Establishment of Branch Office/Liaison Office in India by Foreign Entities

August 13, 2012 Posted by India Briefing Reading Time: 4 minutes

Aug. 13 – With the objective of achieving greater transparency and procedural clarity, the Reserve Bank of India (“RBI”) issues the Master Circular on the Establishment of Branch/Liaison Offices in India by Foreign Entities every year on July 2 with a sunset clause of one year, laying down the eligibility criteria and procedural guidelines for setting up of branch offices (BOs) and liaison offices (LOs) in India by any body corporate incorporated outside India including a firm or other association of Individuals (“foreign entity”). The procedure for annual filings to be done by a foreign entity, and procedure for closure of BOs and LOs are also been laid out in the Master Circular.

Eligibility criteria for establishment of BOs/LOs

I. Basic Criteria

II. Additional Criteria

Net worth has been defined as the 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.

Applicants who do not satisfy the above mentioned eligibility criteria and who are subsidiaries of other companies may submit a letter of comfort from their parent company as per the prescribed format, subject to the condition that the parent company satisfies the eligibility criteria mentioned above.

The RBI or the Government of India, as the case may be, has the right to reject an application for non-fulfillment of any other condition(s) or if the proposed business is seen to be opposed the public interest.

Branch offices
Permissible activities for a branch office
Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up branch offices in India with specific approval of the Reserve Bank. Such branch offices are permitted to represent the parent/group companies and undertake the following activities in India:

Export/import of goods
Rendering professional or consultancy services
Carrying out research work, in areas in which the parent company is engaged
Promoting technical or financial collaborations between Indian companies and parent or overseas group companies
Representing the parent company in India and acting as buying/selling agent in India
Rendering services in information technology and devel¬opment of software in India
Rendering technical support to the products sup¬plied by parent/group companies
Foreign airline/shipping companies

Normally, the branch office should be engaged in the activity in which the parent company is engaged.

Restrictions on activities by branch offices
The Reserve Bank has restricted branch offices from indulging in retail trading activities of any nature, manufacturing or processing activities in India, directly or indirectly.
Additional advantages for branch offices in SEZs

The Reserve Bank has given general permission to foreign companies for establishing branches/units in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is allotted to such units, provided they are working on a standalone basis and are functioning within the sectors in which 100 percent FDI is permitted, and complying with additional regulations under the Companies Act, 1956 (Sections 592 to 602).

Remittance of profits from India
Profits earned by the branch offices are freely remittable from India, subject to payment of applicable taxes.

Liaison offices
Permissible activities for a liaison office
A liaison office (also known as a representative office) can undertake only liaison activities, i.e. it can act as a channel of communication between a head office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the head office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an AD Category I bank.

Liaison offices can undertake the following activities in India:

Representing in India the parent company/group companies
Promoting export/import from/to India
Promoting technical/financial collaborations be¬tween parent/group companies and companies in India
Acting as a communication channel between the parent company and Indian companies

Extension of validity of the approval of liaison offices
The designated AD Category I bank may extend the validity period of LOs for a period of 3 years from the date of expiry of the original approval/extension granted by the Reserve Bank, provided the LO has submitted the Annual Activity Certificates (see below) for the previous years and has operated as per the terms and conditions stipulated in the approval.

Additional branch/liaison offices
Additional BOs/LOs can be opened by justifying to the RBI the need for additional offices, subject to a limitation of four i.e., one BO/LO in each zone viz. East, West, North and South. The applicant may identify one of its offices in India as the nodal office, which will coordinate the activities of all offices in India.

Annual Activity Certificates to be submitted by branch/liaison offices
The branch offices/liaison offices have to file an Annual Activity Certificate (AAC) provided by a chartered accountant, at the end of March 31, along with an audited balance sheet on or before September 30 of that year.

Closure of branch/liaison office
Closure of BOs/LOs has to be reported by the designated AD Category I bank to the Reserve Bank.

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