Establishing liaison or branch or project office in India

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Introduction

On 31 March 2016, the Reserve Bank of India (RBI) issued revised regulations for establishment of a branch office or a liaison office or a project office or any other place of business in India by a person resident outside India. The RBI also issued procedural guidelines in this regard on 12 May 2016.

Background

  • The Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 (Regulation 2016) has superseded the erstwhile regulations issued by the RBI, i.e., the Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000 (Regulation 2000).
  • RBI has additionally issued a circular on 12 May 20161 and updated the master direction on this subject on 17 May 2016.2 These provide procedural guidelines and instructions with respect to the revised framework for setting up of a Liaison Office3 (LO), Branch Office4 (BO) and Project Office5 (PO) in India.

Revised framework

Regulation 2016 has made the following key changes to Regulation 2000: Delegated power of approving applications

  • RBI’s power to approve applications for establishment of an LO/BO/PO by foreign entities whose principal business falls under sectors where 100% Foreign Direct Investment (FDI) is allowed, has been delegated to Authorized dealer category-I banks (AD Bank), except in cases where the applicant:
  1. Is a citizen of or registered/incorporated in Pakistan;
  2. Is a citizen of or registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and application is for opening a LO/BO/PO in Jammu & Kashmir, North East region or Andaman and Nicobar Islands;
  3. Principal business falls in defence/telecom/private security/ information and broadcasting sector. However, no separate reference or approval of the Government of India (GoI) will be required in respect of proposal for opening of a PO relating to the defence sector, if contract for which the PO is opened has been awarded by/entered into with the Ministry of Defence or Service Headquarters or Defence Public Sector Undertakings; and
  4. Non-Government Organization (NGO), Non-Profit Organization (NPO), Body/Agency/Department of a foreign government
  • In cases approved by the AD Bank, the LO/BO/PO has to be opened within six months from the date of approval. AD Bank may consider granting extension of time for a further period of six months. Any further extension will require RBI’s approval.

Letter of Comfort

  • In case of a LO/BO, if the applicant is unable to meet the eligibility criteria (profitability and net worth) provided in Regulation 2016, then such applicant, if it is a subsidiary of another company, may submit a ”Letter of Comfort” (LOC) from its parent or group company, provided such parent or group company satisfies the eligibility criteria provided in Regulation 2016. The parent/group company should issue LOC only if it undertakes to fund the operations, if required.

Requirement of submitting report to the Director General of Police (DGP) removed

  • The erstwhile master directions issued by RBI required new entities setting up
  • LO/BO/PO in India to submit a report, within five working days of the LO/BO/PO becoming functional, to the DGP of the state wherein the office of the LO/BO/PO is established. The said obligation has now been removed.

Delegated power for opening of additional BO/LO and shifting of BO/LO to another city or within the same city

  • Regulation 2016 requires applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan, who are desirous of opening BO/PO/LO in India, to register with relevant state police authorities. Additionally, the AD Bank is required to mark a copy of the approval letter for “persons” from these countries to the Ministry of Home Affairs, Internal Security Division-I, GoI, New Delhi for their record or necessary action.
  • The powers of RBI for the following has also been delegated to AD Bank:
  1. Approving additional BO/LO. For the said purpose, in addition to fresh Form FNC, a justification for the need of additional office is also required to be given. In case of more than four offices, approval of the RBI will be required.
  2. Approving the shifting of BO/LO to another city. For intra-city shifting, AD Bank is only to be intimated.

Change in name of office or top management

  • Change in name of an existing BO/LO may be permitted by the AD Bank provided there is a change in the name of the non-resident entity without change in ownership. Where change in name is requested due to acquisition/merger of the non-resident entity involving change in ownership, the acquired/new entity is required to make a fresh application after closing the existing BO/LO.
  • Any change in the top management or Chief Executive Officer/Managing Director, etc. of the BO/LO is only required to be intimated to the AD Bank and does not require prior approval of RBI.

Annual Activity Certificate (AAC) by BO/LO/PO

  • Under Regulation 2016, a specific clause in respect of filing of AAC by PO has been included. The same is only to be submitted to the AD Bank. The AAC is to be obtained from a charted accountant certifying the project status. It should also state that accounts of the PO have been audited and the activities are in conformity with the permissions granted by RBI.

Miscellaneous

  • The validity period of an LO is generally three years and same may be extended further by the AD Bank. However, validity period of LO of entities engaged in construction and development sectors or non-banking finance companies is two years without an option to extend.
  • Donation by BO/LO/PO of old furniture, vehicles, etc., to NGOs or NPOs may be permitted by AD Bank after satisfaction of the authenticity of the transaction.
  • The AD Bank may extend fund and/or nonfund based facilities to BO and PO, subject to compliance of guidelines issued by RBI.
  • A foreign entity (except from Pakistan), which has been awarded a contract for a project by a government authority/public sector undertakings or has been permitted by the AD Bank to operate in India, is allowed to open a bank account for its PO with the AD Bank without prior approval of RBI.
  • To obtain permission with respect to intermittent remittances, the PO will additionally be required to submit certified copy of the final audited project accounts.

Implications

Regulation 2016 follows the Government’s ”Ease of doing business in India” policy and liberalizes the procedure for non-residents to set up a place of business in India by delegating several powers of the RBI to AD Bank. It, thereby, makes the entire process time efficient as well as more transparent.