Process of RBI approval to open Liaison Office (LO)| Branch office (BO)| Project office (PO) in India

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.

1. Applicable Legislature to setup Business in India

Regulations relating to the process of setting up offices of foreign entities in India is given in:

1. Section 6(6) of Foreign Exchange Management Act (“FEMA”). 
2. Detailed provisions related to various restrictions, conditions and compliances for setting up LO/BO/PO is given in Foreign Exchange Management (Establishment in India of Branch Office or Liaison Office or Project Office or any other place of business) Regulations, 2016 (“LO/BO/PO Regulation”)
3. Master Directions No. 10/1025-16 dated 1st Jan, 2016 on “Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entity”

2. Meaning of Branch Office/Project Office/Liaison Office

2.1 Liaison Office

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.

2.2 Branch Office

Branch office can carry the same activities which are done by its holding Company/Head office.  

2.3 Project 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.

2.4 Site 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.

3. Activities permitted for LO/BO/PO

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:

3.1 Activities permitted for Branch Office in India

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:

1. Export/Import of Goods
2. Providing professional service or consultancy service
3. Carry out research work in the area in which the head office is engaged.
4. Promoting technical or financial collaboration between Indian Company and Head Office/Parent company or various other sister concerns.
5. Representing the foreign company in India and acting as their commission/sales agent.
6. Rendering services in Information Technology and development of software in India.
7. Rending technical support to the product supplies by parent company/head office.
8. Representing a foreign airlines/shipping company.

3.2  Activities permitted for Liaison Office in India

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

1. Representing the parent company / group companies in India.
2. Promoting export / import from / to India.
3. Promoting technical/ financial collaborations between parent / group companies and companies in India.
4. Acting as a communication channel between the parent company and Indian companies

3.3 Activities permitted for Project 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.

3.4 Additional Activity

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.

4. Requirements for opening a LO/BO/PO in India

For the purpose of setting up a LO/BO/PO in India, following are the prerequisites:

1. Prior approval of AD Category-1 Bank/ Reserve Bank of India; and
2. Application should be financially sound.

4.1 Prior approval of AD Category-1 Bank/Reserve Bank of India for setting LO/BO/PO

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:

1. Banking company, if necessary approval under the provisions of the Banking Regulation Act, 1949 has been obtained.
2. An insurance company,  if necessary approval under the provisions of the Insurance Regulatory and Development Authority Act, 1999 has been obtained.
3. A company resident outside India willing to establish a branch office in the Special Economic Zones (SEZs) where 100% FDI is permitted.

In following cases, RBI shall grant the approval only after consultation with Government of India:

1. Application is filed by the foreign entity registered in Pakistan; 
2. Application is filed by the foreign entity registered in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and entity wishes to establish LO/BO/PO in Jammu & Kashmir, North East Regions and Andaman & Nicobar
3. Principal business of the applicant falls in the four sectors namely Defence, Telecom, Private security and Information and Broadcasting.
4. The application is filed by a Non-Government Organisation (NGO, Non-Profit Organisation (NPO) or Bodyagency/department of a foreign government.

4.2 Financially sound application

 If application is filed for setting a LO/BO, then application should be financially sound. 

In following case, application is considered as financially sound:

Requirement	For Branch Office	For Liaison Office
Profit making track record	Profit making track during 5 immediately preceding years	Profit making track during 3 immediately preceding years
Net worth	> USD 100,000 or equivalent	> USD 50,000 or equivalent

* 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

5. Procedure for setting up Liaison Office/ Branch Office

5.1 Approval by AD Category-1 Bank or RBI

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:

1. English version of the Certificate of Incorporation / Registration or MOA & AOA attested by Indian Embassy / Notary Public in the Country of Registration.
2. Latest Audited Balance Sheet of the applicant entity.
3. Other documents as prescribed

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:

1. Automatic route – Where principal business of the foreign entity falls under sectors where 100 percent FDI is permissible under the automatic route.
2. Approval route – Where principal business of the foreign entity falls under the sectors where 100 percent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from non-government organizations are considered by the RBI in consultation with the Ministry of Finance, Government of India.

5.2 General Permission for setting up Liaison Office, Branch office and Project office

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:

1. Inward remittance from abroad; or
2. Bilateral or multilateral International Financing Agency; or
3. Term loan fr/om a public Financial Institution or Bank of India.

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:

1. BOs is functioning in sectors where 100% FDI is permitted;
2. BOs complies with Chapter XXII of the Companies Act, 2013; and
3. Branch office is functioning on a standalone basis.

5.3 Allotment of Unique Identification Number 

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. 

5.4 Validity period of letter of approval for LO/BO/PO

1. Generally, the Validity period of approval of a Liaison office is 3 years. 
2. However, in case of NBFC and entities engaged in construction and development sectors, the validity period is 2 years.
3. Validity period of the project office is the tenure of the project.

5.5 Extension of time period of validity of LO/BO/PO

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:

1. LO has submitted Annual Activity certificate for previous years; and
2. Bank account maintained by LO in AD Category-1 Bank is being operated in accordance with terms and conditions provided in approval letter.

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. 

5.6 Time period of opening Branch Office/ Laision Office

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.

5.7 Shifting of office

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.

5.6 Change of Name 

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.

6. Other provisions related to LO/BO/PO

As per Master directors, once approval letter is received from AD Category-1 Bank, LO/BO/PO is required to make following compliance also:

6.1 Registered with RoC 

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.

6.2 Allotment of PAN for LO/BO/PO

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.

6.3 Change of AD Category-I Bank by LO/BO/PO

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.

6.4 Term Deposit by LO/BO/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.

6.5 Annual Activity Certificate by BO/LO/PO

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.

6.6 Registration with police authorities

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.

6.7 Remittance of profit/surplus

1. BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes to the satisfaction of AD Category-I bank.
2. AD Category – I bank can permit intermittent remittances by POs pending winding up / completion of the project provided they are satisfied with the bonafides of the transaction.
3. Requests for closure of the BO / LO/ PO and allowing the remittance of winding up proceeds of BO / LO/ PO may be submitted to the designated AD Category – I bank by the BO/ LO/ PO or their nodal office, as the case may be.