Establishment of Project Office in India by Foreign Company

“Make in India” And “Aatmnirbharta” are the popular slogans of the day in India. While it is a great idea to be a self-sufficient economy, we are still some years or decades away from that dream in absolute terms. Till the time we achieve those dreams, India will welcome collaboration / participation of foreign companies to provide superior technology to bolster infrastructure needs and also to save on time and resources.

Setting up a project office in India is most preferred mode by a Foreign Company for executing contracts in India, awarded to it by Indian Companies. Establishment of Project Office is regulated by 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 as amended from time to time.

Let us understand what permissions are required and the protocols to follow to avoid any contravention.

As per general permission from RBI, a Foreign Company, is permitted to open a project office in India for executing a contract secured by it from Indian Company in any of the following case:

• Project is funded directly either by inward remittance from abroad or by a bilateral/multilateral International Financing Agency (IMF/World Bank/Similar body); or
• Project has been cleared by an appropriate authority; or
• The Company/Entity in India, who has awarded the contract, has been granted term loan by a Public Financial Institution/ bank in India for the Project.

RBI prior approval is required to open a project office in any of the following cases

• If Applicant is a citizen of or entity registered/incorporated in Pakistan
• If Applicant is a citizen of/registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a project office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
• Principal business of applicant falls in Defence, Telecom, Private Security and Information and Broadcasting. However, no RBI approval is required for opening a project office in Defence sector, if contract is awarded by Ministry of Defence or Service Headquarters or Defence PSU.
• Cases not covered under general permission.

It may be noted that general permission is for the Foreign Company. In case, project office is intended to be opened by non-resident other than the Foreign Company, then RBI prior approval is required.  

Procedure for Opening Project Office: Foreign Company/Applicant should submit Form FNC to AD Category – I Bank, with whom applicant intend to pursue banking relations. Part I of Form FNC to be filled if foreign entity is eligible to open project office without approval of RBI. In other cases, Part I and Part II both has to be filled up. Documents required for submission of Form FNC are as below:

• Copy of the Certificate of Incorporation / Registration & Memorandum of Association and Articles of Association attested by the Notary Public in the country of registration. If 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 Indian Embassy/ Consulate in home country.
• Audited Balance Sheet of applicant.
• Board Resolution of the company for opening project office in India.
• Bankers’ Report, from applicant’s banker in host country, showing years of banking relationship of applicant 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.
• Proof of Residence and Passport Copy of Power of Attorney holder.
• Document supporting the eligibility criteria such as contract agreement/award letter from Indian Company, a letter from Foreign Company confirming required remittance to project office for executing contract/sanction letter of loan from bilateral/multilateral International Financing Agency/sanction letter of term loan to Indian company for the project etc.

AD bank shall, after exercising due diligence in respect of applicant’s background, and satisfying itself as regards adherence to the eligibility criteria, antecedents of the promoter, nature and location of activity, sources of funds etc., and compliance with KYC norms, grant approval for establishing PO in India. AD banks may frame appropriate policy for dealing with these applications in conformity with the FEMA Regulations.

Validity of Project Office: Project office is valid till completion/winding up of Project. Applicant must intimate the date of opening project office to concerned AD Bank. Project office must be established within 6 months from the date of approval by AD Bank. If PO is not opened within 6 months from the date of approval letter, the approval for establishing the office in India shall lapse. However, if applicant is not able to open office within stipulated time frame due to reasons beyond their control, then AD may grant extension of further 6 months. Further extension can be granted only by RBI.

Opening of Bank Account: Any foreign entity that has been awarded a contract for a project by Government authority/PSU or is permitted by AD to operate in India, may open a bank account without any prior approval of RBI. Entity from Pakistan needs prior approval of RBI to open a bank account for its project office in India. 

Foreign Currency Account (FCA) by Project Office: PO of foreign companies can open one or more non-interest bearing FCA in India subject to the following conditions-

• Project Office has been established in India, with general/ specific permission of RBI, having the requisite approval from concerned project sanctioning authority as per the regulation.
• Contract specifically provides for payment in foreign currency.
• Each Project office can open two FCA, one USD account and other in home currency of the project awardee, provided both are maintained with the same AD bank.
• Permissible debit to account is project related expenditure. Permissible credits are foreign currency receipts from Project Sanctioning Authority, or remittances from Parent/Group company abroad or from bilateral/multilateral international financing agency.
• FCA should be closed on the completion of the project.

AD Bank is responsible for ensuring that approved debits and credits are allowed in foreign currency account. FCA are subject to 100% scrutiny by concurrent auditor of the AD bank.

Inter-project transfer of funds are permitted with prior permission of RBI.

FB and NFB Exposure: AD Category-I Bank, may, based on their business prudence, board approved policy and compliance to extant rules/regulations stipulated by Department of Banking Regulation (DBR), extend fund/non-fund based facilities to the Project Office.

Remittance of Surplus or Profits: AD Category – I Bank may permit intermittent remittances by project offices pending winding up/completion of the project subject to submission of the following:

• Certified copy of the final audited project accounts;
• Statutory auditor’s certificate showing the manner of arriving at the remittable surplus and confirming that sufficient provisions have been made to meet the liabilities in India including Income Tax etc.
• Undertaking from the PO that the remittance will not affect the completion of project in India and in case of shortfall of funds, if any, will be met by inward remittance from abroad

Annual Activity Certificate (AAC):  AAC from a Chartered Accountant in specified format showing the project status and certifying that the accounts of the PO have been audited and the activities undertaken are in conformity with the general/specific permission given by RBI, may be submitted to the designated AD Bank within 6 months from the end of the financial year.

Transfer of Assets: A person resident outside India permitted under these Regulations to establish a PO may apply to the concerned AD Category-I Bank for transfer of its assets to a JV/Wholly Owned Subsidiary or any other entity in India. Proposals for transfer of assets may be considered by AD Category-I Bank only from Project Offices who are adhering to the operational guidelines, such as submission of AACs and have got registered with ROC under the Companies Act 2013

• Transfer of assets by way of sale to JV/WoS may be allowed by AD Category-I Bank only when the non-resident entity intends to close their PO operations in India.
• Submission of Statutory Auditors Certificate furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or WDV and sale consideration etc. Statutory Auditor should also confirm that the assets were not re-valued after their initial acquisition. Sale consideration should not be more than the book value in each case.
• The assets should have been acquired by PO from inward remittances and no intangible assets such as goodwill, pre-operative expenses should be included. No revenue expenses such as lease hold improvements can be capitalized and transferred to JV/WOS.
• AD Category-I Bank must ensure payment of all applicable taxes while permitting transfer of assets.
• Credits to the bank accounts on account of such transfer of assets will be treated as permissible credits.
• Donation by PO of old furniture, vehicles, computers and other office items etc. to NGOs or other not-for-profit organization may be permitted by AD category-I Banks after satisfying itself about the bonafides of the transaction.

Guidance by RBI to AD Banks:

• Each PO is required to transact through one designated AD Category-I Bank AD Banks shall be responsible for the due diligence and KYC norms of the PO. Project Office, present in multiple locations, can transact through their designated AD. However, the AD of the nodal office is required to comply with all the reporting norms.
• Project Office can change their existing AD bank subject to both the AD banks giving consent in writing for the transfer and the transferring AD bank confirming submission of all AACs and absence of any adverse features in conducting the account by PO.
• As per section 6(3)(h) of FEMA 1999, Project Office have general permission to carry out permitted/incidental activities from leased property subject to lease period not exceeding 5 years. Acquisition of immovable property in India would be governed by Foreign Exchange Management (Non-debt Instrument) Rules 2019.
• AD Category-I Bank can allow term deposit account for a period not exceeding 6 months in favour of a PO of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and PO furnishes an undertaking that the maturity proceeds of the term deposit will be utilized for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.

Compliances under Companies Act

Foreign Company is also required to submit the below mentioned documents, to the Registrar of Companies, for registration, within 30 days of the establishment of place of business in India:

• Certified copy of the charter, statutes or memorandum and articles, of the company and, if the same is not in the English language, a certified translation thereof in the English language;
• Full address of registered or principal office of the company
• List of the directors and secretary of the company containing such particulars as prescribed under Rule 3 of the Companies (Registration of Foreign Companies) Rules, 2014.
• Names and addresses of persons resident in India authorized to accept on behalf of the company.
• Full address of the office of the company in India which is deemed to be its principal place of business in India.
• Particulars of opening and closing of a place of business in India on earlier occasion or occasions.
• Declaration that none of directors/authorized representative in India have ever been convicted or debarred from formation of companies in India or abroad.
• Other Documents as may be prescribed. 

As per Rule 3(3) E–Form FC-1 supported with an attested copy of approval from RBI/AD Bank or a declaration from the authorized representative of Foreign Company that no such approval is required, to be submitted.  Rule 3(4) provides that in case of any alteration in the aforesaid documents, Foreign Company is required to submit a return in E-Form FC-2 containing the particulars of alteration as per the prescribed format with the Registrar of Companies, within 30 days of any such alteration.

Its important to ensure the compliances as contraventions of Project Office regulation have severe repercussion, as observed from the compounding orders done in past.

New Zealand Tourism Board (NZB), established a Liaison office in India in 2003, with permission of RBI. Initially permission was granted for three years, subsequently extended for another 3 years till 2009, for undertaking solely liaison activities subject to certain condition. One of the condition was submission of yearly certificate to RBI from the auditor that the LO has complied with the terms and conditions stipulated in the letter of approval issued by the RBI and that all the expenses are met by way of inward remittances. LO continued the operations post 2009 without seeking getting extension of approval from RBI. HO of NZB directly kept on making the payments directly to service providers without seeking extension of LO, which was contravention of Regulation 2(e), 5 (iii) of Notification No FEMA 22 /2000 and Regulation 2(e), 4(l), 4(d)(I) of Notification No. FEMA 22(R)/ 2016, as amended time to time. The contravention was compounded on payment of Rs. 2.4 Cr (CA 106/2019).

ILJIN Electric Company Limited, a Korean company, has established Delhi Project Office on July 1, 2007, under General Permission for execution of contract awarded to the company by Delhi Metro Rail Corporation Limited. The company had also established another two Project Office in Hyderabad and Mumbai for executing project work allotted to it by Transmission Corporation of Andhra Pradesh Limited and by Mumbai Railway Vikas Corporation respectively. The transactions pertaining to Hyderabad Project Office and Mumbai Project Office were routed through the bank account opened for Delhi PO leading to contravention of Regulation 5(ii) of Notification No. FEMA.22/2000-RB dated May 3, 2000 and Regulation 4(f) of Notification No.FEMA.22(R)/RB-2016 dated March 31, 2016. Further, PO has also transferred assets from one PO to other PO without approval of AD Bank leading to another contravention. Transfer of assets are allowed by AD banks only when the foreign entity intends to close their LO / BO / PO operations in India. Both the contraventions were compounded on the payment of Rs. 23.4 lacs (CA 101/2019).

IHI Corporation, Japanese Company, established as Project Office in Mumbai under general permission, for executing a contract awarded to it by GSPC LNG Limited. IHI has disposed Diesel Generator sets in Oct 2017 without prior approval from RBI. Regulation 4(k) of Notification No FEMA.22(R)/RB-2016 dated March 31, 2016 states that a person resident outside India, permitted to establish a BO or LO or PO, may apply to AD Category-I Bank for transfer of its assets to a Joint Venture/Wholly Owned Subsidiary or any other entity in India. AD bank shall be guided by instructions laid down by RBI. Para 11(i) of FED Master Direction No.10/2015-16 dated January 1, 2016 states that transfer of assets by way of sale to the JV/WoS be allowed by AD bank only when the non-resident entity intends to close their BO / LO / PO operations in India. Thus, the contravention done by IHI was regularized through compounding on payment of Rs. 28.4 lacs (CA 99/2019).

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About Author: Vikas Maheshwari, FCA, Founder of VM Consulting & Advisory, engaged in interpreting FEMA, PMLA and laws relating to Black Money and Benami Properties. He has more than 3 decades of professional experience and has served at various senior position including CFO, Global Treasury Head etc. in MNCs. Author can be reached at: Email: consultingvm@yahoo.com or at Mobile: +91 98811 36320.