Establishment of Branch/Liaison Offices in India by Foreign Entities
By - Rahul Aggarwal, 4th Year Student, Government Law College, Mumbai
· Introduction:
Any foreign companies wishing to open a branch/liaison office in India have to follow certain provisions. This Article focuses the basic requirement in two parts, first part comprises of provisions governed under FEMA Regulations, 2000 and the other covers under Companies Act, 1956. Now, any foreign company desiring to open a branch/liaison office has to fulfill certain requirements provided hereinafter:-
· Definitions:-
According to Foreign Exchange Management (Establishment in India of Branch or office or other Place of Business) Regulations, 2000
Under regulation 2(b), ‘Foreign Company' means a body corporate incorporated outside India, and includes a firm or other association of individuals;
Under regulation 2(e), 'Liaison Office' means a place of business to act as a channel of communication between the Principal place of business or Head Office 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
· Provisions under Foreign Exchange Management (Establishment in India of Branch or office or other Place of Business) Regulations, 2000.
A Branch or Liaison Office can be opened by any Foreign Company in India with the prior approval of the Reserve Bank of India under Foreign Exchange Management (Establishment in India of Branch or office or other place of Business) Regulations, 2000.
I. Opening a Branch/Liaison office in India by a Foreign Company
Foreign companies desirous of setting up of Liaison Office (LO)/ Branch Office (BO) are required to submit their application in Form FNC, along with the prescribed documents to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai-400001 through an Authorized Dealer bank.
· Application in Form FNC will be considered by the RBI under two parts:
· RBI Route — Principal business of the foreign entity falls under the sectors where sectoral cap for foreign direct investment (FDI) under the Automatic Route is 100 per cent.
· Government Route — Principal business of the foreign entity falls under the sectors where sectoral cap for foreign direct investment (FDI) under the Automatic Route is less than 100 per cent. Applications from entities falling under this category are considered by the Reserve Bank in consultation with the Government of India, Ministry of Finance, (DEA).
· While sanctioning LO/BO of foreign entities, following additional criteria are also considered by the RBI
· Track Record:
· For Branch Office — a successful, profit making track record during the immediately preceding five years in the home country.
· For Liaison Office — a successful, profit making track record during the immediately preceding three years in the home country.
· Net Worth [total of paid-up capital and free reserves, less intangible assets as per latest Audited Balance Sheet or Account Statement certified by a CPA]
· For Branch Office — not less than USD 100,000 or its equivalent.
· For Liaison Office — not less than USD 50,000 or its equivalent.
· Initially, permission for setting up such offices is granted for a period of 3 years and this may be extended by making a request to the concerned Regional Office and to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai-400 001, as the case may be, quoting the reference number of the original approval letter and the UIN.
· The Branch Office/Liaison Office established with the RBI’s approval will be allotted a Unique Identification Number
· Liaison/Branch office have to file an Annual Activity Certificate (AACs) from the Auditors, as at the end of March 31, on or before April 30, to the designated AD Category – I bank and a copy to the Directorate General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi 110002 stating that activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given by the Reserve Bank.
II. Activities which may be undertaken by Liaison/Branch Company
As per regulation 6, a person resident outside India permitted by the Reserve Bank to establish a branch or a liaison office in India may undertake or carry on any activity specified in Schedule I or, as the case may be, in Schedule II (given below), but shall not undertake or carry on other activity unless otherwise specifically permitted by the Reserve Bank.
Schedule I
Permitted activities for a branch in India of a person resident outside India
i. Export/Import of goods
ii. Rendering professional or consultancy services.
iii. Carrying out research work, in which the parent company is engaged.
iv. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v. Representing the parent company in India and acting as buying/selling agent in India.
vi. Rendering services in Information Technology and development of software in India.
vii. Rendering technical support to the products supplied by parent/group companies.
viii. Foreign airline/shipping Company.
Schedule II
Permitted activities for a Liaison office in India of a person resident outside India
i. Representing in India the parent company/group companies.
ii. Promoting export import from/to India.
iii. Promoting technical/financial collaborations between parent/group companies and companies in India.
iv. Acting as a communication channel between the parent company and Indian companies.
III. Application Form and Documentation
Applications in Form FNC, duly completed in all respects and signed by the authorized signatory of the foreign entity in the home country may be submitted along with Letter of Comfort, wherever applicable, to the designated AD Category - I bank for onward transmission to the Reserve Bank, to be forwarded along with their comments and recommendations and the required documents).
· Documents Required as per Item (viii) of Form FNC
a. Copy of the Certificate of Incorporation / Registration attested by the Notary Public in the country of registration.
[If the original Certificate is in a language other than 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]
b. Latest Audited Balance sheet of the applicant company.
[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]
c. 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
IV. Remittance of profit or surplus
A person resident outside India is permitted by the Reserve Bank under Regulation 5, to establish a branch or Project office in India and remit the profit of the branch or surplus of the Project on its completion outside India, net of applicable Indian taxes, on production of the documents mentioned below, and establishing the net profit or surplus, as the case may be, to the satisfaction of the authorized dealer through whom the remittance is effected.
· For remittance of profit of a branch, -
a. certified copy of the audited balance-sheet and profit and loss account for the relevant year;
b. a Chartered Accountant's certificate certifying, -
i. the manner of arriving at the remittable profit,
ii. that the entire remittable profit has been earned by undertaking the permitted activities, and
iii. that the profit does not include any profit on revaluation of the assets of the branch.
· For remittance of surplus on completion of the Project –
a. certified copy of the final audited Project accounts;
b. a Chartered Accountant's certificate showing the manner of arriving at the remittable surplus;
c. income tax assessment order or either documentary evidence showing payment of income tax and other applicable taxes, or a Chartered Accountant's certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities; and
d. auditor's certificate stating that no statutory liabilities in respect of the Project are outstanding.
V. General Conditions Applicable To Branch/ Liaison/ Project Offices Of Foreign Entities In India
· Without prior permission of the Reserve Bank, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.
· Partnership / Proprietary concerns set up abroad are not allowed to establish Branch /Liaison/Project Offices in India.
· Entities from Nepal are allowed to establish only Liaison Offices in India.
· Branch/Project Offices of a foreign entity, excluding a Liaison Office are permitted to acquire property for their own use and to carry out permitted/incidental activities but not for leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years.
· Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised 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 the Reserve Bank.
· Provisions under Companies Act, 1956
According to Section 591 and 592 of Companies Act, 1956, a foreign within thirty days of the establishment of the place of business within India, shall deliver following documents to the Registrar for registration –
I. a certified copy of the charter, statutes, or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company ; and, if the instrument is not in the English language, a certified translation thereof;
II. the full address of the registered or principal office of the company ;
III. a list of the directors and secretary of the company, shall contain the following particulars, that is to say :
A. with respect to each director, -
· in the case of an individual, his present name and surname in full, any former name or names and surname or surnames in full, his usual residential address, his nationality, and if that nationality is not the nationality of origin, his nationality of origin, and his business occupation, if any, or if he has no business occupation but holds any other directorship or directorships, particulars of that directorship or of some one of those directorships ; and
· in the case of a body corporate, its corporate name and registered or principal office ; and the full name, address, nationality, and nationality of origin, if different from that nationality, of each of its directors ;
B. with respect to the secretary, or where there are joint secretaries, with respect to each of them –
· in the case of an individual, his present name and surname, any former name or names and surname or surnames, and his usual residential address ; and
· in the case of a body corporate, its corporate name and registered or principal office :
Provided that, where all the partners in a firm are joint secretaries of the company, the name and principal office of the firm may be stated instead of the list of particulars mentioned above.
IV. the name and address or the names and addresses of some one or more persons resident in India, authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company ; and
V. the full address of the office of the company in India which is to be deemed its principal place of business in India.
In the instant case, by fulfilling the provisions mentioned hereinabove, a foreign company can establish a branch or liaison office in India and can start any of the activities permitted by the regulations under Foreign Exchange (Establishment in India of Branch or office or other Place of Business) Regulations, 2000.