Foreign Investment in India is governed by the FDI policy announced by the government of India, FEMA, and regulations issued by RBI. The FDI policy lays down the broad framework providing for eligibility of doing business in India. A foreign company planning to do business in India can represent through a Liaison office/Representative office, a Project office or branch office as per the (Foreign Exchange Management Regulations 2000).It can be established through two routes viz RBI route ,Government route. The Foreign Company or foreign nationals also have the option of incorporating new companies in India or even can invest into companies incorporated in India subject to the sector caps as prescribed under the guidelines.
A branch office is an establishment which carries on substantially the same business and activity is carried out by its head office.
Branch office help a company in :-
1) Diversifying a company its business to diverse locations
2) Accessibility to product beyond geographical jurisdiction
3) Effective distribution and marketing of its goods and services.
4) Direct access to international customers
5) Opportunity to explore new avenues
6) Profitability and sustainability.
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.The RBI has issued FEM Regulations 2000 in this regard.
Activities Permitted for Branch offices
- Branch offices in India are permitted to represent the parent/group companies and undertake following activities.
- Export/import of goods
- Rendering professional or consultancy services.
- Carrying out research work in which the parent company is engaged
- Promoting technical or financial collaborations between Indian and overseas companies
- Representing parent company in India and act as buying/selling agent in India.
- Rendering services in IT and development of software in India.
- Rendering technical support to products supplied by parent company.
- Foreign airline/shipping company.
Activities Not Permitted for Branch offices
- Retail trading activities of any nature is not allowed.
- cannot carry out manufacturing/processing activities .
Branches of banks
Foreign Banks do not require approval form RBI under FEMA, if such Bank has obtained necessary approval under the provisions of the Banking Regulation Act,1949 from the Reserve Bank.
Branch office in Special Economic Zones
RBI has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:
- Such units are functioning in those sectors where 100 per cent FDI is permitted,
- Such units comply with part XI of the companies Act (Section 592 to 602),
- Such units 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 Authorized Dealer Category-I Bank with the documents as mentioned in “Closure of Office ” except the copy of RBI approval.
Companies which are incorporated outside India can establish liaison office In India with the specific approval of RBI.It acts a liaison ie acts as a channel of communication between head office abroad and parties in India.
It is not allowed to undertake any business activity and cannot earn any income in India.The role of such offices is therefore limited to collecting information about possible market oppurtunities and providing information about the company and its products to the prospective Indian customers.Permission to set up liaison office is initially granted for a period of 3 years which may be extended from time to time.
Residential status of a branch or liaison office :
By FEMA guidelines both are treated as persons resident in India.
Activities Permitted for Liaison offices Liasion offices in India are permitted to represent the parent/group companies and undertake following activities.
- Representing In India the parent company
- Promoting export/import to India.
- Promoting technical /financial collaborations between parent and companies in India.
- Acting as communication channel between the parent companies and Indian companies.
Activities Not Permitted for Liaison offices
- It is not allowed to undertake any business activity in India and cannot earn any income in India.
- Foreign Insurance companies can establish Liasion offices in India only after obtaining approval from Insurance regulatory and development authority (IRDA).
A foreign company planning to do business in India can do through a Liaison office/Representative office, a Project office or branch office as per the FEM(Foreign Exchange Management Regulations 2000).It can be established through two routes viz RBI route ,Government route.
a)RBI route- Where principal business of the foreign entity falls under sectors where 100 percent Foreign Direct Investment (FDI) is permissible under the automatic route.
b)Government Route– Where principal business of the foreign entity falls under sectors where 100 percent Foreign Direct Investment (FDI) is not permissible under the automatic route.
Application to RBI in form FNC through designated authorised dealer Companies incorporated outside India,desirous of opening a liaison office/branch office have to make an application in form FNC and RBI has authorised AD category 1 bank to forward form FNC. FNC should be submitted with the following documents
- English version of the certificate of incorporation / Registration or Memorandum & Articles of Association attested by Indian Embassy/ Notary Public in the country of Registration.
- Latest Audited Balance Sheet of the applicant entity.
Due Diligence by authorised dealer
The designated AD category -1 bank should exercise due diligence in respect of the applicants background , antecedents of the promoter,nature and location of activity ,source of funds and also ensure compliance with the KYC norms before forwarding the application together with their comments/recommendations to Reserve Bank.
Unique Identification Number
The branch/liaison office established with the Reserve bank’s approval are allotted a Unique Identification number (UIN).UIN has to be quoted on all future correspondences.
ANNUAL ACTIVITY CERTIFICATE
The annual activity certificate at the end of March 31 should be submitted to the designated AD category -1 bank by the branch/liaison offices in the prescribed format before April 30.
A copy of the annual activity certificate should also be submitted to the Directorate General of Income Tax New delhi.The designated AD category -1 bank shall scrutinize the annual activity certificate and ensure that the activities are carried out in accordance with the terms and conditions of the approval of RBI.
Remittance of profit or surplus by branch/liaison office
A person resident outside India permitted by the Reserve Bank,to establish a branch office in India may remit outside India the profit of the branch net of applicable Indian taxes,on production of the following documents ,to the satisfaction of the authorised dealer through whom the remittance is affected.
For remittance of profit of branch
- Certified copy of the audited balance sheet and profit and loss account for the relevant year.
- A chartered accountants certificate certifying that everything is properly calculated.
Acquisition /Transfer of properties
Branch/project offices of a foreign entity ,excluding a Liaison office are permitted to acquire property for their own use and to carry out permitted activitiest not but for leasing/renting out the property .
Tansfer of assets of liaison /branch office to subsidiaries or other branch offices is allowed with specific approval from RBI.
The work related to closure of branch office/liaison is handled by designated AD category -1 bank.A s per regulations from FEMA 2000,the remittance of winding up proceeds of a branch office in India of a person resident outside India is supported by following documents
Copy of RBI’s approval for opening branch office.
- indicating the manner in which the remittance amount has been arrived and supported by statement of assets and liabilities of the applicant and manner of disposal of assets.
- confirming that all liabities including arrears of gratuity and other benefits to employees have been either fully met.
- confirming that no income accruing from sources outside India has remained un-repatriated to
- Tax clearance certificate from Income Tax authority for remittances.
- confirmation that no legal proceedings in any court are pending and no legal impediment.
- A report form ROC regarding compliance with the provisions of Companies act 1956,in case of winding up of office.
- Any other document specified by RBI during approval.
- Ensure about filing of all annual activity certificate with RBI
The designated AD category -1 has to ensure that branch/liasion has filed their respective annual activity certificate with the Reserve bank for previous years.
DECLARATION BY THE AUTHORISED DEALER ABOUT THE VALIDITY OF THE DOCUMENTS
Closure of such branch/liaison office has to reported by the designated AD category -1 bank to the RBI along with a declaration stating that all necessary documents filed by branch office have been scrutinised and found in order.If not found in order designated AD category -1 bank may forward the application to RBI with necessary action.
At the time of closure of Branch Offces, the entities have to approach the Central Office of the Reserve Bank for approval, with the same set of documents as mentioned above,whereas Liaison offices has to approach the respective Regional Office of the Reserve Bank with the documents.
OPENING OF PROJECT OFFICE IN INDIA
Reserve bank has granted general permission to foreign companies to establish Project offices in India,provided they have secured a contract from an Indian company to execute a project in India
- the project is funded directly by inward remittance from abroad
- the project is funded by a bilateral or multilateral international financing agency
- the project has been cleared by an appropriate authority
- a company or entity in India awarding the contract has been granted term loan by a public financial instituiton or a bank in India for the project. It may be noted that form FNC can be used for opening along with copy of the secured contract.
Opening of foreign currency account
AD category -1 banks can open non-interest bearing Foreign currency account for Project office in India subject to following:
- The project office has been established in India ,with the general/specific permission of Reserve bank ,having the requisite approval from concerned pjt sanctioning authority
- The contract under which the project has been sanctioned ,specifically provides for payment in foreign currency
- Each project has only one Foreign currency account.
- The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from project sanctioning authority.
- The responsibility of ensuring that only the approved debits and credits are allowed in the Foreign
- currency account shall rest solely with the concerned branch of the AD.
- Foreign currency account has to be closed at the completion of the project.
Intermittent Remittances by Project offices in India
AD Category-I branch can permit intermittent remittances by Project Offices pending winding up/completion of the project provided they are satisfied with the bonafide of the transaction, subject to the following:
- The Project Office submits an Auditors/ Chartered Accountants Certificate to the effect that sufficient provisions have been made to meet the liabilities in India including Income Tax etc.
- An undertaking from the Project Offices that the remittance will not, in any way, affect the completion of the project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.
- Inter Project transfer of funds requires prior permission of the concerned Regional Office of the Reserve Bank under whose jurisdiction the Project Office is situated.
Further Compliances under Companies Act 2013
The branch/liaison/project offices representing foreign companies have to comply with the provisions of Indian Companies Act, 2013.The foreign companies are required to submit their information to Registrar of Companies like financial statements,registration of charges on properties held by it in India,change in Board constitution ,cessation of business in India etc.
Other documents required for setting up such office:
The foreign company establishing a Project Office in India is required to furnish a report through the concerned AD Category – I bank branch to the concerned Regional Office of Reserve Bank of India under whose jurisdiction the Project Office is set up within 60 days of establishment of the new Project Office with the following details.
(i) Name and address of the Foreign Company,
(ii) Reference Number and date of letter awarding the contract
(iii) Particulars of the authority awarding the projects / contract,
(iv) The total amount of contract,
(v) Address / e-mail address, / telephone number / fax number of the Project Office,
(vi) Tenure of Project Office,
(vii) Brief details of the Project undertaken,
(viii) AD branch with whom the account has been opened and the foreign currency in which the account is opened.
(ix) An undertaking to the effect that the Project Office is eligible to avail of the General Permission under Regulation 5.
Master Circular is available at this link