Can a Indian Company can extend loan or guarantee to its WOS or JV Company in Abroad?

An Indian Company can extend loan  to its JV / WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS.

The investments are subject to the following conditions:

a) The Indian party / entity may extend loan / guarantee only to an overseas concern in which it has equity participation. Indian entities may offer any form of guarantee - corporate or personal / primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:

i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 400 per cent of the net worth as on the date of the last audited balance sheet of the Indian party;

ii) No guarantee is 'open ended' i.e. the amount and period of the guarantee should be specified upfront; and

iii) As in the case of corporate guarantees, all guarantees are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, would be outside this ceiling and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

The Indian party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.

All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

GENERAL RESTRICTION FOR OPENING OF BRANCH / LIAISON /PROJECT OFFICE IN INDIA BY A FOREIGN ENTITY

GENERAL RESTRICTION FOR OPENING OF BRANCH  / LIAISON /PROJECT OFFICE IN INDIA BY A FOREIGN ENTITY.

 

No citizen of Afghanistan, Pakistan , Iran ,Bangladesh , Sri Lanka and China can establish in India  branch /Liaison / project office  or any other form of business without prior approval from Reserve Bank .

No branch/Liaison/branch office is allowed to be established in India by the partnership or proprietorship business set up abroad.

Business entities from Nepal are allowed to set up a Liaison office in India under the general permission category of Reserve Bank of India.

Branch / Project offices of a foreign company , excluding a Liaison Office are permitted to acquire property for their own use and to carryout permitted /incidental activities but not for leasing or renting out the property.

However, entities from Bangladesh, Pakistan, Sri Lanka, Afghanistan, Bhutan, Iran or China are not permitted to buy immovable property in India even for Branch office purpose. These entities are allowed to lease such property for a period of not exceeding five years.

Authorised Dealers are permitted to open non-interest bearing INR current accounts in India by the Branch /Project /Liaison Offices.

With a specific approval from the Central Office of the Reserve Bank, transfer of assets of Branch / Liaison Office to subsidiaries or other Liaison /Branch Offices is allowed.

Branch Offices of foreign entities are permitted to remit outside India any profit earned by such branch in India by netting off applicable Indian taxes , on submission of the following documents to the satisfaction of the Authorized dealer through whom such remittance is made;

·         A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year.

·         A Chartered Accountant certificate certifying

a)    The manner of arriving at the remittable profit

b)   That the entire remittable profit has been earned by undertaking the permitted activities.

c)    The profit does not include any profit on revaluation of the assets of that branch .

R.V.Seckar

rvsekar2007@gmail.com

919848915177

Procedure for Establishment of Project Office in India

Establishment of Project Office in India

 Reserve Bank of India has given special permission to foreign companies to open project offices in India provided they have secured a contract from an Indian Company to execute a project in India and

·         The project is directly funded by way of inward remittance from abroad;

·         The project is funded by a multilateral or bilateral International Financing Agency ;

·         The Project has been cleared by an appropriate authority

·         A company or entity in India awarding the contract has been sanctioned by a Public Financial Institution or a bank in India for the project.

In case, if the above criterion have not been met, then such foreign entity has to approach the Reserve Bank of India, Central Office, for approval. 

Obligations on the part of Designated AD Category -1 Bank

AD Category -1 banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

·         The Project office has been established in India, with a specific/general permission of Reserve Bank of India , having the requisite approval from the concerned Project Sanctioning Authority .

·         The contract, under which the project has been sanctioned, specially provides for payment in foreign currency.

·         Two foreign currency accounts can be opened by each project office, usually one in home currency and the other in the USD, provided both are maintained with the same AD category -1 bank.

·         Only project related expenses will be allowed as a permissible deduction.

·         It is the AD who has been given power to decide whether an expense is a project related one or not. Further, the concurrent auditor of AD banker will have to scrutinize the nature debits and credits on continuous basis.

·         The foreign currency account of such project office has to be closed on the closure of such project office.

If the foreign contractor is having many project offices for different projects in India , for inter-project transfer of funds , prior approval from  the regional offices concerned under whose jurisdiction the project office is situated  is needed.

Procedure for Closure of Branch or Liaison Office or project office

Procedure for Closure of Branch or Liaison Office or Project Office

 

While closing down the Branch or Liaison offices, the company has to approach the designated AD Category -1 bank with the following documents:

Permission to remit winding up proceeds of branch/office (Other than Project Office)—

(1) A branch or office established in India by a person resident outside India may, for making remittance of its winding up proceeds, apply to the Authorised Dealer concerned supported by the following documents, namely :

(A) copy of the Reserve Bank’s permission for establishing the branch/office in India;

(B) Auditors certificate :—

(i) indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets;

(ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees etc. of the branch/office have been either fully met or adequately provided for;

(iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India; and

(iv) confirming that the branch/office has complied with all regulatory requirements stipulated by the Reserve Bank of India from time to time regarding functioning of such offices in India.

(C) no-objection or Tax clearance certificate from the Income-tax authority for the remittance;

(D) confirmation from the applicant that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance; and

(E) a report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the office in India.

(2) On consideration of the application made under sub-regulation (1), the authorised dealer concerned may permit the remittance subject to the directions issued by the Reserve Bank in this regard, from time to time.”

Obligations on the part of Designated AD Category -1 Bank

 

AD banker has to ensure that the LO/ BO had filed their respective Annual Activity Certificates with RBI for the previous years in respect of the existing Liaison / Branch Office.  It is the duty of the bank to obtain such confirmation in this regard from the Central Office of the Reserve Bank in cases of BO and the regional offices concerned in the case of LOs. 

Designated AD Category-1 Bank has to report winding up of such BO/LO to the Reserve Bank ( Central office for BO and regional office in case of LO’s ) along with  a declaration stating that all the required documents were submitted by BO / LO which have been duly scrutinised and found to be in order. If the documents are not found in order or cases are not covered under delegated powers, the AD –Category – 1 bank may forward the required application to the Reserve Bank with their remarks for necessary action.

From the Company Law point of view , Form 52 has to be filed with MCA.

For winding up project office, the following procedure is required to be followed:

a. For establishing a project office in India where  prior approval has been taken from Reserve Bank of India , following steps should be taken

1. Sumit an application to the respective regional office of the Reserve Bank of India
   a request for winding up of Project Office .

The application for winding up shall be submitted along with the following documents:

1. Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the project office.

1. A Chartered Accountant's certificate :
   
   1. indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets;
   2. confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the office have been either fully met or adequately provided for;
   3. Confirming that no proceeds accruing from sources outside India has remained un-repatriated to India.

• No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance 
 
• confirmation from the parent entity that no legal proceedings in any Court in India are pending against the Liaison Office and there is no legal impediment to the remittance

• A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the project office in India.

• On receipt of approval from regional office of Reserve Bank of India, AD category bank 1 can allow the remittance of funds.

PROCEDURE FOR OPENING OF BRANCH OFFICE/ LIAISON OFFICE IN INDIA

PROCEDURE FOR OPENING OF BRANCH OFFICE/ LIAISON OFFICE IN INDIA

Any foreign company wants to set up a Liaison office in India should get prior approval from RBI by submitting a form namely Form FNC.

Approval for such branch office / Liaison office is being given under two routes.

Reserve Bank Route:

Where 100% FDI is allowed under automatic route. Application has to be made to RBI. Reserve Bank will look into the following additional criteria for according its approval for Branch/ Liaison office in India by foreign entities.

·         For Branch Office – The foreign entity should have a profit track record of immediately preceding five years in its home nation with a net worth of minimum of $100,000 or its equivalent.

·         For Liaison office - The foreign entity should have a profit track record of immediately preceding three years in its home nation and with a minimum net-worth of $50000 or equivalent.

Government of India Route:

The foreign companies that not fall under 100% FDI under automatic route. Application may be from foreign non-profit organisations, non-government organisations, foreign government departments, foreign government bodies.

The Application for BO / LO should be forwarded in Form FNC through a designated AD Category -1 BANK  along with the following and should be addressed to

                          

                         The Chief General Manager –in-Charge,

                          Reserve Bank of India m

                         Foreign Exchange Department,

                         Foreign Investment Division,

                         Central Office, Fort, Mumbai -400 001

Along with the following documents:

• ·         Certificate of Registration or Incorporation or Memorandum & Articles of Association duly attested by Notary Public / Indian Embassy in the country of incorporation

• ·         Latest Audited Balance Sheet of the Applicant Company or entity.

• If any applicant do not fulfill the above mentioned eligibility criteria and if they are subsidiaries of other companies, they can submit a Letter of Comfort from their parent company provided that the parent company fulfills the eligibility yardstick as mentioned above.

It should be noted that an applicant cannot directly submit his application to RBI and he should forward the same through his banker a AD-Category -1 bank

.

Once the application is approved by RBI , it will allocate a Unique Identification Number (UIN) to the applicant. PAN number should also be obtained by such LO/BO from Income-Tax authorities in India.

Liaison Office

A liaison office or a representative office is on which can undertake only liaison activities so that it can act as a channel of communication between representatives in India and Head Office in abroad. A Liaison office is not authorised to do any business activity in India and hence cannot earn any income in India.  To meet any expenses in India, funds should be remitted through normal banking channels as inward remittance.  The permission for liaison office is initially granted for three years and renewal of approval can be made from time to time by an AD Category I bank for another 3 years provided the following documents are submitted.

·         The LO should have submitted the Annual Activity Certificates for the previous three years.

·         The banking account of LO with AD Category -1 bank has been operated in tune with the conditions and terms as mentioned in the approval letter.

In normal scenarios, extension of LO is being granted within one month of receipt of application.

Branch Offices

   Foreign companies who engaged in manufacturing or trading activities can set up a branch office in India with specific approval from the Reserve Bank of India.  Such branch offices are allowed to represent the parent or group companies and to undertake the following activities in India.

• ·         Export / import of goods

• ·         Rendering any consultancy or professional service

• ·         Rendering services in information technology and development of software in India.

• ·         Carrying out any research work, in areas in which the parent company is engaged.

• ·         Representing parenting company in India and acting as selling or buying agent in India.

• ·         Promoting financial or technical collaborations between Indian companies and overseas group company or parent company.

• ·         Rendering technical support to the products supplied by group or parent companies.

• ·         Foreign airline or shipping company

Restricted Activities:

·         Branch office is not allowed to engage in retail trading activities in India .

·         No manufacturing or processing activities is permitted to carry out by a branch office in India.

·         Profits earned by the Branch office are freely remittable from India subject to payment of applicable taxes.

Annual Activity Certificate should be submitted by the Branch / Liaison Office duly certified by a Chartered Accountant either at the end of 31^st March or before 30^th April of every year to the designated AD Category I bank with a copy to the Directorate General of Income Tax (International Taxation), New Delhi.

Can an Indian Resident acquire shares of a foreign company to become a director ?

Qualification shares to become a director in a Foreign company by an Indian Resident

Reserve Bank has given general permission to a resident individual to acquire foreign securities to the extent of the minimum number of qualification shares required to be held for holding the post of Director provided such shares do not exceed 1% of the paid-up capital of the overseas company and the amount to be remitted for such shares does not exceed USD 20,000 in a calendar year.

Now , 1% of the paid-up capital of the overseas company has been removed vide RBI Circular 
RBI/2011-12/474 A. P. (DIR Series) Circular No.97 dated 28 March 2012.

March 28, 2012Since the necessity of having certain qualification shares by an individual to be appointed as a Director of the company is governed by the law of the host country, it has been decided to remove the existing cap of 1 (one) per cent on the ceiling for resident individuals to acquire qualification shares for holding the post of a Director in the overseas company. Accordingly, henceforth, remittance shall be allowed from resident individuals for acquiring the qualification shares for holding the post of a Director in the overseas company to the extent prescribed as per the law of the host country where the company is located. The limit of remittance for acquiring such qualification shares shall be within the overall ceiling prescribed for the resident individuals under the Liberalized Remittance Scheme (LRS) in force at the time of acquisition.

R.V.Seckar

rvsekar2007@gmail.com

919848915177

General Permission for acquisition of shares by employees/directors of an Indian software company in their foreign JV /WOS?

General permission is available for the individual employees/directors of an Indian promoter company engaged in the field of software for acquisition of shares of a JV/WOS abroad provided :

1. the consideration for purchase does not exceed USD 10,000 or its equivalent per employee in a block of five calendar years;
   
2. the shares acquired by all the employees/directors do not exceed 5% of the paid-up capital of the Joint Venture or Wholly Owned Subsidiary outside India; and
   
3. after allotment of such shares, the percentage of shares held by the Indian promoter company, together with shares allotted to its employees is not less than the percentage of shares held by the Indian promoter company prior to such allotment.
   

Resident employees of Indian companies in the knowledge based sectors including working directors may purchase foreign securities under the ADR/GDR linked stock option scheme provided the consideration for purchase does not exceed USD 50,000 or its equivalent in a block of five calendar years.

R.V.Seckar

 

rvsekar2007@gmail.com

919848915177