. ESTABLISHMENT OF OVERSEAS OFFICES BY INDIAN COMPANIES and Investment in overseas Joint Ventures (J/V)

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ESTABLISHMENT OF OVERSEAS 

OFFICES BY INDIAN COMPANIES

In the globalised scenario where the Companies export products and/or execute projects abroad, it is inevitable for Indian firms and companies to open offices in foreign countries. Such offices can be doing trading activities or non-trading activities such as liaison work, marketing etc. The Indian firms and companies may post a representative abroad for promotion of their business.

Such companies have to comply with the laws of the foreign country where they are opening offices. Since opening office abroad involves by an Indian company the use of foreign exchange outside India, such Indian companies have to follow procedures prescribed by the Reserve Bank of India.

The Indian companies can also participate in overseas Joint Ventures (J/V). "Joint Venture (JV)" means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes a direct investment.

They can also set up wholly owned subsidiaries (WOS) abroad. "Wholly Owned Subsidiary (WOS) "means a foreign entity formed, registered or incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party.

Under automatic route the Company (Indian Party) can invest up to 400% of the net worth (paid up capital + free reserves) in the overseas JV/WOS. However if the investment is made through EEFC (Exchange Earners’ Foreign Currency) Account the limit of 400% is not applicable. The investment has to be routed through normal banking channels and the same has to be reported to RBI in Form ODI in the stipulated time frame.

The approval of RBI is required in case of investment exceeding the above limit.

Note that under the automatic route there is no need to have track record in India before making the investment. That mean to say a new Company without having any past track records can make investment. But under approval route past track record is one of the criteria for RBI while considering the application. Start ups may not be in a position to get the approval of RBI.

No prior permission of Reserve Bank is required to open offices (trading or non-trading) abroad or post representatives abroad by Indian firms/companies.

The Indian firm/companies should submit applications to their bankers (authorized dealers) in form OBR along with the particulars of their turnover duly certified by their auditors and also a declaration to the effect that they have not approached/would not approach any other authorized dealer for the facility being applied for. The application form OBR needs to be filled in with necessary details along with supporting documents.  After which the foreign exchange is released by the authorized dealer (bank).

Foreign Exchange released by the Bank Authorized dealers may release exchange towards initial expenditure as also for recurring expenses of the office as under, provided the applicant fulfils the following conditions:  Category Initial Expenditure Recurring Expenditure (per annum) (a) EEFC Account(Exchange Earners’ Foreign Currency account) No limit for remittances out of EEFC funds. No limit for holders’ remittances out Of EEFC funds. Firms/companies not having EEFC accounts or not having sufficient funds EEFC accounts. Up to 15% of the average annual sales / income or turnover during the last two financial years or up to 25% per cent of the net worth, whichever is higher Up to 10% of their average  annual sales/income turnover during last two years.

In the case of newly established 100% EOUs or Units in EPZs and Hardware/Software Technology Parks, exchange may be released as per their estimated requirements for initial as well as recurring expenses on verification of suitable documentary evidence during the first two years of their operation. From third year onwards, exchange may be released as per item (a) or (b) above. Thus for first two years such units can get more foreign exchange released than the limits for other Indian companies.

The recurring (expenditure) remittance facilities are allowed initially for a period of two years only, after obtaining confirmation form the applicant that they have completed all legal and other formalities in India and abroad in connection with the opening of trading/non-trading office or for posting a representative abroad. The renewal of remittance facility after two years may be granted, provided proper accounts of utilisation of foreign exchange released are furnished to the authorized dealer.

You may note that if you are a new Company you may not be able to get the approval of Authorized Dealer to open offices aboard.

The Firstever  overseas branch office in India was the East India Company Limited of Britishers.

The general terms and conditions for opening the offices abroad normally are:

a.     The overseas office should not create any financial liabilities contingent or otherwise for the head Office in India.

b.     Exchange released by the authorized dealer should be strictly utilized for the purpose(s) for which it is released. They unused exchange may be repatriated to India under advice to the authorized dealer.

c.      The details of bank account opened in the overseas countries should be promptly reported to the authorized dealer.

d.     The approval granted for the purpose should be made valid for 6 months from the date thereof, within which time the applicant should open its overseas office or post representative abroad. In case the overseas office is not opened or the representative is not posted abroad within this period, intimation in writing to the effect should be sent to the authorized dealer immediately after expiry of 6 months period. Fresh application for release of exchange should be submitted to the authorized dealer as and when the overseas office is desired to be opened.

e.     Profits, if any, earned by the overseas office/s should be repatriated to India.

f.       The following statements should be submitted by the applicant to the authorized dealer:

A.    A statement showing details of initial expenses incurred together with suitable documentary evidence, wherever possible, within three months from the date of release of exchange for that purpose.

B.     Annual account of trading/non-trading office abroad duly certified by statutory Auditors/Chartered Accountants.

Temporary Site/Project Offices Abroad

Indian firms/companies executing contracts/projects abroad with the approval of the appropriate authority are permitted under a general permission granted by Reserve Bank to set up site/project offices abroad provided that such offices are maintained out of project receipts and remittances from India are not required. These offices are required to be closed down and surplus foreign exchange earnings repatriated to India after completion of the project.

Credit facilities for overseas trading offices of Indian companies

Reserve Bank considers, on merits, request from Export Houses/Trading Houses/Star Trading Houses/Super Star Trading Houses to avail of fund based/non-fund based facilities for their trading offices abroad from overseas banks. Application in such cases should be made to the Chief General Manager, Reserve Bank of India, Exchange Control Department (Export Division), Mumbai together with full particulars of the exchange facilities availed of for maintenance of the overseas office concerned, full details of terms and conditions subject to which the facilities are being extended by the overseas bank and the need for availing of the credit facilities by the overseas trading office.

Application for permission to post a representative in Overseas Branch Office 

Establish office/branch overseas

·         The application is to be made in form OBR to the Bank with supporting documents.

·         The estimates of foreign exchange expenditure should be given in units of foreign currency and the appropriate rupee equivalent furnishing the exchange rate applied.

Documents to be submitted along with the Form OBR

Correspondence, if any, in original together with photocopies regarding the arrangement made in foreign country for posting of representative/establishment of branch/office.

Bank certificates, in form BCX (certificate of export), together with photocopies thereof for the immediately preceding four calendar half years in support of export realizations.

Other Conditions to be followed

a) The overseas branch/office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity;

b) The overseas branch/office/representative shall not enter into any contract or agreement in contravention of the Act, Rules or Regulations made there under;

c) The overseas office (trading / non-trading) / branch / representative should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank. Any funds rendered surplus should be repatriated to India.

(iii) The details of bank accounts opened in the overseas country should be promptly reported to the AD Bank.

(iv) AD Category – I banks may also allow remittances by a company incorporated in India having overseas offices, within the above limits for initial and recurring expenses, to acquire immovable property outside India for its business and for residential purpose of its staff.

(v) The overseas office / branch of software exporter company/firm may repatriate to India 100 per cent of the contract value of each ‘off-site’ contract.

(vi) In case of companies taking up ‘on site’ contracts, they should repatriate the profits of such ‘on site’ contracts after the completion of the said contracts.

(vii) An audited yearly statement showing receipts under ‘off-site’ and ‘on-site’ contracts undertaken by the overseas office, expenses and repatriation thereon may be sent to the AD Category – I banks.

Courtesy : CS Vivek Hegde,B.com, ACS, CWA