What steps should be taken by Foreign Companies to set up their operations in India?
India has becomes the top most growing and developing country with new technology, vast natural and human resources, and with diversified opportunities to foreign companies. Indian law provide number of ways and opportunities to set up their offices and entities in India to expand and grow their business.
Foreign Companies can set up their operations in India through:
- Branch Office
- Liaison Office/Representative Office
- Project Office A) Opening of Branch office in India
Foreign Companies are allowed to set up a branch office/ in India. But unlike the case of setting up a Company, a branch office requires an approval from the Reserve Bank of India (RBI). Only after getting the branch license from RBI, the foreign company is allowed to commence the operations
Conditions and Requirements
- Name: The name of Indian Branch office shall be same as parent company.
- Approvals and Applications: With effect from February 1, 2010, foreign companies/ entities desirous of setting up of Branch Office are required to submit their application in Form FNC along with following:
( a) English version of the Certificate of Incorporation / Registration or Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration.
(b) Latest Audited Balance Sheet of the applicant to Foreign Investments Division, Foreign Exchange Department, Reserve Bank of India through an Authorised Dealer Bank.
The applications from such entities in Form FNC will be considered by the Reserve Bank under two routes:
- Reserve Bank Route– Where principle business of the foreign entity falls under sectors where 100 percent Foreign Direct Investment (FDI) is permissible under the automatic route.
- Government Route– Where principle business of the foreign entity falls under the sectors where 100 percent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non- Government Organisations/ Non- Profit Organisations/ Government Bodies/ Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.
- Track Record of the Company: RBI considers the track record of the applicant company, the foreign parent company looking to start a Branch Office in India shall have a profitable track record during immediately preceding five years in the home country.
- Net Worth: The Net worth i.e. 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 by whatever name shall be not less then or equal to USD 100,000.
- Letter of Comfort: In case companies willing to setup Branch office are Subsidiaries’ of the Foreign Parent Company they need to provide Letter of Comfort from the Parent Company provided the other conditions of eligibility are satisfied.
- Permanent Account Number (PAN): The Branch Office must also get PAN from Tax Authorities and Unique identification numbers from RBI before getting License of setting up operation in India.
- Due Diligence: Foreign Entity intending to apply for Branch Office license in India must get through detailed Due Diligence, by Authorised Merchant bankers – category 1 on criteria’s of background check, promoter antecedent’s check, nature and location of activity and other KYC norms.
- The Branch office does not have any ownership; it is just extension of the existing company in the foreign country.
- All the expenses of the Branch office are met by the head office, if it does not have the revenue from Indian operations.
Documentation Required for Branch Office
- Applicant if satisfy the eligibility criteria shall submit application Form FNC- 1
- Letter from the principal officer of the Parent company to RBI.
- Letter of authority from the parent company in favour of Local Representative.
- Letter of authority/ Resolution from parent company for setting up BRANCH office in India.
- Comfort letter from the parent company intending to support the operation in India.
- Two copies of the English version of the Certificate of Incorporation, Memorandum & Articles of association (Charter Document) of the parent company duly attested by the Indian embassy or notary public in the country of registration.
- Certification of Incorporation – Translated & Duly Notarized and properly authenticated.
- The Latest audited Balance sheet and annual accounts of parent company duly Translated notarized for past Three years and properly authenticated
- Name, Address, email ID and telephone number of the authorized person in Home Country.
- Details of Bankers of the Organization the Country of Origin along with the bank account number
- Commitment from the Organization to the effect that it will be open to report / opinion sought from its banker by the Government of India / Reserve Bank of India
- Expected funding level for operations in India.
- Details Relating to address of the proposed local office, number of persons likely to be employed, number of Foreigners among such employees and address of the head of the Local office, if decided
- Details of Activity carried out in Home Country by the applicant organization in brief about the product and services of company in Brief.
- Bankers Certificate
- Latest Proof of identity of all the Directors – Properly Certified by Banker in Home Country and duly authenticated
- Latest Proof of address all of Directors – Properly Certified by Banker in Home Country and duly authenticated
- Details of the Individuals / Company holding more 10% of Equity
- Structure of the Organization and its Shareholding pattern
- Complete KYC of Shareholders holding more than 10% Equity in the Applicant Company
- Resolution for Opening up Bank Account with the Banker
- Duly Signed Bank Account Opening Form for Indian Bank
Permitted activities by the Branch
Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India 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 company.
- Representing the parent company in India and acting as buying / selling agent in India.
- Rendering services in information technology and development of software in India.
- Rendering technical support to the products supplied by parent/group companies.
- Foreign airline / shipping company.
- Foreign Banks
Prohibited activities by the Branch
- Retail trading activities of any nature is not allowed for a Branch Office in India
- A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
Other Requirements for Branch Office
Every Branch office registered with RBI shall get itself registered with the Ministry of Corporate Affairs, It is a registration by the Branch office as a establishment of foreign company in India. On such registration a CIN i.e., Corporate Identity Number is allotted by the Registrar of Companies, the following requirements are also necessary for a branch office:
- Permanent account number – PAN
- Tax deduction number – tan number Shop & establishment
- Registration Service Tax Registration, if the Branch provides any services in India
- VAT & CST Registration, If the Branch carries out trading activities in India
Acquiring Property in India
- Branch Offices of a foreign entity are permitted to acquire property for their own use and to carry out permitted/incidental activities but not allowed to buy for the purpose of renting it out
- Entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years.
Reporting to Director General of Police (DGP)
- Submit a report containing information in the prescribed format within five working days of the Branch Office becoming functional to the Director General of Police (DGP) of the state concerned in which Branch office has established its office;
- If there is more than one office of such a foreign entity, submit report to each of the DGP concerned of the state where it has established office in India.
Annual Compliances Required for Branch Office
Every year a branch office is required to undertake the following activities:
- Maintenance of Books of Account
- Getting Annual Accounts audited
- Filling of Annual Activity Certificate with RBI
- Filling of Annual Return and Balance sheet with Registrar of Companies
- Intimating any change in constitution of Foreign Company to RBI & ROC
- Intimating any change in Directors of Foreign Company to RBI & ROC
- Intimating each and every change in the BRANCH office to RBI & ROC
- No additional place of business can be started unless approval is taken from RBI.
B) Liaison Office/Representative Office
A Liaison Office or a Representative Office can undertake only liaison activities, which means that it can act as a channel of communication between the Head Office (outside India) and parties in India. It could be established with the approval of the government of India. It is not allowed to undertake any commercial activity in India. As there is no income of Liaison Office of its own, its expenses are to be met entirely through inward remittances from the parent company outside India received in Convertible Foreign Exchange.
In terms of permitted activities, a liaison office can do the following listed activities in India:
- Act as a channel between the Head office and parties in India.
- Collect market information and provide information about the products to Indian customers.
- Promote exports/Import from/to India
- Promote technical/financial collaboration between parent company and Indian customers.
- Open Non-Interest bearing INR current account with Category-1 Banks in India
If the foreign entity’s perspective to enter India covers in the above listed permitted activities, then Liaison Office is the best option. Establishment of Liaison Office/Representative Office in India is governed by Reserve Bank of India (RBI) together with Ministry of Finance, Government of India. The rules and regulations in respect to Liaison Offices are framed under Foreign Exchange Management Act, 1999 and Circulars/Notifications issued by RBI from time to time.
Foreign insurance companies can establish liaison offices in India, after obtaining approval from the Insurance Regulatory and Development Authority (“IRDA”). Foreign banks can establish liaison offices in India only after obtaining approval from the Department of Banking Operations and Development, RBI.
All conditions and requirements of Branch office are applicable on Liaison office as well. Some specials requirements for Liaison office are:
Net Worth: For liaison office net worth must not be less than USD 50,000 or its equivalent.
Track Record: For liaison office a profit making track record during the three years immediately preceding three years in the Home country.
The other perquisites of Liaison Office application are to have a designated manager of the proposed Liaison Office and a prospective office space of the proposed Liaison Office which can be provided by consultants who help the foreign entities in applying for LO as part of their services which is called Virtual Office or Service Office Services.
The Application has to be made to RBI through Authorized Dealer Category-1 Bank in India. RBI will allot a UIN (Unique Identification Number) on approval of application. Once approved the intimation has to be given to Registrar of Companies (ROC) and Director General of Police (DGP). An application has to be sen to the Income Tax Department to allot Permanent Account Number (PAN).
A Liaison office has to do minimal annual compliances as compared to other forms of business in India.
As annual compliance, an annual activity certificate issued by a Practicing Chartered Accountant at the end of March 31 every year, need to be submitted to the Authorized Dealer Category-1 Bank, Directorate General of Income Tax (International Taxation), concerned Registrar of Companies and Director General of Police, on or before 30th September of each financial year (In India the Financial Year is April to March) including audited receipts and payments account.
C) Project Office
A “Project Office” means a place of business established to represent the interests of a foreign company executing a project in India. Such offices are prohibited from undertaking or carrying on any activity other than the activity relating and incidental to the execution of the project for which such office is established.
In order to set up a project office, a foreign company has to secure a contract to execute a project in India from an Indian company, and the fulfilment of one of the following conditions:
- Such project is funded directly by inward remittance from abroad; or
- Such project is funded by bilateral or multilateral international financing agency; or
- Such project has been cleared by an appropriate authority; or
- The company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project.
If either of the above conditions is not met, the foreign entity has to approach the RBI for approval.