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A foreign investor can invest in India in multiple ways depending upon the long-term objective of the said investor. One of the ways for them to enter in India is through the unincorporated entities, unincorporated entities as in the Liaison office, Branch office or Project office. These entities are given permission to operate in India for specific duration and can operate in India for the purpose for which they are given the licence for. One of such unincorporated entities are Liaison office (herein after referred as LO).

LO provides window to foreign investors to have the initial understanding of the business environment in India. The activities that can be undertaken by LO are specified in 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 [referred as FEMA] and they cannot undertake any other activity which is not specified.

As defined under clause 2(e) of FEMA: ‘Liaison Office’ means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called 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.

An LO can undertake the following activities in India:

  • Representing the parent company/group companies in India
  • Promoting export/import from/to India
  • Promoting technical/ financial collaborations between parent/group companies and companies in India
  • Acting as a communication channel between the parent company and Indian companies

An LO is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. The LO office is required to report its activities to Reserve Bank of India (RBI), Ministry of corporate affairs (MCA) on regular basis viz. if the address of LO is changed from one place to another both RBI and MCA needs be notified. Apart from that, there are annual compliances to be done which are listed below in detail.

Requirement under Foreign Exchange Management Act, 2000

The LO is required to submit the Annual Activity Certificate as at the end of March 31 along with the audited financial statements including receipt and payment account on or before September 30 of that year. 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 may be submitted within six months from the due date of the Balance Sheets to the Authorised Dealer Category-bank and the Director General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002. Annual activity certificate required to be obtained from Chartered Accountant states the following

“This is to certify and confirm that during the period from . . . . . . . . .. . to . . . . . . . . . . . ., the Branch/Liaison Office/s with PAN No. . . . . . . . . . . of M/s. . . . . . . . . . . . . . . . (UIN- ) has/ have undertaken only those activities that have been specifically permitted by the Reserve Bank vide its approval letter/s No/s. . . . . . . . . . dated . . . . . .. . . . . . and has/have complied with the terms and conditions specified in the above-mentioned letter/s”

It may be noted the AAC is required to be filed within six months from the due date of the Balance Sheet while Form 49C under Income Tax Act, 1961 is required to be filed within sixty days from the end of such financial year. And in Form 49C the AAC is required to be given. So practically, AAC is required to be filed prior to filing of Form 49C.

Any adverse findings by the auditor in respect of LO/BO or the LO/BO is defaulting in submission of AACs is reported to the Reserve Bank.

Requirement under Companies Act, 2013

As per Section 381 as Companies Act,2013:

1) Every foreign company shall, in every calendar year,

a) Make out a balance sheet and profit and loss account in such form, containing such particulars and including or having annexed or attached thereto such documents as may be prescribed; and

b) Deliver a copy of those documents to the Registrar: Provided that the Central Government may, by notification, direct that, in the case of any foreign company or class of foreign companies, the requirements of clause (a) shall not apply, or shall apply subject to such exceptions and modifications as may be specified in that notification.

2) If any such document as is mentioned in sub-section (1) is not in the English language, there shall be annexed to it a certified translation thereof in the English language.

3) Every foreign company shall send to the Registrar along with the documents required to be delivered to him under subsection (1), a copy of a list in the prescribed form of all places of business established by the company in India as at the date with reference to which the balance sheet referred to in subsection (1) is made out. E-Form FC-3 is required to be filed pursuant to Section 381 of the Companies Act, 2013 and Rule 4, 5 and 6 of Companies (Registration of Foreign Companies) Rules, 2014 which are reproduced for your reference.

As per Rule 4 of Companies (Registration of Foreign Companies) Rules, 2014

Liaison Office – Thorough Insights

1) For the purposes of clause (a) of sub-section (1) of section 381, every foreign company shall prepare financial statement of its Indian business operations in accordance with Schedule III or as near thereto as may be possible for each financial year including:

i. Documents required to be annexed thereto in accordance with the provisions of Chapter IX of the Act;

ii. documents relating to copies of latest consolidated financial statements of the parent foreign company , as submitted by it to the prescribed authority in the country of its incorporation under the provisions of the law in that country: Provided that where such documents are not in English language, there shall be annexed to it a certified translation thereof in the English language: Provided further that where under proviso to subsection (1) of section 381, the Central Government has exempted or prescribed different documents for any foreign company or a class of foreign companies, then documents as prescribed shall be submitted.

iii. Such other documents as may be required to be annexed or attached in accordance with sub-rule (2).

2) Every foreign company shall, along with the financial statement required to be filed with the Registrar, annex or attach thereto the following documents:

a) Statement of Related party transaction, which shall include:

i. Names of the person in India which shall be deemed to be the related party within the meaning of clause 76 of section 2 of the Act, of the foreign company or of any subsidiary or holding company of such foreign company or of any firm in which such foreign company or its subsidiary or holding company is a partner;

ii. Nature of such relationship;

iii. Description and nature of transaction;

iv. amount of such transaction during the year with opening, closing, highest and lowest balance during the year and provisions made (if any) in respect of such transactions;

v. Reason of such transaction;

vi. Material effect of such transaction on both the parties;

vii. Amount written off or written back in respect of dues from or to the related parties;

viii. A declaration that such transactions were carried out at arm’s length basis;

ix. Any other details of the transaction necessary to understand the financial impact.

b) Statement of Repatriation of profits which shall include:

i. Amount of profits repatriated during the year;

ii. Recipients of the repatriation;

iii. Form of repatriation;

iv. Dates of repatriation;

v. Details if repatriation made to a jurisdiction other than the residence of the beneficiary;

vi. Mode of repatriation; and

vii. Approval of Reserve Bank of India or any other authority, if any.

c) Statement of transfer of funds (including dividends if any) which shall, in relation of any fund transfer between place of business of foreign company in India and any other related party of the foreign company outside India including its holding, subsidiary and associate company, include:

i. Date of such transfer;

ii. Amount of fund transferred or received;

iii. Mode of receipt or transfer of fund;

iv. Purpose of such receipt or transfer; and

v. Approval of Reserve Bank of India or any other authority, if any.

3) The documents referred to in this rule shall be delivered to the Registrar within a period of six months of the close of the financial year of the foreign company to which the documents relate:

Provided that the Registrar may, for any special reason, and on application made in writing by the foreign company concerned, extend the said period by a period not exceeding three months.

Rule 5 of Companies (Registration of Foreign Companies) Rules, 2014:

1. Every foreign company shall get its accounts pertaining to the Indian business operations prepared in accordance with the requirements of clause (a) of sub-section (1) of section 381 and rule 4, audited by a practicing Chartered Accountant in India or a firm or limited liability partnership of practicing Chartered Accountants.

2. The provisions of Chapter X and rules made there under, as far as applicable, shall apply mutatis mutandis to the foreign company.

Rule 6 of Companies (Registration of Foreign Companies) Rules, 2014

For the purposes of sub-section (3) of section 381, every foreign company shall file to the Registrar, along with the financial statement, in Form No. FC-3 along with such fee as provided in Annexure to Companies (Registration Offices and Fees) Rules, 2014 a list of all the places of business established by the foreign company in India as on the date of balance sheet.

Key Points to remember

Any non-compliance with regard to the statutory requirements leads to interest and penalty. Although under the Companies Act, 2013 the e-forms could be filed with late fees. At the end of tenure of LO, the RBI does not give permission to close the LO till the time all the requirements of Companies Act, 2013 and all other requirements subject to which the approval was given have been complied with. The key thing for the LO is to keep reviewing its activities in India that it is as specified and approved by RBI and it doesn’t expose the parent company by constituting the PE in India. Making all the compliances including the annual compliances viz Filing of Form 49C under Income Tax Act, 1961, Filing of Form FC 3 under Companies Act, 2013 and Filing of Form AAC under Foreign Exchange Management Act, 2000. Besides these, the LO must keep a check on its Bank account in India as it cannot open more than one account in India, if an LO/BO wants to open more than one account it has to obtain prior permission of the Reserve Bank through its AD Category I bank justifying the reason for additional account and also LO needs to ensure that account can be funded only through the foreign remittance.

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