New procedure to open a Branch office in India by Foreign entity

Contributed by : CA. Sudha G. Bhushan (sudha@mukeshraj.com)

Establishment of Branch (BO) / Liaison Offices (LO) in India by Foreign Entities delegation of powers

Application for opening Branch office/liaison office to be routed through Authorised dealer

The application in form FNC by the foreign entity (other than those engaged in insurance and banking) for opening of BO / LO in India should be routed through a designated AD Category – I bank.

Documents with Form FNC:

1. 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 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].

2.   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]

3. 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.

The designated AD Category – I bank is required to forward the application/s, along with the relevant documents and their comments / recommendations to Reserve Bank of India.

Unique Identification Number (UIN)

From February 01, 2010 a Unique Identification Number (UIN) will be allotted to both the existing as well as new BO / LOs. Consequent upon delegation of powers existing BO / LO will also have to necessarily approach the Reserve Bank through their designated AD Category -I bank for their requests/references.

Permanent Account Number (PAN)

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 Annual Activity Certificate.

Submission of Annual Activity Certificate

With effect from February 01, 2010, the Annual Activity Certificate as at the end of March 31 shall be submitted, 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, [at present BO/ LOs are required to submit Annual Activity Certificate from their Auditors to the Central Office / Regional Office of the Reserve Bank, certifying that the BO / LO has carried out only those activities which are approved by the Reserve Bank]

Extension of validity period of Liaison Offices

With effect from February 01, 2010 the designated AD Category – I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted by the Reserve Bank.

Upon expiry of the validity period, these entities have to either close down or be converted into a Joint Venture (JV) / Wholly Owned Subsidiary (WOS), in conformity with the extant Foreign Direct Investment policy.

Closure of Branch / Liaison Office/s

With effect from February 01, 2010, the work related to closure of Branch / Liaison Offices, hitherto being done by the Reserve Bank (Central Office in the case of Branch Offices and Regional Office in the case of Liaison Offices), shall be handled by the designated AD Category – I bank.

Cases which are not covered under the delegated powers will continue to be referred to the Reserve Bank, by the designated AD Category – I bank.

Eligibility Criteria for Establishment of Branch / Liaison Office in India

An application from a foreign entity to establish Branch / Liaison Office in India is considered on the basis of two criteria viz: basic and additional:

Basic criteria

Reserve Bank Route — Principal business of the foreign entity falls under sectors where 100 per cent foreign direct investment (FDI) is permissible under the automatic route.

Government Route — Principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category are considered by the Reserve Bank, in consultation with the Government of India, Ministry of Finance.

Additional criteria

Track Record

  • For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
  • For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.

Net Worth [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].

  • For Branch Office — not less than USD 100,000 or its equivalent.
  • For Liaison Office — not less than USD 50,000 or its equivalent.

Applicants that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company, subject to the condition that the parent company satisfies the eligibility criteria as prescribed.

Source: Source: -A. P. (DIR Series) Circular No. 23 /24