Mamta Binani, B,COM, FCS
Practising Company Secretary & Immediate Past Chairperson-EIRC of ICSI
Sunday, 11 September 2011Options for Setting up Business Establishment in India by a Foreign Company
What are the forms in which business can be conducted by a foreign company in India?
A foreign company planning to set up business operations in India may:
Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.
To lend clarity in understanding, some issues have been clarified in question format.
What is the procedure for receiving Foreign Direct Investment in an Indian company?
An Indian company may receive Foreign Direct Investment under the two routes as given under:
i. Automatic Route
FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for Investment' issued by the Government of India from time to time, are attracted.
FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India.
And there is also the:
ii. Government Route
What is the procedure to be followed after investment is made under the Automatic Route or with Government approval?
A two-stage reporting procedure has to be followed :.
• On receipt of share application money :
Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Regional Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, the Advance Reporting Form, containing the following details :
Name and address of the foreign investor/s;
Date of receipt of funds and the Rupee equivalent;
Name and address of the authorised dealer through whom the funds have been received;
Details of the Government approval, if any; and
KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.
• Upon issue of shares to non-resident investors :
Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the following documents should be filed with the Regional Office concerned of the Reserve Bank of India.
Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that:
The company has complied with the procedure for issue of shares as laid down under the FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.
The investment is within the sectoral cap / statutory ceiling permissible under the Automatic Route of the Reserve Bank and it fulfills all the conditions laid down for investments under the Automatic Route, namely-
Are the investments and profits earned in India repatriable?
All foreign investments are freely repatriable (net of applicable taxes) except in cases where:
i) the foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period; and
ii) NRIs choose to invest specifically under non-repatriable schemes.
Further, dividends (net of applicable taxes) declared on foreign investments can be remitted freely through an Authorised Dealer bank.
Let me now discuss, in brief, setting up of Branch/ Liaison Office of a foreign company in India.
The process of setting up Branch/ Liaison office in India is cumbersome in comparison to setting up a registered office in India. Moreover having a registered office will give an immense sense of confidence to the customers in India.
For the purposes of better and thorough understanding, the process of setting up/ opening of Liaison/ Branch office in India is mentioned herein below:
A. With effect from February 1, 2010, foreign companies/entities desirous of setting up of Liaison Office are required to submit their application in Form FNC along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai through an Authorised Dealer bank.
Permission for setting up Branch Offices is granted by the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. Reserve Bank of India considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinising the application. The application in Form FNC should be submitted to the Reserve Bank through the Authorised Dealer bank.
The 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, and
i. the project is funded directly by inward remittance from abroad; or
ii. the project is funded by a bilateral or multilateral International Financing Agency; or
iii. the project has been cleared by an appropriate authority; or
iv. a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
However, if the above criteria are not met or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai for approval.
B. The applications from such entities in Form FNC will be considered by the Reserve Bank under two routes:
· Reserve Bank Route - Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
· Government Route - Where principal business of the foreign entity falls under the sectors where 100 per cent 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.
C. The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison/Branch Offices of foreign entities
• Track Record
· For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
· For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.
• Net Worth [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].
· For Branch Office — not less than USD 100,000 or its equivalent.
· For Liaison Office — not less than USD 50,000 or its equivalent.
D. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Authorised Dealer in whose jurisdiction the office is set up. The Branch / Liaison offices established with the Reserve Bank's approval will be allotted a Unique Identification Number (UIN) ( www.rbi.org.in/scripts/Fema.aspx ). The BOs / LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.
E. Liaison/Branch offices have to file an Annual Activity Certificate (AACs) from the Auditors, as at end of March 31, along with the audited Balance Sheet on or before September 30 of that year, stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India. In case the annual accounts of the LO/ BO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.
What are the permitted activities of Liaison Office/ Representative Office?
A. Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. A Liaison Office can undertake the following activities in India :
i. Representing in India the parent company / group companies.
ii. Promoting export / import from / to India.
iii.Promoting technical/financial collaborations between parent/group companies and companies in India.
iv. Acting as a communication channel between the parent company and Indian companies.
What are the permitted activities of Branch Office?
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. Such Branch Offices are permitted to represent the parent / group companies and undertake designated activities in India.
Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.
Note :
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.
Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
What are the general conditions applicable to Liaison/Branch/Project Office of foreign entities in India?
The general conditions applicable to Liaison/Branch/Project Office of foreign entities in India are as under:
(i) Without prior permission of the Reserve Bank, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.
(ii) Partnership / Proprietary concerns set up abroad are not allowed to establish Branch/ Liaison/Project Offices in India.
(iii) Entities from Nepal are allowed to establish only Liaison Offices in India.
(iv) 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/incidental activities but not for leasing or renting out the property. However, 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.
(v) Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorised Dealers for opening the accounts.
(vi) Transfer of assets of Liaison / Branch Office to subsidiaries or other Liaison/Branch Offices is allowed with specific approval of the Central Office of the Reserve Bank.
(viii) Authorised Dealers can allow term deposit account for a period not exceeding 6 months in favor of a branch/office of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.
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