The Foreign Exchange Management Act, 1999 allows for foreign enterprises to set up representative entities in India to carry out operations in the country and reach Indian customers. Foreign companies may do so by establishing liaison offices or branch offices. A foreign company can set up as a Branch office, Liaison office or as a Project office.
Liaison Office L/O
In the case of a liaison office, it can only act as a bridge between the entity in India and the foreign headquarters. Since its role is limited, it is first only granted permission to operate for 3 years. The liaison office will be required to provide information about the head organization and all the products or services that are offered by them to the Indian customers as a requirement.
The foreign company that wants to set up the office must have a track record of profit making for the immediately preceding three financial years and should have a minimum net worth of $50,000.
As per RBI guidelines, the liaison office is allowed to carry out limited activities and cannot do full fledged business like a private limited company.
Branch Office B/O
With regards to the branch office, it can only be set up by those organizations that are engaged in manufacturing or trading activities in India. These branches do not themselves have a separate legal entity and is suited to those organisations who are only looking for a temporary presence in India. The main purpose of a branch office is to expand its customer base within India. It is not allowed to conduct retail trading but it is allowed to freely remit its profits back to the home country after being subject to taxation laws.
The foreign company must have a track record of 5 years of profit making in the immediately preceding years and must have a minimum net worth of $100,000.
Both organisations must submit the latest audited balance sheet which must be certified by a public accountant.
Both must submit the Certificate of Incorporation and Articles of Association which are to be attested by the Indian Embassy or the notary public in the home country.
The organisation must also procure the Bnaker's Report which will clarify how long the applicant has had banking relations with the specified bank.
Procedure for Setting Up
Form FNC(As per Annexure A) must be submitted via AD Category -1 to the RBI.
Once the RBI approves, a Unique Identification Number will be granted.
The applicant must also apply for a Permanent Account Number before setting up operations.
If the foreign company is for some reason unable to satisfy the eligibility criteria, it may submit a Letter of Comfort (As per Annexure B).
What is a LO allowed to do?
The LO acts as a representative of the foreign company and as such it is allowed to promote import/export activities and the technical and financial cooperation between Indian companies and the parent organisation.
What is BO allowed to do?
A BO can actively engage in import/export activities and can also render consultancy services in India. It can also promote technical and financial cooperation between Indian firms and the parent company and can provide IT services if necessary. The BO may also provide technical assistance to local customers of the products supplied by the parent company.
The following categories of business must get prior approval from the RBI before setting up a BO/LO -
Defense, telecom, private security, broadcasting
Companies that want to set up in a Special Economic Zone (SEZ)
Additionally, citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau must take prior approval as well. Entities from these countries must also get prior approval to purchase immovable property in India.
Companies from Nepal are only allowed to set up LOs and not BOs.
Opening of a Joint Bank Account
Both BOs and LOs may open a bank account in India in order to send the remittance from the offices in India. However, if they want to open more than one account then they must take the permission of the RBI.
Submission of Annual Activity Certificate (AAC)
BO/LO are both required to submit the AAC every year on the 31st of March along with the audited balance sheet. The AAC must be submitted via the designated AD Category -1 bank as well as Director General of Income tax. If there are multiple offices, then the AAC must be a single certificate which is a combination of all the offices' activities.
Compliances under the Companies Act , 2013
BO/LO in India will be governed by Chapter XX11 of Companies Act, 2013 which concerns companies that are incorporated outside India. After the RBI approves the formation of the BO/LO, the applicant must register themselves under the Companies Act.
e-Form FC1 must be filed to the Ministry of Corporate Affairs within 30 days of establishment. e-Form FC2 must also be filed which is for return of alteration.
e-Form FC3 is to be filed for the return of annual accounts along with the list of all principal places of business while e-Form FC4 is for the annual return of the foreign company.