A resident outside India or a foreign company can establish the following types of offices in India:
- Branch Office.
- Liaison Office.
- Project Office.
Step-by-Step Process of Establishing a Branch Office in India:
India, as a major consumer market and a strong global economy, attracts companies worldwide eager to invest and start businesses.
For those outside India, creating a branch office is often the top choice to expand their existing business into India or establish a temporary presence there. Many global businesses use this method to explore the Indian market without long-term commitments.
Consequently, there's a clear rise in foreign companies registering branch offices in India to benefit from its growth and expand their market presence.
What is a Branch Office?
A branch office in India is like an arm of a foreign company's business that is set up and registered in India. This lets the foreign company do business in India while still being a separate legal entity.
When a foreign company opens a branch office in India, it has to follow the rules set by the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs (MCA). The main goal of a branch office is to support and promote the parent company's business in India.
It's important to know that unlike a liaison office, a branch office can do commercial activities in India. But it can only do what the parent company does, like research, technical support, consulting, trading, or acting as a middleman.
It's worth mentioning that the directors of the foreign parent company are responsible for what the branch office does in India, both good and bad. That's why many companies prefer to set up a wholly-owned subsidiary in India instead.
Eligibility for opening a Branch office in India :
An individual living outside India can open a branch office there if they meet certain conditions. These include having a track record of making profits for the last five years in their home country and having a net worth of at least USD 100,000 or an equivalent amount.
However, there's a special rule for individuals or entities that are not financially strong and are subsidiaries of other companies. In such cases, they can give a Letter of Comfort from their parent company, as long as the parent company meets the specified criteria for net worth and profit. This letter assures and supports the branch office's financial activities in India.
Step-by-step process to Set up a Branch Office in India:
- Applying to RBI through AD Bank:
The first step to set up a branch office in India is to apply to the Reserve Bank of India (RBI) through an Authorized Dealer (AD) bank. The AD Bank acts as a middleman between the applicant and the RBI. The application must include all necessary documents, such as a board resolution from the parent company approving the branch's establishment, a copy of the parent company's certificate of incorporation, and details about the planned activities of the branch office.
- KYC Verification from Parent Company's Bank:
As part of the application process, the parent company needs to provide Know Your Customer (KYC) information from its bank. These records typically include a letter of recommendation, bank statements, and other relevant financial information. The AD Bank reviews these documents to confirm their authenticity and assess the parent company's financial stability.
- Prior RBI Approval in Special Cases:
In rare situations where the branch office's planned activities don't match the RBI's automated procedure, prior approval from the RBI may be necessary. To obtain this approval, the applicant must give a thorough and detailed explanation for their request. The RBI will carefully review the application and make a decision based on its merits.
- Registering with ROC:
Once the RBI approves the branch office's establishment, the next step is to register it with the Registrar of Companies (ROC) in the specific state where it'll be located. To complete this registration, the applicant must submit required documents, pay applicable fees, and provide supporting documentation, including the RBI permission letter, the parent company's certificate of incorporation, and the company's articles of association and memorandum.
- PAN Card, TAN, and Opening Bank Account:
After registration with the ROC, the branch office should apply for a Permanent Account Number (PAN) from the Income Tax Department. A PAN card is crucial for financial transactions and tax compliance. Additionally, to enable tax deductions at the source, the branch office must get a Tax Deduction Number (TAN). It's also important for the branch office to open a bank account in India for its financial activities.
- GST and IE Code Registration:
If the branch office sells goods or provides services, it must register for the Goods and Services Tax (GST). GST is an indirect tax on the sale of goods and services in India. Additionally, if the branch office plans to import or export goods, it needs to obtain an Import Export (IE) code from the Directorate General of Foreign Trade (DGFT). This code is necessary for all businesses involved in importing or exporting products.
Document required for Setting up a Branch Office in India:
List of Documents Needed to Set Up a Branch Office in India:
1. Board resolution approving the establishment of the branch office in India.
2. Certified proof of company's incorporation issued by the registrar of companies.
3. Letter providing additional information and explaining the purpose of setting up the branch office in India.
4. Formal application submitted to RBI for approval to establish the branch office.
5. Memorandum of Association (MOA).
6. Articles of Association (AOA).
7. Initial form with basic company details and proposed project office location in India.
8. Declaration form confirming accuracy, compliance, and completeness of provided information.
9. Company's history, nature of business, and key stakeholders information.
10. Directors' names and details required for ROC registration.
11. Shareholders' names, addresses, and shareholdings for ROC registration.
12. Director's declaration confirming compliance with legal requirements and regulations.
Compliances:
- Compliance under Companies Act, 2013 read with allied Rules
- Registering with Ministry of Corporate Affairs [Section 380]
Any foreign company opening a Branch Office in India must register itself with the Ministry of Corporate Affairs (MCA) by submitting Form FC-1 within thirty days of establishing the BO.
Documents needed with Form FC-1 include:
- Certified copy of the foreign company's charter, statutes, or memorandum and articles defining its constitution
- List of directors and secretary of the foreign company
- Power of attorney or board resolution for the authorized representative in India
- RBI approval letter
- Declaration stating that none of the company's directors or the authorized representative in India have been convicted or barred from forming companies, both in India and abroad Complete address of the registered or principal office
- Preparation and filing of Financial Statement [Section 381]
The foreign company must prepare financial statements for its Indian Branch Office following Schedule III guidelines or something similar each financial year. A copy of these statements must be filed with the Registrar of Companies using Form FC-3 within six months after the end of each financial year. Additionally, along with the financial statements in Form FC-3, a list of all the places of business set up by the foreign company in India as of the Balance Sheet date needs to be submitted to the Registrar.
- Audit of accounts
Every foreign company must have its Branch Office's accounts audited by a practicing Chartered Accountant in India or by a firm or limited liability partnership of practicing chartered accountants.
- Filing of Annual Return:
Every foreign company shall prepare and file annual return of its BO within a period of sixty days from the last day of its financial year with the Registrar in Form FC-4.
- Compliances under FEMA Regulations
- Foreign Liabilities and Assets (FLA) Return: Each Branch Office must submit the FLA return by July 15 annually if there are any outstanding foreign assets or liabilities as of the reporting date.
- Annual Activity Certificate (AAC): Every BO needs to file the AAC by March 31 each year with the designated AD Category-I bank and the Director-General of Income Tax (International Taxation), New Delhi.
Liaison office:
According to clause 2(e) of FEMA 22R, a 'Liaison Office' is a business location meant to facilitate communication between the main office or Head Office and entities in India. However, it cannot engage in any commercial, trading, or industrial activities, and it must sustain itself using funds from abroad through regular banking channels.
The purpose of an LO is to promote the parent company's business in India and foster collaboration. It cannot make profits in India or conduct any commercial activities. Its expenses must be covered by funds received from the parent company abroad.
An LO's role is limited to gathering market information and providing information about the company and its products to potential Indian customers.
No person residing outside India can establish a Branch, LO, or any other business location in India without prior approval from the Reserve Bank. In certain cases, authorized banks have been given the power to approve such establishments on behalf of the RBI.
To register a Liaison Office (LO), a foreign entity must meet specific requirements. It should have a profitable track record in its home country for the past three financial years and a Net Worth of at least US$ 50,000 or its equivalent.
Net Worth is calculated as the total of paid-up capital and free reserves, minus intangible assets, according to the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner.
If a foreign entity does not meet these requirements but is a subsidiary of another company, it can provide a Letter of Comfort from its parent company as outlined in Annexure I.
Permitted Activities
A Liaison Office (LO) cannot engage in business activities or generate income in India. Its expenses must be covered by foreign exchange remittances from the Head Office outside India. The main role of an LO is to gather market information and provide information about the company and its products to potential Indian customers.
However, an LO is permitted to:
1. Represent the parent company or group companies in India.
2. Promote exports or imports to or from India.
3. Facilitate technical or financial collaborations between the parent/group companies and Indian companies.
4. Serve as a communication channel between the parent company and Indian companies.
Any activity beyond these permitted activities would violate FEMA regulations.
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Procedure for Establishment of a Liaison Office in India:
- Route Determination:
Prior to initiating the establishment of a Liaison Office in India, it is imperative to meticulously select the regulatory route to be pursued. The options available are through the Reserve Bank of India (RBI) or through the Government approach.
- Acquisition of Prior Approval:
In pursuance of financial activities, it is essential to solicit prior approval from the Reserve Bank of India (RBI). This process typically encompasses a duration of 3-4 weeks, during which the application undergoes comprehensive scrutiny. Additionally, the approval granted can be renewed for an additional period of three years post its expiry.
- Application Submission:
Prior to commencement, the designated application form along with all requisite documentation and particulars is to be submitted to the Indian Authorized Banker (AD).
- Approval Routes:
Under the Foreign Exchange Management Act, 1999 (FEMA), two distinct routes are delineated:
a. Automatic Route: Applicable if the primary business of the foreign entity is eligible for 100% Foreign Direct Investment (FDI) under the automatic route.
b. Approval Route: To be pursued if the principal line of business of the foreign entity pertains to a sector not encompassed within the automatic route.
- RBI Approval:
Following consultation with the Ministry of Finance of the Government of India, the RBI furnishes approval in consonance with the selected route and sector. Subsequent to the acceptance of the application, a Unique Identification Number (UIN) is allocated to the Liaison Office to facilitate its operations.
- Liaison Office Registration:
To establish the legitimacy of the Liaison Office, the registration process must be diligently completed with pertinent agencies such as the Ministry of Corporate Affairs (MCA) and the Registrar of Companies (ROC). Post registration, application for the official Certificate of Establishment of Place of Business is to be made, which is issued by the ROC.
- Compliance & Tax Registration:
In order to ensure strict adherence to legal obligations, all requisite annual reports are to be meticulously prepared and precise financial records maintained. Acquisition of both a Tax Deduction Number (TAN) and a Permanent Account Number (PAN) is imperative to facilitate seamless tax proceedings.
Documentation Required for Establishing a Liaison Office in India:
Below is a comprehensive list of the requisite documentation for the establishment of a Liaison Office in India:
1. Board Resolution
2. Covering letter
3. Draft prescribed Form Part 1
4. Draft prescribed Form Part 2 (Declaration)
5. LO Application
6. Foreign Direct Investment eligibility and Source of Fund
7. RBI format as per KYC
8. Three years of audited financial statements for the years ending December 2018, December 2019, and December 2020
9. Copy of Certificate of Incorporation (COI)
10. Copy of Memorandum of Association (MOA)
11. Articles of Association (AOA)
12. Applicant's background details
13. List of Shareholders (Not requiring approval but necessary for ROC registration)
14. List of Directors (Not requiring approval but necessary for ROC registration)
15. Declaration under Section 380 (Not requiring approval but necessary for ROC registration)."
Project Office:
The establishment and regulation of Project Offices are governed by the Foreign Exchange Management Act, 1999, and Regulations issued by the Reserve Bank of India (RBI). Project Offices are typically set up by foreign entities to carry out projects awarded by Indian companies. RBI permits foreign entities to establish project offices in India if they have secured a contract from an Indian company to execute a project.
Here are the general conditions for setting up a project office in India for a non-resident individual:
1. The project must have obtained the necessary regulatory approvals.
2. The project must be funded directly by inward remittances from abroad.
3. The project can be funded by a bilateral or multilateral International Financing Agency.
4. The Indian company awarding the contract must have received a Term Loan from a Public Financial Institution or bank in India for the project.
Applications for establishing a Project Office in a sector allowing 100% Foreign Direct Investment (FDI) are processed through designated Authorized Dealer (AD) Category I Banks. The applications are submitted to the AD Category I bank in Form FNC along with the required documents as per RBI guidelines.
Project Offices can approach AD Category I Banks in India to open a Non-Interest Bearing Foreign Currency Account for their operations, subject to certain conditions. The account can receive foreign currency receipts from the Project Sanctioning Authority and remittances from the parent/group company abroad or bilateral/multilateral international financing agency. Permissible debits include payment of project-related expenses.
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- Authentication of Documents:
All documentation pertaining to the foreign company must be filed with the Reserve Bank of India (RBI). These include the certificate of incorporation, memorandum of association (MOA), articles of association (AOA), and board resolutions. It is imperative that any documents signed by the authorized signatory of the foreign entity undergo legalization by the Indian Embassy or apostillation in accordance with the Hague Convention.
- Submission of Application to the Reserve Bank of India through AD Bank:
The parent company's application is lodged with the Foreign Exchange Department (FED) of the RBI. This submission is facilitated through an Authorized Dealer (AD) Bank. The role of the AD Bank is pivotal as it serves as the conduit for all communications with the RBI.
- Know Your Customer (KYC) Verification from the Parent Company's Bank:
A formal request for document verification is directed to the foreign company's banking institution. The verification process is conducted via the SWIFT system. Once the foreign bank confirms the authenticity of the submitted documents, the application proceeds for regulatory approval. Depending on the circumstances, the RBI/AD may request additional documentation.
- Approval of Project Office Registration by the Reserve Bank of India:
Upon establishment, the subsequent step involves the opening of a bank account for the project office. Foreign Direct Investment (FDI) must be infused within 180 days of the company's formation, with prior intimation to the designated banker.
- Registration of Foreign Company's Project Office with the Registrar of Companies (ROC):
Within 30 days of receiving RBI clearance for the establishment of the Project Office in India, an application for project office registration of the foreign entity is filed. If there exists an Indian director, obtaining a Director Identification Number (DIN) is mandatory, along with the digital signature of the authorized signatory for electronic filing of statutory documents with the ROC.
- Initiation of Bank Account Opening, PAN Card Acquisition, and Tax Deduction Number Procurement:
PAN numbers, comprising unique 10-digit identifiers, are issued by the Indian income tax authority. Subsequent to receipt of the PAN number, the branch office can proceed with the opening of a bank account. Compliance with Tax Deduction at Source (TDS) regulations necessitates the acquisition of a Tax Deduction Account Number (TAN) by every taxpayer.
- Obtaining Additional Licenses and Registrations:
Upon dissolution of the Project Office, various compliance measures are undertaken in accordance with the pertinent industry and state-specific regulations applicable to all commercial entities. These may include compliance with the Goods and Services Tax (GST), the Professional Tax Act, the Provident Funds Act, and the Employee State Insurance Act (ESIC), among others.
Article by
Ayush Gupta, Legal Intern at Corpzo
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