Opening representation office in India
In this article, we will focus on branch office (BO), liaison office (LO), project office
(PO) setup for person resident outside India who wants to extend their head office business in India also or need a temporary business setup in India Most foreign companies use this mode to explore Indian market without having any long-term commitment.
India is one of the most ideal destinations for foreign investors looking to set-up their businesses in India or to open a BO/PO/LO in India for a fact that there are infinite business opportunities in India. India is blessed with a large labour pool and admirable levels of judicial transparency. It can leverage its territorial position to play a critical role in the global supply chains.
With the idea of setting up a BO/PO/LO in India, the representatives of the foreign company should receive an approval from the Foreign Exchange Department, Reserve Bank of India (RBI). The approval should be done through AD category 1 Banker and further registration of the foreign company with the ROC.
Prior approval from RBI
An application from a person resident outside India for opening of a BO/LO/PO in India shall require prior approval of Reserve Bank of India in the following cases:
- The applicant is a citizen of or is registered/incorporated in Pakistan;
- The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
- The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting. In the case of proposal for opening a PO relating to defence sector, no separate reference or approval of Government of India shall be required if the said non-resident applicant has been awarded a contract by/ entered into an agreement with Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings. No separate approval is required from Reserve Bank of India for such cases only.
- The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. Such applications may be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi – 110 001 who shall process the applications in consultation with the Government of India.
Regulation of LO, BO and PO
LO, BO and PO are unincorporated place of business of foreign company in India and is regulated by the Companies Act as well under FEMA.
Regulation under the Companies Act, 2013
Provisions under the Companies Act, 1956: Sections 591 to 602 of the Companies Act, 1956 dealt with foreign companies having a place of business in India. Corresponding to these sections Chapter XXII was introduced in Companies Act, 2013 with additional sections and requirements read with the Companies (Registration of Foreign Companies) Rules, 2014.
Registration under Companies Act, 2013: A foreign company (through LO/BO or PO) shall, within a period of 30 days of the establishment of its place of business in India, file with the registrar Form FC-1 with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 and with the documents required to be delivered for registration by a foreign company in accordance with the provisions of sub-section (1) of s 380.
Application for registration to be supported by approval from RBI: The above application shall be supported with an attested copy of approval from the Reserve Bank of India under Foreign Exchange Management Act or Regulations, and also from other regulators, if any, approval is required by such foreign company to establish a place of business in India or
a declaration from the authorised representative of such foreign company that no such approval is required.
Alteration in the information: Where any alteration is made or occurs in the document delivered to the Registrar for registration under sub-section (1) of section 380, the foreign company shall file with the Registrar, a return in Form FC2 containing the particulars of the alteration, within a period of 30 days from the date on which the alteration was made or occurred.
Accounts and Audit: Every foreign company (present through LO/BO or PO in India) shall prepare financial statement of its Indian business operations in accordance with Schedule III or as near thereto as may be possible for each financial year and get them audited by a practising Chartered Accountant in India.
Filing of financial statement and list of place of business: Every foreign company (present through LO/BO or PO in India) shall file with the Registrar, along with the financial statement, in Form FC.3 a list of all the places of business established by the foreign company in India as on the date of balance sheet.
Regulation under FEMA
Governing Regulation: As per sub-section (6) of section 6 of the Foreign Exchange Management Act, 1999, 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 given under sub-section (6) of section 6 of the Foreign Exchange Management Act, 1999, the RBI has framed the regulation by way of notification to regulate the provisions relating the LO in India. These regulations are 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 issued by way of Notification No. FEMA 22(R)/RB-2016 dated March 31, 20161 (referred as ‘FEMA 22R’ as well).
Procedure for Applying
- The application for establishing BO / LO/ PO in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category – I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the LOC, wherever applicable. The AD Category-I bank shall after exercising due diligence in respect of the applicant’s background, and satisfying itself as regards adherence to the eligibility criteria for establishing BO/LO/PO, antecedents of the promoter, nature and location of activity of the applicant, sources of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for establishing BO/LO/PO in India. The AD Category-I banks may frame appropriate policy for dealing with these applications in conformity with the FEMA Regulations and Directions.
- However, before issuing the approval letter to the applicant, the AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each BO/LO. After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO/LO in India. This is in order to enable the Reserve Bank to keep, maintain and upload up-to-date list of all foreign entities which have been granted permission for establishing BO/LO in India, on its website.
- The validity period of an LO is generally for three years, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only. The validity period of the project office is for the tenure of the project.
- There is a general permission to non-resident companies to establish POs in India, provided they have secured a contract from an Indian company to execute a project in India. Also, the project must have secured the necessary regulatory clearances; andis funded directly by inward remittance from abroad; or the project is funded by a bilateral or multilateral International Financing Agency, 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.
- An applicant that has received a permission for setting up of a BO/LO/PO shall inform the designated AD Category I bank as to the date on which the BO/LO/PO has been set up. The AD Category I bank in turn shall inform Reserve Bank accordingly. In case an approval granted by the AD bank has either been surrendered by the applicant or has expired without any BO/LO/PO being set up, the AD Category I bank shall inform RBI accordingly.
- The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO/LO/PO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse. In cases where the non-resident entity is not able to open the office within the stipulated time frame due to reasons beyond its control, the AD Category-I bank may consider granting extension of time for a further period of six months for setting up the office. Any further extension of time shall require the prior approval of Reserve Bank of India in this regard.
- All applications for establishing a BO/LO in India by foreign banks and insurance companies will be directly received and examined by the Department of Banking Regulation (DBR), Reserve Bank of India, Central Office and the Insurance Regulatory and Development Authority (IRDA), respectively. No UIN for such representative offices is required from the Foreign Exchange Department, Reserve Bank of India.
- There is a general permission to non-resident companies for establishing BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions that:
- such BOs are functioning in those sectors where 100% FDI is permitted;
- such BOs comply with Chapter XXII of the Companies Act, 2013; and
- such BOs function on a stand-alone basis.
In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the documents as mentioned in para 10 under “Closure of Liaison / Branch Office”
Opening of Bank Account by BO/LO/PO
i. An LO may approach the designated AD Category I Bank in India to open an account to receive remittances from its Head Office outside India. It may be noted that an LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India. The permitted Credits and Debits to the account shall be:
a. Credits –
- Funds received from Head Office through normal banking channels for meeting the expenses of the office.
- Refund of security deposits paid from LO’s account or directly by the Head Office through normal banking channels.
- Refund of taxes, duties etc., received from tax authorities, paid from LO’s bank account.
- Sale proceeds of assets of the LO.
b. Debits –
Only for meeting the local expenses of the office.
ii. A BO may approach any AD Category-I Bank in India to open an account for its operations in India. Credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office and any legitimate receivables arising in the process of its business operations. Debits to this account shall be for the expenses incurred by the BO and towards remittance of profit/winding up proceeds.
iii. Any foreign entity except an entity from Pakistan who has been awarded a contract for a project by the Government authority/Public Sector Undertakings or are permitted by the AD to operate in India may open a bank account without any prior approval of the Reserve Bank. An entity from Pakistan shall need prior approval of Reserve Bank of India to open a bank account for its project office in India.
iv. AD Category – I banks can open non-interest bearing foreign currency account for POs in India subject to the following:
a. The PO has been established in India, with the general / specific permission of Reserve Bank of India, having the requisite approval from the concerned Project Sanctioning Authority concerned as per these Regulations.
b. The contract governing the project specifically provides for payment in foreign currency.
c. Each PO can open two foreign currency accounts, usually one denominated in USD and other in home currency of the project awardee, provided both are maintained with the same AD Category–I bank.
d. The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority and remittances from parent/group company abroad or bilateral / multilateral international financing agency.
e. The responsibility of ensuring that only the approved debits and credits are allowed in the foreign currency account shall rest solely with the AD Category–I bank. Further, the accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD Category–I bank.
f. The foreign currency accounts have to be closed at the completion of the project.
Annual Activity Certificate by BO/LO/PO
i. The Annual Activity Certificate (AAC) as at the end of March 31 each year along with the required documents needs to be submitted by the following:
a. In case of a sole BO/ LO/PO, by the BO/LO/PO concerned;
b. In case of multiple BOs / LOs, a combined AAC in respect of all the offices in India by the nodal office of the BOs / LOs. 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.
ii. The designated AD Category – I bank shall scrutinize the AACs and ensure that the activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given. In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with the copy of the AAC and their comments thereon.
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