With Globalization, India has become a preferable choice among all MultiNational Companies to set up their business units in India as India is a very fastest growing economy and having labour and various other resources at very reasonable rates.
Foreign companies should consider state regulations, physical connectivity, and local costs when choosing a location for their Indian office. The right establishment presence can mean the difference between success and wasted efforts.
Various foreign entities are opting for various methods to set up their entities in India such as set-up a subsidiary in India with Foreign Company as holding, Project Office, Liaison Office, Branch Office, Direct Investment in Indian Companies etc.
The government is making all the efforts to make India as one of the best places for doing business. Keeping National Security and Domestic development in mind, the Central Government, in consultation with Reserve Bank of India, has prescribed various pre-requisite approvals for foreign entities before setting up any entity in India.
In this article, the process of setting up a Liaison Office (LO)/ Branch Office (BO)/ Project Office (PO) is discussed in detail.
Regulations relating to the process of setting up offices of foreign entities in India is given in:
A Liaison Office (LO) functions as a representative office of the head office in Indian market. A Liaison Office (also referred to as Representative Office) can undertake only liaison activities i.e. act as a channel of communication between the head office and Parties in India. Liaison offices do not enter into any commercial or trading activity independently. Therefore, The role of such offices is Limited to collecting information about possible market opportunities, Source of supply, providing information about the parent company and its products to the prospective Indian customers or the other way around to its vendor. Expenses incurred for such offices are to be met entirely through inward remittances received from head office through normal banking channels.
Branch office can carry the same activities which are done by its holding Company/Head office.
Project Office means a place of business established in India to represent the interests of the foreign company/Head office in executing a project in India but excludes a Liaison Office.
Site office means a sub-office established of a project office at the site of project. E.g, A project is being undertaken in Sonipat, Haryana. Project office related to such a project is set-up in Delhi, India. However, a site office is established for such project at Sonipat itself. Site office does not include Laision office.
As per directions given in Master Circular No. 10/2015 and Schedule I and II of LO/BO/PO regulations, following set of activities are permitted for different offices:
Branch office carries out the same activity or part of the activities carried out by the head office. Therefore, branch offices are permitted to undertake more activities as compared to other offices. Following are activities permitted:
Liaison office act as a channel of communication between head office and entities established in India. Therefore, it don’t enter into any commercial activity independently. Below are the activities permitted to liaison office in India
No specific list of permitted activities are given for the project office. However, while granting approval letter for setting up the project office, designated Bank specifies a list of activities permitted for the project office.
If LO/BO/PO wishes to carry out any additional activity then approval to carry out such activity is required from Reserve Bank of India. Requests for undertaking activity can be submitted by the applicant to the Reserve Bank of India through the designated Bank.
For the purpose of setting up a LO/BO/PO in India, following are the prerequisites:
Application for approval of setting up a LO/BO/PO from a foreign company shall be filed with AD Category-1 Bank in accordance with guidelines issued by RBI.
In some cases, AD Category-1 Bank can approve the application itself, if it is permitted as per guidelines issued by RBI. However, in other cases, prior approval of the Reserve Bank of India is required. For such cases, AD Category-1 Bank shall forward the application to RBI.
In following cases, prior approval of RBI is not required:
In following cases, RBI shall grant the approval only after consultation with Government of India:
If application is filed for setting a LO/BO, then application should be financially sound.
In following case, application is considered as financially sound:
* Meaning of 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.
However, if LO/BO is not financially sound and it is a subsidiary company of any other company then a letter of comfort (LOC) may be issued by such holding company. Provided that such holding company must fulfil the criteria specified above
Any foreign company intending to establish a Liaison Office/ Branch office in India is required to file an application with AD Category-I Bank in form FNC alongwith prescribed documents. This application is required to be supported by:
After proper scrutiny, AD bank shall forward the application together with their comments/ recommendations to the RBI for its approval. The applications will be considered by the RBI under two routes:
A general permission is given to foreign companies to establish their project office in India where the contracts have been secured from an Indian Company to execute a project. However, projects must have obtained necessary legal approvals and entire funds for execution of projects are received:
Further, general permission is granted to non-residents for establishing Branch office in India where Branch office is established for Special Economic Zones (SEZ) to undertake manufacturing and service activities subject to following conditions:
Before issuance of approval letter, AD Bank shall forward the application in form FNC alongwith supporting documents to RBI for the purpose of allotment of Unique Identification number.
Post receipt of UIN from RBI, AD Bank shall issue the approval letter for setting up LO/BO in India.
In case of Liaison Office, request for extension of time period of Liaison office can be filed before expiry of validity of approval. Application of extension of validity period shall be filed with AD Category-1 Bank. AD Category-1 Bank can extend the validity period by further 3 years from date of expiry of approval provided that following conditions are duly met and application is filed in proper order:
Application related to extension of validity period has to be dealt with in one month from date of receipt of the request.
Please note that in case entities engaged in construction and development sector and NBFC, LO is valid for a period of 2 years. No further extension shall be granted. On expiry of validity period, the LO has to either shut down the office or convert the same to Joint Venture or wholly owned subsidiary according to FDI Policy.
After issuance of approval letter by AD Bank, LO/BO shall establish the LO/BO within 6 months from date of issuance of approval letter. However, if a non-resident entity fails to open LO/BO within stipulated time, the approval shall stand lapsed. However, if such a non-resident entity has reasons beyond its control then a request may be filed with the AD bank for extension of such time period by further 6 months. Any further extension shall require the prior approval of RBI.
AD banks are now authorized to grant approval to shift office to a different city in India. Just in case the office change is within an equivalent city, no such approval shall be required. Only filing of an intimation of the new address with the AD bank would be required.
AD bank may permit change in name only of LO/BO if there's no change within the ownership of foreign company. However, if the change in name is only due to merger/acquisition/change in ownership of the parent company, then the closing of existing LO/BO shall be required. Also, an acquired entity or new entity is required to apply fresh by closing the existing entity.
As per Master directors, once approval letter is received from AD Category-1 Bank, LO/BO/PO is required to make following compliance also:
Once the registration is approved by AD Category-1 Bank, the LO/BO/PO is required to register itself with the Registrar of Company (RoC) if such registration is required under Companies Act, 2013.
LO/PO shall apply for allotment of Permanent Account Number (PAN) to Income Tax Authority once letter of approval is received from AD Category-1 Bank. Upon upgradation of LO to BO, existing PAN and Bank Account can be used.
BO/LO/PO can change their existing AD Category-I bank subject to both the AD banks giving consent in writing for the transfer and the transferring AD bank confirming submission of all AACs and absence of any adverse features in conducting the account by the BO/LO/PO.
AD Category-I bank can allow term deposit account for a period not exceeding 6 months in favour of a BO/LO/PO of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the BO/LO/PO furnishes an undertaking that the maturity proceeds of the term deposit will be utilized for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.
The LO/BO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi whereas the PO needs to submit the AAC only to the designated AD Category -I bank.
Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO/LO/PO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.
