Categories: RBI Consultancy

Branch office, Liaison office, Project office Establishment

Foreign-Offices-setup-in-India-Branch-Office-Liaison-Office-and-Project-Office

Branch office, Liaison office, Project office Establishment

BRIEF INTRODUCTION

India is considered as the hotspot in respect of foreign companies in India. With the fast-growing economy and increasing globalization, there has been a rise within the foreign multinational companies within the variety of Liaison offices, branch offices, or project offices of the foreign holdings in India. India has the best and cheapest labor around the globe. Foreign offices are promoted in India

Foreign entities tend to look for various methods in order to establish their entities in India, one of which includes subsidiaries in India in the form of Branch Office, Liaison Office, and Project Office or the other place of business in India by foreign law firms.

With Globalization, India has become a preferred choice among all Multinational Companies to line up their business units in India as India may be a very fastest-growing economy and provide for labor and various other resources at quite a reasonable rate.

Foreign companies are required to comply with the state regulation, along with physical connectivity, and native costs. Various foreign entities tend to choose various methods in order to line up their entities in India in the form of a subsidiary in India with Foreign Company as Holding, Project Office, Liaison Office, Branch Office, etc.

The government is making all the efforts to form India united of the simplest places for doing business. Keeping National Security and Domestic development in mind, the Central Government, in consultation with a bank of India, has prescribed various pre-requisite approvals for foreign entities before putting in place an entity in India.

In this article, the method of fixing a Liaison Office (LO)/ Branch Office (BO)/ Project Office (PO) is discussed intimately.

ELIGIBLE FOREIGN ENTITIES

  • Foreign NGOs (Non-Govt. Organizations)
  • Foreign Companies
  • Foreign Govt. Bodies
  • Foreign NPOs (Non-Profit Organizations)
  • Foreign Govt. Departments

PERMISSION REQUIRED

  1. General Approval by the RBI (Commonly referred to as the ‘RBI’ Route)

Foreign entities, eligible for the establishment, would be required to file an application with the RBI and the same be submitted through a designated AD Category-I bank, in Form FNC under general approval route where the foreign entity is engaged within the sector where 100% FDIs are permitted in India

  1. Specific Approval by the govt. of India (Commonly referred to as ‘Govt.’ Route)

Foreign entities would be required to file an application with the RBI and the same be submitted through a designated AD Category-I bank, in Form FNC under a specific approval route where the RBI is required specific approval from the concerned Ministry or Department of Govt. of India within the following circumstances.

    • Establishment of BO/LO by the foreign NGOs, NPOs, Govt. bodies, or Govt. dept.
    • The applicant is registered/incorporated in Pakistan and apply for establishment at ‘any’ place in India
    • The applicant is a registered/ unregistered entity in the following 7 Countries in respect of establishing a BO/LO in J&K/ North East /Andaman and Nicobar Island
      • Bangladesh
      • Sri Lanka
      • Afghanistan
      • Iran
      • China
      • Hong Kong
      • Macau
      • The principal business of the applicant is in 5 following Sectors
      • Defense
      • Telecom
      • Private Security
      • Information and Broadcasting
      • The foreign entity has been engaged in the sector, in respect of which 100% FDIs has not been permitted in India

ENTITIES NOT PERMITTED

    • Other Foreign entities Include the followings
    • Partnership firm
    • Association of people
    • Proprietary Concern

MANDATORY REQUIREMENT FOR APPROVAL UNDER THE RBI ROUTE

  1. Profit Making Track Record
  2. Net worth

REQUIREMENT OF PROFIT-MAKING TRACK RECORD

  1. Branch Office

The foreign entity having a consistent profit-making record during the preceding 5 financial years in the home country, immediately proceeding with the relevant financial year.

  1. Liaison Office

The foreign entity having a consistent profit-making record during the preceding 3 financial years in the home country, immediately proceeding with the relevant financial year.=

REQUIREMENT OF NET WORTH

Net worth is inclusive of total paid-up capital+ Free Reserves – Intangible Assets as per latest audited record or statement as certified by Certified Public Account (CPA) or any Registered Account Practitioner

    1. Branch Office

Minimum net worth is required to be at least USD 1 Lac in the home country

    1. For LO

The minimum net worth is required to be at least USD 50 thousand in the home country.

APPLICATION FOR ESTABLISHMENT

  • The application shall be made in respect of the establishment of BO/LO and the same be forwarded by a foreign entity to the RBI, by means of a designated AD Category-I bank, for their approval.
  • Designated AD Category-I bank is required to get Unique number (UIN) from chief answerable, exchange Department, home base Cell, the RBI, New Delhi, Regional office, 6 Parliament Street, New Delhi- 110001 together with prescribed documents

DOCUMENTS REQUIRED

  1. English version of
    • Certificate of incorporation or registration and MOA or AOA and also
    • Audited record as attested by Indian Embassy or functionary in the country of registration Outside India
  1. Letter of the Comfort
    • Letter of Comfort (LOC), to be issued by the parent company and the same be submitted in case the applicant does not satisfy the eligibility criteria like data and/or net worth.
  1. Due Diligence
    • Designated AD category-I bank is required to try and do due diligence refers to the followings
    • Applicant background
    • Antecedents of the promoter
    • Nature and placement of activity
    • Source of fund
    • Compliance in respect of KYC norms is made, before forwarding the application together with comments or recommendations to the RBI, and the same is required for obtaining UIN number and approval.
  1. Allotment of the UIN

The RBI shall be required to allot a Unique Identification Number (UIN) to the BO/LO

  1. Allotment of the PAN

BO/LO is required to get a PAN from the tax Authorities in India

PERMITTED AND PROHIBITED

  1. Permitted Activities for the LO in India
    • Representing their parent company or the group companies in India.
    • Promotion of the export or import activity from India
    • Promotion of technical or financial collaborations between parent company or their group companies and entities already established in India
    • Acting as communicating between parent entity and entity in India
  1. Prohibited Activities for the LO in India
    • Shall not undertake any sought of commercial activity in India
    • They shall earn any sought of income in India
    • Not allow incurring any sought of expenses apart from their direct inward remittances in exchange from Head office as located outside India

Foreign insurance company, Foreign Bank, or Foreign firm for establishing LO

  • LO of the Foreign insurance underwriter in India

The foreign underwriter is permitted to ascertain a LO after obtaining approval from Insurance Regulatory and Development Authority (IRDA) as set up in India additionally to the RBI.

  • LO of the Foreign Bank in India

The foreign bank can maintain a LO, but the same be allowed after obtaining approval from the Department of Banking Operations and Development (DBOD) of the RBI in India

  • LO of the Foreign firm in India

Fresh permission or renewal for LO of a Foreign business firm isn’t permitted.

EXTENSION OF APPROVAL

  1. Designated AD Category – I bank has been provided with the option, for the extension of the validity of LO for another period of three years from the date of expiry of original or extension where the applicant has also complied with the subsequent terms and conditions
    • LO must have already submitted their Annual Activity Certificates (AACs) in respect of ‘all’ the previous year.
    • LO must be having an account with designated AD Category -I bank, and the same be maintained in accordance with the terms and conditions.
  1. The extension is to be granted by AD Category-I bank within 1 month from the date of a request under intimation to the RBI together with the reference number of the original approval letter and UIN
  2. Extension of Validity of the LO of Insurance entity and Bank in India. Application for obtaining an extension of validity of LO of insurance entity and bank shall be submitted with IRDA and DBOD respectively

PERMITTED AND PROHIBITED ACTIVITIES FOR THE BO

  1. Manufacturing or Trading Activities Permitted for the Parent Entity/Group Companies ‘Outside’ India

Companies incorporated outside India and also engaged in manufacturing or trading activities ‘Outside’ India is permitted to line up BO in India to represent the parent or group companies and are also eligible to undertake the following activities –

    • Export or import of products and procurement of products for export and sale of products after the import is permitted on a wholesale basis
    • Rendering of professional or consultancy services
    • Polishing off research add which parent company is ‘already’ engaged
    • Promotion of technical or financial collaborations between Indian companies and parent company or group companies
    • Representation of the parent company or group companies in India.
    • Rendering of Services for information technology and development of software in India
    • Rendering of technical support to the products as supplied by the parent company or group companies
    • Undertaking operations of the foreign airline or shipping activities in India.
  1. Retail Trading Activities ‘Not’ Permitted in India
    • Retail trading activities aren’t permitted by a BO in India
  1. Manufacturing or Processing Activities ‘Not’ Permitted for the BO in India
    • Manufacturing or processing activities don’t seem to be permitted for BO in India
    • However, permitted through the incorporation of a subsidiary in India

DOCUMENTS REQUIRED FOR MAKING REMITTANCES

    1. Certified copy of audited record and profit and loss account of the BO in India
    2. Certificate from comptroller certifying the way of arriving remittable profit and also entire remittable profit is earned from ‘permitted’ activities by BO and also profit, excluding the amount in respect of revaluation of assets of the BO in India

ESTABLISHMENT OF THE PROJECT OFFICE

    • The RBI has granted general or specific ‘approval’ route to the foreign companies to ascertain a PO in India
    • It should be funded by means of inward remittance from Outside India ‘or’
    • Through a bilateral or multilateral International Financing Agency ‘and’ also
    • It should be cleared using an appropriate authority in India ‘and’ also
    • The Indian Entity as awarding the contract should obtain a term loan from a Public financial organization or bank for the project in India
    • In absence of the above-mentioned, under the Para (a) to (c) foreign entity is required to get selected permission from the RBI through designated AD Category – I bank in India.

ACCOUNT OPENING

Designated AD Category I bank is allowed to open Non-Interest bearing foreign currency account in respect of the PO established in India, ‘after’ satisfaction of the following terms and conditions

    • The said PO is required to be established under the general or specific ‘approval’ route from the RBI ‘and’ also after obtaining approval from the appropriate project sanctioning Authority
    • The contract should be specifically provided for the payment in foreign currency only.
    • PO is permitted to open 2 foreign currency accounts only with the identical designated AD category-I bank one in USD and the other in non-USD
    • Permissible debits to the account are to be project-related expenditures and permissible credits to the account are to be foreign currency receipts from foreign entities only.
    • Designated AD Category-I bank is required to make sure that permissible debits and credits are allowed within the foreign currency account and also account should be 100% scrutinized by Concurrent Auditor of bank
    • The said should be closed, once the project for which it exists gets completed.

REMITTANCES BY THE PO

Designated AD Category-I bank is permitted to remit by the PO as pending concluding or completion of the project after satisfaction of the following terms and conditions

    • PO should obtain an auditor certificate regarding payment of all liabilities including tax etc.
    • PO should submit an undertaking as remittance won’t affect the completion of the project in India and also a shortfall of the fund to finish the project ‘if any’ shall be received through inward remittance from outside India

REPORTING TO THE RBI

  1. A foreign entity is required to furnish the followings details within 2 months from the date of the firm of PO to the RBI through Designated AD Category -I bank in form FNC
    • Name and address of the said foreign entity.
    • Reference number and date of the letter, in respect of which the contract has been awarded.
    • Particulars of authority, providing the approval towards the project or contract to the PO
    • The total amount of the contract
    • Address, e-mail, and phone number of the PO
    • Tenure of the PO
    • Brief detail of the project undertaken
    • Name of designated AD Category – I bank, with whom the said foreign currency account has been opened,
    • Undertaking, that the said PO shall be eligible to avail General Permission.
  1. PO is required to submit a certificate from the controller showing the status of the project and also confirming that the accounts of PO are audited and activities, as undertaken, shall be in accordance with the general or specific permission granted by RBI

SPECIAL PROVISIONS IN RESPECT OF BO/LO/PO

  • Purchase undertook by the BO/LO/PO, in respect of an Immovable Property in India
  • BO or PO in India is permitted to buy immovable property if necessary or incidental to continue the activities of the BO/PO as the case is also
  • Payments made, in respect of the acquisition of immovable property, shall be made out of the foreign inward remittance using the normal banking channel only.
  • The declaration shall be submitted with the RBI, in the prescribed form IPI, and the same be submitted within 90 days from the date of acquisition of the said immovable property.
  • This property is often mortgaged with a bank as security for the borrowings.
  • Sale proceeds of the property on completion are to be repatriated with approval from the RBI
  • However, an approval from the RBI is additionally required for the acquisition of immovable property by an entity incorporated within the 10 countries
    • Pakistan
    • Bangladesh
    • Sri Lanka
    • Afghanistan
    • China
    • Iran
    • Nepal
    • Bhutan
    • Hong Kong
    • Macau
  • LO from ‘any’ country isn’t permitted to acquire immovable property in India
  • However, LO established by an entity registered in any other country shall be permitted to acquire immovable property on lease ‘not’ exceeding 5 years

GENERAL CONDITIONS

  • Entities registered in Nepal shall be permitted for the establishment of LO but not for BO in India
  • BO/LO is required to open a non-interest-bearing INR current account in India
  • Approval will be required to be granted by RBI, in order to transfer the assets to subsidiaries or other BO
  • Term deposits exceeding 6 months doesn’t seem to be permitted against temporary surplus funds of the BO/ LO
  • However, term deposits don’t seem to be permitted to a shipping or airline Company working in India
  • Regularization of BO/LO is required if established pre-FEMA i.e., before 1999

ADDITIONAL REPORTING REQUIREMENT

Following ‘additional’ reporting’s are required for fixing of BO/LO

    • Submit a report in respect of the said information’s and the same be submitted within 5 working days from the date BO/LO become functional to the Director-General of Police (DGP) of the State/Union Territory
    • The same report is to be submitted on annual basis to DGP together with AAC in India

MISCELLANEOUS PROVISIONS FOR THE BO/LO

  1. Establishment of a BO in SEZs
    • The RBI shall grant general permission to the foreign companies in respect of the establishment of a BO or unit in SEZ area, in order to undertake manufacturing and repair activities
    • General permission is accessible after satisfaction of the following terms and conditions
    • The unit shall be working in the sector where 100% FDIs have been permitted.
    • It shall comply with the provisions as per Section 380 to 386 of the companies Act, 2013
    • Also, the said unit shall be functioning on a standalone basis.
  1. winding up of a BO in India

BO is required to approach AD Category -I bank together with documents mentioning under the closure of the BO for remittance of closing proceeds Outside India

  1. Application in respect of additional establishment of BO/LO in India
    • Application for additional BO/LO is to be submitted to the RBI through designated AD Category -I Bank where specific approval is required for the establishment of a BO/LO
    • Fresh FNC form shall be required to be executed and submitted in respect of an additional BO/LO
    • However, documents aren’t to be re-submitted where there’s no change in ‘already’ submitted documents

Justification shall be provided in respect of the additional BO/LO and the same be submitted where BOs/Los number exceeds 4 in India

    • The applicant is to be required to spot one office as a nodal office to coordinate the activities of all offices in India
    • Submission of Annual Activity Certificate (AAC) for BO/LO in India
    • BO/LO will be required to submit an AAC as on March 31, till September 30 of every year in the name of –

DGIT (International Taxation) New Delhi

DGP of the State/Union Territory or

AAC is additionally to be submitted by the BO/LO

    • Designated AD Category -I bank is required to scrutinize the AAC to confirm that activities undertaken by BO/LO are in accordance with terms and conditions of the RBI
    • Designated AD Category -I bank is required to report back to the RBI where statutory auditors have given the negative comments/reports

CLOSURE OF THE BO/LO

BO/LO would be required to submit the followings documents in order to close their establishment –

    • Copy of approval granted in respect of establishment of BO/LO in India
    • Certificate issued by the statutory auditors in respect of computation of remittable amount.
    • NOC from the income tax authority for remittance
    • Undertaking from the applicant that no due process is pending in any court in India
    • Report from the ROC regarding the compliance of provisions of the companies Act, 2013
    • The other document as specified at the time of granting an approval
    • Role of Designated AD Category – I Bank in respect of Closure of BO/LO
    • Designated AD Category- I bank is required to make sure that the BO/LO has submitted all the AACs
    • Also, to report back to the RBI together with a declaration stating that each one necessary document as submitted by the BO/LO are scrutinized and located so as.

APPROVAL FOR ESTABLISHMENT OF A LO

    1. Generally, the RBI is taking approximately 40 days in granting permission for the establishment of a LO in India
    2. RBI grants permission for a max period of three years.
    3. RBI also provides for an extension for max period of three years ‘each’ time
    4. LO is required to shut the establishment in India once original or extended approval is expired. However, LO is permitted to convert the establishment into a venture or wholly-owned subsidiary in India

REGISTRATION AND ANNUAL FILINGS WITH THE MCA

    • BO/LO is required to register with the ROC within 30 days from the day of its establishment through filing of e-form FC-1
    • BO/LO shall file e-form FC-3 and FC-4, in order to report their financial statement and annual return.

CONCLUSION ON ESTABLISHMENT OF BO/LO/PO

  1. The establishment of a BO/LO is permitted under the pinnacle
    • The establishment can be under the General Permission and Specific permission.
    • Hence there are certain specified restrictions, where specific permission would be required, like –
    • Parent entity is found in 8 countries i.e., Pakistan and China ‘, etc.’
    • 4 Sensitive sectors i.e., defense ‘etc.’
    • NGOs and NPOs
    • Sector where 100% FDIs are ‘not’ permitted in India

Hence establishment of a Domestic (subsidiary) company in India may be a solution for the ‘not’ permitted activities in India.

    • PO establishment be permitted in India, where they satisfy all the prescribed terms and conditions.
    • BOs/POs shall be permitted to buy immovable properties only for necessary purposes. Thus, LOs shall not be permitted to buy immovable properties in India. However, LO is permitted to require on lease for a maximum period of 5 years
    • BOs/LOs/POs are permitted to shut their establishment ‘after’ satisfaction of certain terms and conditions.
    • BOs/LOs shall submit AAC ‘annually’ to the subsequent offices. Hence PO isn’t required to submit AAC
    • Designated AD Category- I Bank
    • DGIT
    • DGP

CONCLUSION

  • As discussed earlier, India is indeed the hotspot in respect of foreign companies establishing their LO/BO/PO in India. If they set their law firms, it’s to be within the prescribed limits of our Act that’s the Advocates Act, 1961, and Bar Council Rules. Activities excluded are the activities of legal acts, being outside the purview of our legislation.
  • Where the foreign business firm comes on a “fly-in and fly-out basis” does legal activities regularly, the same shall not be permitted within India.

 

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