In this blog post, Mandvi Singh, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details the procedure of setting up a branch office in India by a Foreign Company. 

Introduction

Foreign companies, as they grow, seek to expand their business over the globe. The establishment of branch offices, herein referred to as BOs, achieves this strategic growth. This article explains the route to be taken by these foreign companies in establishing their branches and the compliance to be met in the process, focusing solely on the establishment of Branch Offices and not Liaison or Project Offices. Branch Offices help companies with an easier management of their businesses in the particular areas. A BO is an extension of the Parent Company.[1] Section 2(42) of the Companies Act, 2013, defines a foreign company as a company or a body corporate incorporated outside India and which has a place of business whether by itself or through an agent, in this country. This definition includes a Branch Office; all the provisions of the Act applying to the company will also apply to the BO.

India sets up several rules under the RBI (Reserve Bank of India) and FEMA, 1999. The establishment of a BO is regulated as per Section 6(6) of FEMA, 1999 read along with notification no FEMA 22/2000-RB dated May 3, 2000. Under Section 11 of the aforementioned Act, RBI issues directions to the authorised persons regarding the regulations to be followed when conducting foreign exchange business with the customers or constituents. The BOs that were established in the pre-FEMA period are now required to regularise their offices under FEMA through the RBI, as per the recent regulations.

Initial Procedure

 RBI Master Circular Jan 2016:

A BO can be established by a body incorporated outside India, including a firm or association of persons, involved in manufacturing or trading activities. The process of setting up is an easy one with minimal compliance requirements. The permission to set-up a BO has to be obtained by the RBI under the FEMA, 1999 provisions. RBI provides guidelines to be followed for establishing a BO; the former also reserves the right to reject an application on the non-fulfilment of the same. The Applications are to be made in form FNC and are considered by the RBI under two routes determined by the degree of Foreign Direct Investment (FDI):

• The Reserve Bank Route: taken when the principle business of the foreign company falls under sectors where 100% FDI is permissible.
• The Government Route: when the sectors do not permit 100% FDI investment. The RBI considers applications under this in consultation with the Ministry of Finance of India.

The RBI has a few other considerations:

• Track Record: For a BO a company will require a profit making track record in the in the immediately preceding five financial years in the home country.
• Net Worth: “a 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”. The net worth has to be equal to or more than USD 100,000.

The application by the foreign company has to be made through a designated AD Category-I bank to the General Manager of the Foreign Exchange Department of RBI. Some prescribed documents have to be attached with the application. The RBI Master Circular of 2016 provides two of the documents that have to be attached:

“1. English version of the Certificate of Incorporation / Registration or Memorandum & Articles of    Association attested by Indian Embassy / Notary Public in the Country of Registration.

2. Latest Audited Balance Sheet of the applicant entity.”

Even if applications do not satisfy the criteria if an agent files them on behalf of a parent company, that parent company ought to satisfy the criteria. The AD-I Category bank involved in the process will conduct due diligence on the Applicant in the following areas- “background, antecedents of the promoter, nature and location of activity, sources of funds, etc.”, along with compliance of the Know Your Customer (KYC) norms.

The BO hence, once approved by the RBI, will be allotted a Unique Identification Number (UIN). Once the offices have been set up, the BO must also obtain a Permanent Account Number (PAN) from the Income Tax Authorities. This should be reported in the Annual Activity Certificate (AAC) that the BO is required to present at the end of each ear to show that the activities are undertaking in the permitted categories only.

Section 382 of the Companies Act, 2013, states that the company has to ‘conspicuously’ exhibit outside the office, the company’s name and the specify country it was incorporated in. The name must be in English Language and in the local language of the area where the office is set-up. If the members of the company have limited liability, then the same has to be specified with the name of the company outside the office and also mentioned in all the broachers, prospectus and any other circulars generated by the company. The Act also provides for the registration of the prospectus of the company with the registrar before it circulates and spreads any information about the issuance of securities by the company.

Funding of the BO by the Foreign Company:

Equity Share Capital: in the usual way Indian companies are financed.[2]

Preferred Share Capital: such convertible preference shares, compulsorily convertible into equity shares are regarded as Foreign Direct Investment (FDI).

Debentures and Borrowings: there can be redeemable, convertible or non-convertible. Companies can issue debentures, bonds and other debt securities. These also, when convertible into equity shares, are treated as FDI.

Activities:

These BOs represent the parent company and usually undertake the same activities as the latter. The profits from these are easily remittable from India, subject to the taxes applicable. They are permitted by the RBI to undertake the following activities, as listed in the Master Circular:

1. Export / Import of goods.
2. Rendering professional or consultancy services.
3. Carrying out research work, in areas in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or
5. Overseas group company.
6. Representing the parent company in India and acting as buying / selling agent in India.
7. Rendering services in information technology and development of software in India.
8. Rendering technical support to the products supplied by parent/group companies.
9. Foreign airline / shipping company.

A branch office is not allowed to undertake any Retail Trading Activities. Manufacturing or Processing activities, undertaken directly or indirectly, are also barred.

The RBI has given general permission to foreign companies to set up branch offices in Special Economic Zones (SEZs) subject to the following conditions:

1. such units are functioning in those sectors where 100 per cent FDI is permitted;
2. such units comply with part XI of the Companies Act,1956 (Section 592 to 602);
3. Such units function on a stand-alone basis.

Every Branch Office within thirty days of its establishment has to deliver certain documents to the Registrar as specified in Section 380 of the Companies Act, 2013.

Branch Office Rights:

• Immovable Property: the Branch Offices of Foreign Companies have the right to acquire immovable property in India for their use, to carry out the permitted activities and the various supplementary functions. This right is contingent in the case of the companies from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan and China and can be exercised only with prior approval of the RBI.

The permitted activities can also be carried out from leased property but the lease period is not allowed to be over five years.

• INR Current Accounts (Non-interest bearing): the BOs are required to approach their authorised dealers for opening such bank accounts.
• Remittance of Profits: the BOs are allowed to remit profits outside India subject to applicable taxes and on producing the required documents to the Authorized Dealer. The taxes are as provided as per Section 9 of the Income Tax Act, 1995.[3] The documents required are: (1) A certified copy of the audited Balance Sheet and certified Profit and Loss account of the relevant financial year. (2) A Chartered Accountant’s certificate is certifying that the profit has been earned from the permitted activities, not by the revaluation of the assets of the branch along with the manner of arriving at the remittance.
• Term Deposit Account: such an account can be sanctioned by the Authorized dealer for a branch office of a foreign company to the satisfaction of the bank that the term deposit is out of the temporary surplus funds. The BO must deliver an undertaking to the effect that the maturity proceeds of the term deposit will be utilised for their Indian office(s) within three months of maturity. This type of account is permitted for six months and is not available to shipping/airline companies.

Additional Activities/Additional BO:

Request to undertake any additional activities apart from the ones already sanctioned by the RBI must be made via an application through the designated AD-Category-I Bank to the Chief General Manager-in-charge of the Foreign Exchange Department of RBI.[4] The Application must justify the need for such additional activities and also be accompanied by the comments of the AD Category-I Bank.

The foreign company is allowed four BO’s, in the four zones of the country, without any hassles. Any offices over and above that have to be justified with an explanation. The company may identify a ‘Nodal Office’ in India from amongst the BOs, that will overlook the functioning and activities of all the other BOs in the country. To establish an additional BO, a fresh FNC application needs to be submitted to the RBI, duly signed by the authorised signatory of the foreign company from the home country. The documents that were submitted with the first FNC form need not be resubmitted except when there are certain changes that have occurred in them.

Post-Establishment Procedures

New entities setting up BOs shall submit a report containing information, as per the provided format, within five working days of the BO being functional, to the Director General of Police (DGP) of the states in all the branches of the foreign company.

The offices also have to file Annual Activity Certificates (AACs) from Chartered Accountants at the end of each financial year by 31^st March along with the audited balance sheet before 30^th September. If there is more than one BO, then the AAC has to be filed by the Nodal Office, on behalf of all the other offices. The AAC has to be scrutinised by the AD Category-I bank, and the same has to ensure that the activities of the office/offices are being carried out as per the guidelines of RBI.

Conclusion

Initially, the company begins to establish its operation in another country by establishing a Liaison/Project/Branch office. Among the three the Branch Office is the wisest choice if the purpose is not merely to regulate or establish in a country for a specific project. A Branch Office has the widest range of activities available for a Foreign company. Beginning with a single Branch Office, the company can spread across by establishing three more, across the country. With the expansion of operations, a few more may be set-up by referring to the applicable rules and regulations specified above.

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BIBLIOGRAPHY:

1. Companies Act, 2013.
2. Income Tax Act, 1995.
3. Master Direction – Establishment of Liaison/ Branch/ Project Offices in India by Foreign Entities RBI/ FED/ 2015-16/6 FED Master Direction No. 10/ 2015-16
4. Master Circular on Establishment of Liaison / Branch / Project Offices in India by Foreign Entities RBI/2014-2015/11 Master Circular No.7/2014-15
5. Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016   Notification No. FEMA 22(R) /RB-2016
6. http://dipp.nic.in/English/policy/entry.htm

References:

[1] There are several structures – word doc

[2] There are several structures – word doc

[3] Income tax act

[4] 11ELB Circular