PROCEDURE FOR OPENING A LIASION OFFICE OR REPRESENTATIVE OFFICE IN INDIA

How can foreign companies open Liaison /Branch office in India?

With effect from February 1, 2010, foreign companies/entities desirous of  setting up of Liaison Office / Branch Office (LO/BO) 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.

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) . 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?

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.

Can Foreign Insurance Companies / Banks set up Liaison Office in India?

. Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Similarly, foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Operations and Development (DBOD), Reserve Bank of India

Clarifications received from RBI on various queries on the recent regulations on the EEFC circular dated 10th May 2012

Clarifications received from RBI on various queries on the recent regulations on the EEFC circular dated 10th May 2012

RBI Replies are given in Blue Color for easy reference

1A customer has balance of USD 4 million in his account.  He has sold 3 months forward or bought 3 month put option for USD 3 million on 2nd May 2012, against the balance in his EEFC account.  The customer can not convert 50% of USD 4 million balances in his EEFC account now, as amount of USD 3 million is earmarked for forward / option contract.  Therefore, there is need for clarification. 

Available balances may be arrived at by netting off earmarked amounts on account of outstanding forward / option contracts against the EEFC balances.
Forward/option contracts based on past performance or export orders may be also excluded from available balance, if the customer instructs to earmark EEFC balance.


2On 14 June 2012, a customer has an export transaction of USD 2 million and he expects realisation in October. On 1st Aug, he sells 3 month forward or bought 3 month put option for USD 2 million, against this order.   Now, if he receives the proceeds in Sep 12, he needs to park entire USD 2 million in EEFC account and use it for settlement on the due date. If he is required to convert half the amount to INR i.e. USD 1 million, he will not be left with adequate balance to utilise his contract maturing in October

The customer is allowed to retain in the EEFC account amount equal to the forward cover / option contract booked and balance may be dealt with in terms of our circular.


3 A customer has payment obligation of USD 1 million for his imports after 2 months. He has zero balance in EEFC account and he books call option or buys USD 1 million 2 month forward for this transaction. On the due date, he has balance of USD 2 million in his EEFC account.  As per the above circular, he is required to utilise the balance in his EEFC account before purchasing foreign exchange. If he does that, he will not be utilising related forward / option contract.

The EEFC balances at the time of booking the purchase (of customer) contract is to be taken into account and not on the settlement date.


4 A customer has balance of USD 1 million in his EEFC – USD account.  He receives import bill of Yen 40 million.  Is he required to utilise the balance in EEFC – USD account to settle the import bill in JPY?

Yes. Customers will have to utilize the balance in the EEFC account irrespective of the currency in which it is held.


5 Whether 50% of the balance in EEFC account held as of the circular date today (i.e. reference date) be converted forthwith into rupee balance. For e.g. A situation where a client has 100 USD in his EEFC account as of the reference date and he intends to make import payment of 80 USD on the 5th day from the reference date. In such a scenario whether he will be able to utilise the 80 USD or be restricted to 50 USD.

Customer has to convert USD 50. Thereafter, he has to utilise balance amount of USD 50 for partial import payment. Balance import payment of USD 30 will have to be purchased from the market.
EEFC account holders who based on the business cycle, hold balances for less than a week may approach Reserve Bank ofIndia separately through their ADs.


6 Whether the conversion of 50% of the balances ( stock balances) for  RFC and DDA should be converted like that in case of EEFC.  Please note that point 4 of the circular mentions that provisions of only  2(b) and 2(c) apply for RFC and DDA accounts

No only the future forex earnings as mentioned in para 2(b) & 2(c) of the circular.


7Where client has EEFC accounts with other banks, can the EEFC balances be moved from that bank to the remitting bank for effecting payment for outward remittances.

Yes


8 As per RBI circular EEFC account holders henceforth will be permitted to access the forex market for purchasing foreign exchange only after utilising fully the available balances in the EEFC accounts.  Can client be allowed to book forward purchase contract for a forward date even he has enough balance in his EEFC account?

No


9 An export client had availed a FCY export loan (PSCFC) of USD 50M against an export bill of USD 100M which is now realised. Client wishes to use USD 50 M out of the realisation to liquidate the  PSCFC and retain the remaining USD 50M in his EEFC a/c.

Export proceeds of USD 50 mio will be used for liquidating PSCFC account. 50 % of the balance amount $ 50 i.e. $ 25 will have to be converted and USD 25 can be parked in EEFC account.


10 Client has USD 100M in his EEFC a/c today. He has to mandatorily convert USD 50 M into INR balances within a fortnight. The client now wants to utilise USD 50 Mio for retiring an import bill (within this fortnight). Subsequent to this import payment the clients EEFC balance will be USD 50 M and he wishes to not convert any more USD from his EEFC a/c.

No. He will have to first convert USD 50 mio. He has to thereafter utilise balance amount USD 50 mio to retire import bill of USD 50 mio.


11 Client has USD 100 M in EEFC a/c. He wishes to book import forward contract for USD 50 M. Since booking a forward contract also amounts to access to forex markets we ask him to utilise the EEFC first. The client has asked for clarifications on the following 4 alternatives he has :
a) Liquidate EEFC balance of USD 100 M & book forward contract of USD 50 M
b) Liquidate EEFC to the extent of USD 50 M i.e. equal to the amount of import forward contract to be booked.
c) Instead of liquidating EEFC to the extent of USD 100 M, client books a sell USDINR forward contract of USD 100 M to sell EEFC balances forward and simultaneously books the Import contract for USD 50M
d) Client books a sell USDINR forward contract of USD 50 M to sell USD 50 M of EEFC balances forward - equal to the amount of the import forward contract he wishes to book and then books the import forward contract.

The options at (a) and (c) may be allowed.


12 Client does not give directions within a fortnight to liquidate 50% of 9th May EOD EEFC balance in his account.

Directions from client, mentioned in the circular, relate to the account to which the Rupee proceeds are to be credited and not for liquidation of the EEFC balances.


13 Client has been accumulating EEFC balances to deliver against option contracts booked to hedged exports against Past Performance. Forced conversion of 50% will mean, there will be less FCY to settle the option hedges under PP. In this case at the time of forced EEFC liquidation to the extent of 50% the client would ideally be cancelling the export hedges to that extent (he cannot early deliver because these are option hedges). However as per the current regulations PP contracts should only be settled by delivery and in cases where the PP contracts have to be cancelled the gains cannot be passed to clients. So what does a client, who has in the money PP option hedges do with his option hedges, when he is forced to liquidate his EEFC balances?

Customer may be allowed to hold export proceeds in EEFC account to the extent amount earmarked in EEFC account for utilisation of  forward contract


14 Will the customer be allowed to book forward contract to buy dollars if they already have EEFC balances on the date of booking the forward cover? For example, if a customer has EEFC balance of USD 50,000 in his account but he wants to book a forward contract for purchase of USD 200,000 value 31 May 2012, then will he be allowed to book a contract for USD 200,000 or he will be allowed to book only USD 150,000 (USD 200,000 less EEFC balance of USD 50,000).

If  customer undertakes to utilise $ 50,000 for imports purpose, he can thereafter book forward contract for USD 150,000/-


15 Declaration while selling foreign exchange to their constituents – Should it cover other banks also?

Yes. The customers need to declare that they have exhausted the EEFC/RFC/DDA account balances maintained with other banks also.


16  Treatment of FCY transactions done on the same value date

Can be netted off.


17 Whether this regulations would also apply to foreign currency accounts opened by SEZ units

The regulations are only applicable to EEFC, RFC and DDA accounts as mentioned in the circular.

Henceforth , 50% of the Exchange Earner's Foreign Currency (EEFC) Account is to be converted into Indian Rupees

Henceforth , 50% of the Exchange Earner's Foreign Currency (EEFC) Account is to be converted into Indian Rupees

Earlier A.P. (DIR Series) Circular No.15 dated November 30, 2006 in terms of which  permitted all foreign exchange earners were permitted to retain 100% of their forex earnings in EEFC account with any AD in India.

2.  On a review of the Scheme, it  has been decided as under :-
a)  50% of the balances in the EEFC accounts should be converted forthwith into rupee balances and credited to the rupee accounts as per the directions of the account holder.  This process may be completed within a fortnight from the date of the circular and compliance reported to the Chief General Manager, Foreign Exchange Department, Central Office, Trade Division, Amar Building, Sir P.M. Road, Fort, Mumbai 400 001

b)  In respect of all future forex earnings, an exchange earner is eligible to retain 50% (as against the previous limit of 100%) in non-interest bearing EEFC accounts.  The balance 50% shall be surrendered for conversion to rupee balances.

c)  The facility of EEFC scheme is intended to enable exchange earners to save on conversion/transaction costs while undertaking forex transactions in future. This facility is not intended to enable exchange earners to maintain assets in  foreign currency, as India is still not fully convertible on Capital Account.  Accordingly, EEFC account holders henceforth will be permitted to access the forex market for purchasing foreign exchange only after utilising fully the available balances in the EEFC accounts.  ADs may, accordingly, obtain a declaration while selling foreign exchange to their constituents.

3.  It may be noted that the provisions at paragraph 2(b) and 2(c) above will apply, mutatis mutandis, also to holder of  either a Resident Foreign Currency  Account (RFC) or a Diamond Dollar Account (DDA).

RBI asks companies to give details of ECB fund utilisation

RBI asks companies to give details of ECB fund utilisation

The Reserve Bank asked companies to divide utilisation of funds raised through External Commercial Borrowings (ECBs) under the heads of foreign currency and rupee expenditure.

"On a review, it has been decided that at the time of availing Loan Registration Number (LRN) from the Reserve Bank, borrowers should provide bifurcation of the utilisation of the ECB proceeds towards foreign currency and rupee expenditure," RBI said in a notification.

In November, 2011, RBI had asked corporates to park funds raised through ECBs for domestic expenditure with local banks.

Such funds could be used for local sourcing of capital goods, on-lending to self-help groups or for micro credit and payment for spectrum allocation, among other purposes.

"The primary responsibility to ensure that the ECB proceeds meant for Rupee expenditure in India are repatriated to India for credit to their Rupee accounts," the RBI said.

Courtesy : PTI 7 May 2012

FDI in Commodity Exchanges require FIPB approval & No Prior Approval is needed for FII investment in Commodity Exchanges under PIS

FDI in Commodity Exchanges require FIPB approval & No Prior Approval is needed for FII investment in  Commodity Exchanges under PIS

Para 2 of A.P (DIR Series) Circular No.41 dated April 28, 2008, which allowed foreign investment in commodity exchanges, subject to a composite (FDI & FII) ceiling of 49 per cent with FDI limit of 26 per cent and FII limit of 23 per cent under Portfolio Investment Scheme (PIS), subject to conditions stated therein.

2. The extant policy for foreign investment in commodity exchanges, has since been reviewed and it has been decided that prior approval of the Government (FIPB) would be required only for FDI component and Government approval would not be required for investment by registered FIIs in commodity exchanges. All other conditions contained in A.P (DIR Series) Circular No.41 dated April 28, 2008 shall remain unchanged.

Ref-RBI/2011-12/542 A. P. (DIR Series) Circular No.121 dated 8 May 2012

Amount Payable against Import of Second Hand Machinery cannot be Converted into Equity under FDI

Amount Payable against Import of Second Hand Machinery cannot be Converted into Equity under FDI

A.P. (DIR Series) Circular No. 74 dated June 30, 2011, and A.P. (DIR Series) Circular No. 55 dated December 09, 2011, on issue of equity shares/ preference shares under the Government route by conversion of import of capital goods / machineries / equipments (including second-hand machineries) and pre-operative / pre-incorporation expenses (including payments of rent, etc.), subject to the terms and conditions stated therein.

2. With a view to incentivising use of machinery embodying the latest state-of-the-art technology, compliant with international standards, in terms of being green, clean and energy efficient, it has now been decided to exclude conversion of imported second-hand machinery from the purview of this provision.

Ref_-RBI/2011-12/541--- A. P. (DIR Series) Circular No.120-- dated May 08, 2012

NOW NRI CAN TRANSFER UPTO $ 1 M per Financial Year from NRO account to NRE Account under automatic route

Now Transfer of Funds from NRO account to NRE account is under automatic Route

As a further Reform , RBI has now liberalised the transfer of funds from NRO account to NRE account under automatic route upto $1million per financial year.

The Committee to Review the Facilities for Individuals Under FEMA, 1999 (Chairperson : Smt. K.J.Udeshi) has recommended that the NRIs/PIOs may be permitted, subject to payment of applicable taxes, to transfer repatriable funds from their NRO account within the overall ceiling of US $ 1 million per financial year, for credit to their NRE account in India. At present transfer of funds from NRO to NRE account is not permissible.

2. On a review, it has been decided that henceforth NRI as defined in Foreign Exchange Management (Deposit) Regulations, 2000 contained in Notification No. FEMA.5/2000-RB dated 3rd May 2000, as amended from time to time, shall be eligible to transfer funds from NRO account to NRE account within the overall ceiling of USD one million per financial year subject to payment of tax, as applicable (i.e. as applicable if funds were remitted abroad). Such credit of funds to NRE account shall be treated as eligible credit in terms of paragraph 3(j) of Schedule-1 of Notification No. FEMA.5/2000-RB dated 3rd May 2000.

3. All Authorised Dealer banks and Authorised banks may bring the contents of this circular to the notice of their constituents and customers concerned.

4. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.

“At present transfer of funds from NRO to NRE account is not permissible,” the RBI notification said.
While, an NRE account is for depositing income from abroad, NRO account is mainly for putting Indian incomes.

In case of NRE account, only NRIs can become joint account holders but for NRO account both resident and non-resident can become joint account holders

Ref:RBI/2011-12/536
A. P. (DIR Series) Circular No.117
May 07, 2012
To
All Authorised Dealer banks and Authorised banks
Madam/Sir,
Transfer of Funds from Non-Resident Ordinary (NRO) account to Non-
Resident External (NRE) Account
The Committee to Review the Facilities for Individuals Under FEMA, 1999 (Chairperson : Smt. K.J.Udeshi) has recommended that the NRIs/PIOs may be permitted, subject to payment of applicable taxes, to transfer repatriable funds from their NRO account within the overall ceiling of US $ 1 million per financial year, for credit to their NRE account in India. At present transfer of funds from NRO to NRE account is not permissible.

2. On a review, it has been decided that henceforth NRI as defined in Foreign Exchange Management (Deposit) Regulations, 2000 contained in Notification No. FEMA.5/2000-RB dated 3rd May 2000, as amended from time to time, shall be eligible to transfer funds from NRO account to NRE account within the overall ceiling of USD one million per financial year subject to payment of tax, as applicable (i.e. as applicable if funds were remitted abroad). Such credit of funds to NRE account shall be treated as eligible credit in terms of paragraph 3(j) of Schedule-1 of Notification No. FEMA.5/2000-RB dated 3rd May 2000.




 Ref: RBI/2011-12/536 -A. P. (DIR Series) Circular No.117 dated May 7 ,2012