In this blog post, Archishman Chakraborty, who is curently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, explains the regulatory requirements for opening liasion, branch and project office in India.
In India, establishment of liaison, branch or project office are regulated in terms of Section 6(6) of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA 22/2000-RB dated May 3, 2000. Section 6(6) of Foreign Exchange Management Act, 1999 states:
Without prejudice to the provisions of this section, the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business.
In exercise of the powers conferred by sub-section (6) of Section 6 of the Foreign Exchange Management Act, 1999, the Reserve Bank has formed the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 to prohibit, restrict and regulate establishment in India of a branch or office or other place of business by a person resident outside India.
Regulation 3 of the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 prohibits establishing branch or office in India, states:
No person resident outside India shall, without prior approval of the Reserve Bank, establish in India a branch or a liaison office or a project office or any other place of business by whatever name called: Provided that no approval shall be necessary for a banking company, if such company has obtained necessary approval under the provisions of the Banking Regulation Act, 1949.
Regulation 4 prohibits establishing a branch or office in India by citizens of certain countries:
No person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, without prior permission of the Reserve Bank, shall establish in India, a branch or a liaison office or a project office or any other place of business by whatever name called.
Regulation 5 allows a person resident outside India to establish a branch or a liaison office in India, by applying to the Reserve Bank in form FNC 1 for permission to establish a Project or Site Office in India, on fulfilment of certain criterions regarding funding of the project.
Regulation 6 empowers a person resident outside India to carry on or undertake any of the activity relating to execution of the project as mentioned in Schedule 1 and 2, whereas Regulation 7 allows remittances of surplus of the project outside India on production of appropriate documents.
On July 1, 2015, the Reserve Bank of India published a Master Circular No. 7/2015-16, to consolidate the existing instructions on the subject of “Establishment of Branch/Liaison/Project Offices in India by Foreign Entities” at one place.
According to this Master Circular, any application made to the RBI in the FNC 1 form, can be considered under:
- Government Route
- Reserve Bank Route
A profit making track record for preceding 5 and 3 financial years has been prescribed for both BOs and LOs respectively, with BOs having a net worth of not less than USD 100,000 or equivalent and LOs not less than USD 50,000 or equivalent.
The application for establishing BO/LO in India should be handed over by the foreign body through a designated AD Category – I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, along with the prescribed documents that includes :-
- Certificate of Incorporation in English / Registration or Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration.
- Latest Audited Balance Sheet of the applicant body.
Applicants who are unable satisfy the eligibility criteria and who are basically subsidiaries of other companies can put in a Letter of Comfort from their parent company as per annexure 2. However, it is subject to the condition that the parent company should satisfy the eligibility criteria as given above. The designated AD Category – I bank ought to exercise due diligence towards the applicant’s background, antecedents of the promoter, nature and location of activity, sources of funds, etc. It should also ensure compliance with the KYC norms before forwarding the application together with their comments and suggestions to the Reserve Bank of India.
The Branch / Liaison offices established with the approval of the Reserve Bank of India will be allotted a Unique Identification Number or a UIN. The BOs/LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.
A Liaison Office can take charge of the following activities in the territory of India:-
- Representing the parent company/group companies in India.
- Promoting export or import from or to India.
- Promoting technical/financial collaborations between parent/group companies and companies in India.
- Acting as a communication channel between the parent company and Indian companies.
Generally, the Branch Office should be engaged in the activity in which the parent company is engaged in. Some of the activities permissible to be undertaken by the BO are:
- Export / Import of goods.
- Rendering professional or consultancy services.
iii. Carrying out research work, in areas in which the parent company is engaged.
The Reserve Bank of India has granted general permission to companies of foreign countries to establish their own Project Offices in India. However, it is based upon the condition that they have secured a contract from an Indian company to execute a project in India, and that
- the project is funded directly by inward remittance from abroad; or
- the project is funded by a bilateral or multilateral International Financing Agency; or
iii. the project has been cleared by an appropriate authority; or
- a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval.
Setting up of Project Offices by foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, by whatever name called, are under the Government Route. Accordingly, such entities are required to apply to the Reserve Bank for prior permission to establish an office in India, whether Project Office or otherwise.
