FCA Neeraj Bhagat

Neeraj Bhagat

Brief

Recently, India has been growing at an unprecedented pace which has aroused a keen interest among foreign entities to establish their operations in India and tap into one of the largest and fastest growing market, and have access to some of the best human resources in the world.

A physical presence in India is essential to break into the country’s emerging market.

Foreign companies should consider state regulations, physical connectivity, and local costs when choosing a location for their Indian office. Of equal importance is the type of company setup foreign companies choose. Having the right establishment presence can mean the difference between success and wasted efforts.

Given the shortage of good commercial office space at reasonable prices in major Indian cities, business centers are a viable option for new companies wanting to establish a physical presence. The government is making all the efforts to make it one of the best places for doing business. The latest RBI guidelines regarding establishment of Liaison Office/ Branch Office have been issued with the aim to facilitate ease in doing business in India. Let us discuss the procedure and compliances to be followed for setting up branch office and liaison office in India.

Liaison Office in India

Setting up a liaison or representative office (“LO”) is a common practice for foreign companies seeking to enter the Indian market. The role of such offices is limited to collecting information about the possible market and to providing information about the company and its products to prospective Indian customers. It cannot undertake any commercial activities and must only use remittances received from its parent foreign company to maintain itself.

Branch Office in India

As a Branch Office (“BO”) in India, foreign companies can conduct full-fledged business in India. BO can carry the same or substantially the same trading activities as carried out by their parent or group companies. However, BO is not allowed to directly carry out manufacturing activities though it is permitted to sub-contract these services to an Indian manufacturer.

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Requirements for establishment

A branch office or liaison office in India of a foreign entity can be established by adhering to the following requirements:

Eligibility Criteria:

Requirements For Branch Office For Liaison Office
Profit making track record immediately preceding 5 financial years immediately preceding 3 financial years
Net Worth* > USD 100,000 or equivalent > USD 50,000 or equivalent

*Net Worth is 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.

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Procedure for Setting up

Application for Registration

If the applicant company fulfills above mentioned eligibility criteria, it shall submit an application in Form FNC (As per Annex B of 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) to an Authorized Dealer Category-I bank along with following documents:

  • 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 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 favor of signatory of Form FNC in case the Head of the overseas entity is not signing the Form FNC.

The 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, antecedents of the promoter, nature and location of activity of the applicant, sources of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for establishing BO/LO in India. The AD Category-I banks may frame appropriate policy for dealing with these applications in conformity with the FEMA Regulations and Directions,

However, before issuing the approval letter to the applicant, 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. After 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. This is in order to enable the Reserve Bank to keep, maintain and upload up-to-date list of all foreign entities which have been granted permission for establishing BO/LO in India, on its website.

Note: If a person resident outside India that is not financially sound and are subsidiaries of other companies, then it may submit a Letter of Comfort in the format given under Annex A 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 from their parent company subject to the condition that the parent company satisfies the prescribed criterion for net worth and profit.

Time Period: It generally takes 45 days to register an LO / BO. Validity for setting up of Liaison Office for companies in the business of construction & development and Non-Banking Finance Companies (NBFCs) has been set for two years. The validity of setting up of LO in rest all of the cases is for 3 years. Renewal is required after 3 years. However, in case of BO, renewal of registration is generally not required but in some cases RBI gives approval for 2-3 years and renewal is required post that.

Validity of Approval: After the approval, LO/BO shall establish the office within six months. The approval shall elapse, in case the office is not set up in six months. Companies looking for any further extension of time shall require prior approval of RBI.

Shifting of Office: AD banks are now authorized to grant approval to shift office to another city in India. In case the office change is within the same city, no such approval shall be required. Only filing of an intimation of the new address with the AD bank would be required.

Name Change: AD bank may permit change in name of LO/BO if there is no change in the ownership of foreign company. However if the change in name is due to merger/acquisition/change in ownership of the parent company, then the closing of existing LO/BO shall be required. Also, fresh approval would be required for the same.

Activities permitted (as per Annex C)

♦ For a liaison office in India of a person resident outside India

For a liaison office in India of a person resident outside India

♦ For a branch office in India of a person resident outside India

For a branch office in India of a person resident outside India

Cases in which prior approval of RBI required

Any application from a person residing  outside,for opening a branch office or a liaison office in India shall require prior approval of Reserve Bank in the following cases where:

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

b. 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 liaison or branch office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;

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

d. The applicant is a Non-Government Organization, Non-Profit Organization, Body/ Agency/ Department of a foreign government.

Such applications shall be forwarded to the Reserve Bank, Foreign Exchange Department, Central Office Cell, New Delhi by the Authorized Dealer Category-I bank and be considered in consultation with the Government of India.

Exceptions

No branch office or a liaison office shall require prior approval of the Reserve Bank in case of:

  • A banking company resident outside India if such company has obtained necessary approval under the provisions of the Banking Regulation Act, 1949.
  • An insurance company resident outside India if such company has obtained necessary approval under the provisions of the Insurance Regulatory and Development Authority Act, 1999.
  • A company resident outside India willing to establish a branch office in the Special Economic Zones (SEZs) to undertake manufacturing and service activities, subject to the conditions that:
    • such branch offices are functioning in those sectors where 100% FDI is permitted;
    • such branch offices comply with Chapter XXII of the Companies Act, 2013; and
    • such branch offices function on a stand-alone basis.

General Conditions

  • Partnership/Proprietary concerns set up abroad are not allowed to establish Branch/ Liaison Office in RBI.
  • Branch/Liaison Offices are allowed to open non-interest bearing current accounts in India. Such Offices are required to approach their Authorized Dealers for opening the accounts.
  • Transfer of assets of Liaison/Branch Office to subsidiaries or other Liaison/Branch Offices is allowed with specific approval of the Central Office of RBI.
  • A BO/LO or any other place of business by whatever name called is required to register with the Registrar of Companies (ROCs) once it establishes a place of business in India if such registration is required under the Companies Act, 2013.
  • The BOs / LOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the AACs.

Opening of bank account by BO/LO

i. 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:

a. Credits

  • Funds received from Head Office through normal banking channels for meeting the expenses of the office.
  • Refund of security deposits paid from LO’s account or directly by the Head Office through normal banking channels.
  • Refund of taxes, duties etc., received from tax authorities, paid from LO’s bank account.
  • Sale proceeds of assets of the LO.

b. Debits

Only for meeting the local expenses of the office.

ii. 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. Debits to this account shall be for the expenses incurred by the BO and towards remittance of profit/winding up proceeds.

Submission of Annual Activity Certificate (AAC)

The Annual Activity Certificate (AAC) in Form FNC (Annex D) as at the end of March 31 every year along with the required documents needs to be submitted by the following:

a. In case of a sole BO/ LO, by the BO/LO concerned;

b. 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.

The LO/BO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation).

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. In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I Bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with the copy of the AAC and their comments thereon.

  • on or before September 30 along with the audited financial statements including receipt and payment account, in case the annual accounts of the office are finalized with reference to March 31, or
  • Within 6 months from the close of the Balance Sheets in case the annual accounts of the office are finalized with reference to a date other than March 31, the AAC along with the audited financial statements.

Compliance under Companies Act, 2013

Any foreign entity establishing its place of business in India by way of Branch office, liaison office or any other place of business shall be treated as foreign company as defined under section 2(42) of the Companies Act, 2013 which says:

A foreign company is a company or body corporate incorporated outside India having a place of business in India whether by itself or through an agent, physically or through electronic mode and conducts any business activity in India in any other manner.

Such foreign companies shall be governed by the provisions of:

(i) Chapter XXII of the Companies Act, 2013

(ii) Companies (Registration of Foreign Companies) Rules, 2014

Rule 3(3) of the Companies (Registration of Foreign Companies) Rules, 2014 requires every foreign to file eForm FC-1 to the Ministry of Corporate Affairs within 30 days of the establishment of its place of business in India. 

And Rule 3(4) provides that in case of any alteration in the aforesaid documents the Foreign Company is require to submit a return in eForm FC-2 containing the particulars of alteration as per the prescribed format with the Registrar of Companies, within 30 days of any such alteration.

About the Author

Author is Neeraj Bhagat, FCA 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. He is also the founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered Accountancy firm established in the year 1997 with its head office in  New Delhi and can be reached at info@neerajbhagat.com.

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Author Bio

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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