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


Setting up of operations in India by Overseas Company/ Non-Resident

A foreign company or a non-resident planning to set up business operations in India can do so in the following manner:

  • As a foreign company through a Liaison Office/ Representative Office, Project Office or a Branch Office; or
  • As an Indian company through a Joint Venture or a Wholly Owned Subsidiary.

A foreign company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Co Act.

Liaison Office/ Representative Office

A liaison office is not allowed to undertake any business activity in India and earn any income in India. The role of liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.

The Foreign Exchange Management Act (“FEMA”) regulates the opening and operation of liaison offices. Prior approval of Reserve Bank of India (“RBI”) is required for opening of such offices. Permission for such offices is typically granted for a period of three years initially and may be extended from time to time. These offices have to ensure compliance with the following conditions:

  • Expenses are met entirely through inward remittances of foreign exchange from Head Office abroad.
  • These offices do not undertake any trading or commercial activities. Activities should be limited to collecting and transmitting information between overseas Head Office and potential Indian customers.
  • Such offices should not charge any commission or receive other income from Indian customers for provision of liaison services.

A person resident outside India permitted by RBI to establish a liaison office in India may carry out the following activities:

  • Represent in India the parent company/ group companies.
  • Promote export import from/ to India.
  • Promote technical/ financial collaborations between parent/ group companies and companies in India.
  • Act as a communication channel between the parent company and the Indian companies.

Further, liaison/ representative offices are required to furnish an annual compliance certificate, from their auditors, with the RBI.

Project Office

Foreign companies planning to execute specific projects in India can set up temporary project/ site offices in India. Under the earlier provisions of FEMA, specific approval was required to be obtained from RBI for establishment of a Project Office. Recently, the RBI has accorded general permission to foreign companies for establishment of Project Offices in India subject to following conditions:

  • It has secured from an Indian company a contract to execute a project in India;
  • The project is funded by inward remittance from abroad or bilateral/ multilateral International Finance Agency or the project has been cleared by an appropriate authority or the contracting entity has been granted term loan by a Public Financial Institution or a bank in India for the project; and
  • Intimation is required to be filed with the regional office of RBI in the prescribed manner.

Further, until recently an approval from the RBI was required for:

  • opening of foreign currency accounts by Project Offices in India; and/ or
  • Intermittent remittances to be made by such Project Offices.

In order to further liberalize the procedure for Project Offices, the Authorized Dealers (bankers) have been empowered to open foreign currency accounts for the Project Offices as well as permit intermittent remittances by Project Offices without an approval from the RBI, subject to fulfillment of certain conditions.

Branch Office

Foreign companies may set up Branch Offices in India, with prior permission of RBI, for the following purposes:

  • To represent parent company/ other foreign companies in various matters in India e.g. acting as buying/ selling agents in India.
  • To conduct research work in the area in which parent company is engaged.
  • To undertake export and import.
  • To promote possible technical and financial collaborations between Indian companies and parent/ overseas group companies.
  • To render professional or consultancy services.
  • To render services in Information Technology and development of software in India.
  • To render technical support to products supplied by the parent/ overseas group companies.

A Branch Office is not permitted to carry out manufacturing activities on its own. A Branch Office is required to file an annual compliance letter, from their auditors, with the RBI. Remittance of profits of the Branch Office is permissible by furnishing requisite documents with an authorized dealer.

Further, RBI has granted general permission to foreign companies to establish Branch Offices/ units in SEZs to undertake manufacturing/ service activities subject to the following conditions:

  • such units function in those sectors where 100 percent FDI is permitted;
  • such units comply with prescribed requirements of the Co Act;
  • such units function on a stand-alone basis; and
  • in the event of winding-up of business and for remittance of winding-up proceeds the branch/ unit shall approach an Authorized Dealer with the prescribed documents.

As an Indian Company

A foreign company can commence operations in India through incorporation of a company under the provisions of Co Act. Foreign equity in such Indian companies can be up to 100 percent depending upon the business plan of the foreign investor, prevailing foreign investment policies of the Government and receipt of requisite approvals.

Joint Venture with an Indian Partner

Foreign companies can set up their operations in India by forming strategic alliances with Indian partners. Setting up of operations through Joint Venture may entail the following advantages to a foreign investor:

  • Already established distribution/ marketing set up of the Indian partner.
  • Available financial resources of the Indian partner.
  • Already established contacts of the Indian partner that help smoothen the process of setting up operations.

Foreign investments are approved through two routes as under:

  • Automatic Route: Approvals for foreign equity up to 26 percent, 50 percent, 51 percent, 74 percent and 100 percent are given on an automatic basis subject to fulfillment of prescribed parameters in certain industries as specified by the Government. RBI accords automatic approval to all such cases.
  • Government Approval: Approval in all other cases where the proposed foreign equity exceeds 26 percent, 50 percent, 51 percent or 74 percent in the specified industries or if the industry is not in the specified list, it requires prior specific approval from Foreign Investment Promotion Board (“FIPB”).