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

FOR INCORPORATING A WHOLLY-OWNED SUBSIDIARY IN GERMANY

For incorporation of a GmbH in Germany, one should  have to adhere the guideline prescribed by the Company Register under whose jurisdiction your GMBH would be formed in Germany. Also, German law would govern incorporation issues.

From the Reserve Bank of India perspective, this is an instance of Overseas Direct Investment (ODI) and you would have to follow guidelines laid down by RBI.

First check whether the overseas investment is under automatic route or approval route. 

If under automatic route,

·         The Indian party (investing co.) is eligible to invest in WOS up to 100% of net worth as per last audited balance sheet without prior approval of RBI.

·         But this ceiling of 100% of Net worth is not applicable if investment is out of funds raised thru ADR/GDR, or balances in Exchange Earners' Foreign Currency account of the Indian party. 

·         Reporting is to be done within 30 days of investment to the AD Category - I bank in Form ODI (part I and II) with prescribed enclosures after which you will be granted a Unique Identification Number (UIN). Forms shall be submitted in physical form and your AD will submit the same through online.

If under approval route:

·         Prior approval of RBI would be required

·         For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks.

·         Reserve Bank would, inter alia, take into account the following factors while considering such applications:

a) Prima facie viability of the JV  / WOS outside India;

b) Contribution to external trade and other benefits which will accrue to India through such investment;

c) Financial position and business track record of the Indian party and the foreign entity; and

d) Expertise and experience of the Indian party in the same or related line of activity of the JV / WOS outside India.

From Company Law Point of View

As far as Companies Act, 1956 is concerned ensure compliance with Sec.372A as the investment should be within the limit. 

Kindly note that it can be inferred from reading of sec .372 A, that investment in other body corporate for the purpose of "making "it a wholly owned subsidiary is not exempted form applicability of sec. 372A because the exemption is for investment in wholly owned subsidiary. So needless to say that there must be status of wholly owned subsidiary before the proposal of investment in a company.

Every inter corporate investment/loan/guarantee/security falling within section 372A (even within limit) must be sanctioned by a resolution of the board passed at its meeting. Such decision can not be taken by circular resolution nor can it be delegated by the Board.

If investment is beyond limit, then follow provisions of Sec 372A by taking approval of shareholders in General meeting.

R.V.Seckar

rvsekar2007@gmail.com

919848915177

PROCEDURE FOR INVESTING IN WOS IN ABROAD

INITIAL COMPLIANCE'S -

1. Board Resolution under Section 292(1) (d) & S.372A for investment and incorporation of Wholly Owned Subsidiary.
   
   
2. Form ODI – Part I (i. e. details of JV/ WOS, Indian Parties and the financing pattern of the overseas entity) is required to be filed by Investing Indian Company with Designated Authorised Dealer Bank. Certificate by the Statutory Auditor for compliance of FEMA is also required to be submitted along with ODI form.
   
   
3. Under Automatic Route, in case of new proposals, immediately after effecting remittance, the Designated Authorised Dealer Bank will forward Form ODI – Part I along with Part II (i. e. Remittance Report) to RBI for obtaining Unique Identification Number.
   
   
4. On receipt of the Form from the AD bank, RBI will allot an Unique Identification Number to each JV/ WOS, which is required to be quoted in all the future correspondence by AD Bank/ Indian Company.

How Much Quantum can be Invested:

Under automatic route , up to 100% net worth of investing company in its foreign subsidiary or JV Company.

If your Indian Company net worth is say Rs 1 Crore , you can invest up to 1 Crore under automatic route in the WOS / JV company in foreign country.

How Much can be invested in WOS / JV by an Indian Listed Company  ?

As per RBI guidelines , if  there is no JV or WOS , Listed Indian companies can invest up to 50 % of their net worth as on the date of the last audited Balance Sheet in overseas companies, listed on a recognized stock exchange, or by way of rated debt securities issued by such companies by way of portfolio investment.

Prohibitions

Indian parties are prohibited from making investment in a foreign entity engaged in real estate (meaning buying and selling of real estate or trading in Transferable Development Rights (TDRs) but does not include development of townships, construction of residential/commercial premises, roads or bridges) or banking business, without the prior approval of the Reserve Bank.

POST INVESTMENT COMPLIANCE'S -

1. An Indian Company which has made direct investment abroad is under obligation to receive share certificate or any other document as an evidence of investment, and submit the documents / Annual Performance Report to the Reserve Bank, in accordance with the provisions specified in Regulation 15 of the Notification. The share certificate or any other document as evidence of investment has to be submitted to and retained by the designated AD Category - I bank, who is required to monitor the receipt of such documents and satisfy themselves about the bonafides of the documents. A certificate to this effect should be submitted by the designated AD category – I bank to the Reserve Bank along with the APR (Part III of Form ODI). 
   
   
2. Annual Performance Report (APR) should be submitted, through the designated AD Category-I bank, every year within 3 months of the closing of the annual accounts of the WOS i. e. on or before 30.06.2010
   
   
3. A JV / WOS set up by the Indian party as per the Regulations may diversify its activities / set up step down subsidiary / alter the shareholding pattern in the overseas entity . The Indian Company should report to the Reserve Bank through the AD Category - I bank, the details of such decisions within 30 days of the approval of those decisions by the competent authority of the JV / WOS concerned in terms of local laws of the host country and include the same in the Annual Performance Report (APR—Part III of form ODI) required to be forwarded to the AD Category-I bank.
   
   

   R.V.Seckar

    

   rvsekar2007@gmail.com

   
   

   919848915177

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.

CAP on FDI in India and Procedures to be observed on receipt of FDI by an Investee Company:

CAP on FDI in India and Procedures to be observed on receipt of FDI by an Investee Company:


In majority of cases , 100% FDI is permitted without any prior approval from RBI or FIPB.

However , Approval is required for licensed industries such as hazardous chemicals and defense equipment .

Some Sectors have FDI cap which is detailed below :

Sector FDI Cap
• Private Banking 74%
• Telecom 74%
• Civil Aviation 49%
• Insurance 26%
• Single Brand Retail 51%
• News Media 26%
• Defense Sector 26%

• Development of Townships , Housing , Built-up infrastructure and Construction -development projects- 100% 

Prohibited Sectors

• Agriculture with some exceptions
• Gambling & Lottery
• Retail (except Single Brand retail)
• REAL estate - Real Estate Business or Construction of Farm Houses
• Tobacco Products
Chitfund
Nidhi Company
Trading in Transferable Development Rights (TDRs).
Reserved For Government Sector only
• Atomic Energy
• Railways

Reporting of FDI to RBI –Procedures

In case of FDI only , allotment has to be made within 180 days of receipt of funds in India and investee company has to report to RBI within 30 days on receipt of funds. There is a separate form for this and it is known as “ Foreign Inward Remittance Reporting Form “. After filing this , RBI will allot a UIN (Unique Identification Number ) for each FDI reported to RBI. Allotment has to be made within 180 days of receipt of funds and Form FC-GPR is to be filed with your regional RBI within 30 days of allotment through your authorised dealer ( banker).
Along with the Form FC-GPR , the following certificates will have to be enclosed:
• A certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that
o All the requirements of the Companies Act, 1956 have been complied with;
o Terms and conditions of the Government approval, if any, have been complied with;
o The company is eligible to issue shares under these Regulations, and
o The company has all original certificates issued by Authorized Dealers in India evidencing receipt of amount of consideration.
• A certificate from Statutory Auditors or a Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

In case of issue of bonus shares by an Indian company , even though there is no inflow of funds and but , the company has to file Form FC-GPR within 30 days of allotment of bonus shares to a foreign company through its authorised dealer.

R.V.Seckar