requisite documents as specified by the RBI.

OPENING OF BANK ACCOUNT BY BO/LO/PO:

An BO/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 BO/LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India.

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.

Author is a Company Secretary from Delhi and can be contacted @ [email protected]/08430645653.