Analysis of eligibility criteria and other procedural guidelines for the establishment of Branch office / Liaison office by foreign entities in India

Under the current regulations, an application from a foreign entity to establish BO / LO in India is considered on the basis of the following Basic criteria:

• If principal business of the foreign entity falls under sectors where 100 percent foreign direct investment (FDI) is permissible under the automatic route.
• If principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from such entities are considered by the RBI in consultation with the Government of India, Ministry of Finance.

The Reserve Bank of India (RBI) had issued draft circulars dealing with certain guidelines for Branch Office (BO) / Liaison Office (LO) of foreign entities in India. The draft circular prescribed Guidelines for closure of office, extension of the validity period, the eligibility criteria and procedural guidelines for BO / LO of foreign entities in India. This was issued by RBI for public comments. On the basis of the feedback received from the public, now the RBI has issued the final guidelines vide A. P. (DIR Series) Circular No.23 and 24, dated 30 December 2009.

Now, with the objective of achieving greater transparency the RBI has decided to enhance, the criteria regarding eligibility of any foreign entity for opening of BO / LO in India . The Cirular further covers the scope of activities permitted and other procedural guidelines regarding functioning of the BO / LO in India.

Applications of banks and insurance companies for opening of BO / LO will be examined by the Department of Banking operations, the RBI and the Insurance Regulatory and Development Authority (IRDA) respectively. Further, the approval of the RBI is not required to establish a branch/unit in Special Economic Zones (SEZ) for undertaking manufacturing and service activities, subject to conditions specified in the Notification no. 102/2003 dated 3 October 2003 read with A. P. (DIR Series) Circular No. 58, dated 16 January 2004.

The Synopsis of the Circulars are given below:

> Eligibility Criteria

The Circular has added some additional criteria which are given below:

• Profit making track record

>             In case of BO, a profit making record of the Foreign Entity during the immediately preceding five financial years in the home country and

>             In case of LO, a profit making record of the Foreign Entity during the immediately preceding three financial years in the home country.

• Net Worth Criteria (total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement)

>             In case of BO the net worth of the Foreign Entity should not be less than USD 100,000 or its equivalent and

>             In case of LO the net worth of the Foreign Entity should not be less than USD 50,000 or its equivalent.

Those applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company provided the parent company satisfies the eligibility criteria as prescribed as per the format prescribed by the Circular.

> Application Form and Documentation

• The foreign entity (other than those engaged in insurance and banking sector) are required to make applications in Form no. FNC as provided by the Circular, after filling all the details and signed by the authorised signatory of the foreign entity in the home country. Further, it may be submitted along with the Letter of Comfort, wherever applicable to the designated AD Category- I bank for onward transmission to the RBI along with their comments and recommendations to the Chief General Manager­in-Charge, RBI.

• Applications of banks and insurance companies for opening of BO / LO will be examined by the RBI and the IRDA respectively. Further, approval of the RBI is not required to establish a branch/unit in SEZ for undertaking manufacturing and service activities, subject to conditions specified in RBI notification no. 102/2003 dated 3 October 2003.

> Scope of permitted activities

The list of permitted activities for BO in India is given below:

• Export/import of goods.
• Rendering professional or consultancy services.
• Carrying out research work, in which the parent company is engaged.
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• Representing the parent company in India and acting as buying/ selling agent in India.
• Rendering services in Information Technology and development of software in India.
• Rendering technical support to the products supplied by parent/group companies.
• Foreign airline/shipping company.

The list of permitted activities for LO in India is given below:

• Representing the parent company / group companies in India.
• Promoting export / import from / to India.
• Promoting technical/ financial collaborations between parent / group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.

> Submission of AA C (AAC)

• With effect from 1 February 2010, the AAC certified by the Auditors that the BO / LO has carried out only those activities which are approved by the RBI, currently being approved by the RBI, shall be submitted on or before April 30 to the designated AD Category – I bank and a copy to the Directorate General of Income Tax (International Taxation), by the following:

-  In case of a sole BO/ LO, by the BO/LO concerned

-  In case of multiple BOs / LOs, a combined AAC in respect of all the Offices in India by the Nodal Office of the BOs / LOs.

• The designated AD Category – I bank shall scrutinise the AAC and ensure that the activities undertaken by the BO / LO are being carried out in accordance with the terms and conditions of the approval given by the Reserve Bank. In the event of any adverse findings being reported by the Auditor or noticed by the designated AD Category -I bank, the same should be reported immediately to the respective Regional Office of the RBI in respect of LOs and to the Central Office of the RBI in the case of BOs, along with the copy of the AAC and their comments thereon.

> Applications for additional offices or undertaking additional activities

• Application for establishing additional BOs / LOs may be submitted to the RBI in the fresh FNC form and in the same manner as indicated above. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier.
• If the number of offices exceeds four (i.e. one BO / LO in each zone viz. East, West, North and South), the applicant has to justify the need for additional office/s.
• The applicant may identify one of its offices in India as the Nodal Office, which will coordinate the activities of all of its offices in India.
• Requests for undertaking activities in addition to what has been permitted initially by the RBI may be submitted through the designated AD Category-I bank to the Chief General Manager­in-Charge, RBI and justify the need with comments of the designated AD Category-I bank.

> Extension of validity of the approval of LOs

• For extension of time for continuance of LOs a request on letter head of LO [other than for entry in Insurance sector, Banks, NBFCs and Construction and Development sectors (excluding infrastructure development companies)] may be submitted to the AD Category – I bank concerned under whose jurisdiction the LO / Nodal Office is located before the expiry of the validity of the approval. Whereas the applications from foreign banks and insurance companies will continue to be directly received and examined by the RBI and Insurance Regulatory and Development Authority (IRDA) respectively.
• With effective from 1 February 2010 the AD Category – I bank may extend the validity period of LOs for a period of 3 years from the date of expiry of the original approval / extension granted by the RBI, if the applicant has complied with the following:

o    The LO has submitted the AACs for the previous years (initially, for existing LO, the designated AD Category – I banks may obtain confirmation from the Regional Office concerned about timely submission of the Certificate for previous years); and

o   The account of the LO maintained with the designated AD Category – I bank is being operated in accordance with the terms and conditions stipulated in the approval.

• Such extension may be granted within a period of one month from the receipt of the request under intimation to the Regional Office concerned and to the Chief General Manager-in-Charge, RBI, quoting the reference number of the original approval letter and the Unique Identification Number.
• Extension will not be considered for LOs of NBFCs and those engaged in Construction and Development sectors (excluding infrastructure development companies). Upon expiry of the valid period, these entities have to either close down or be converted into a Joint Venture / Wholly Owned Subsidiary, in conformity with the extant FDI policy.

> Winding up of BO / LO

• With effective from 1 February 2010, the work related to closure of BO / LO, hitherto being done by the RBI (Central Office in the case of BO and Regional Office in the case of LO), shall be handled by the designated AD Category – I bank.
• Requests for closure of the BO / LO and allowing the remittance of winding up proceeds of BO / LO shall be submitted to the designated AD Category – I bank by the BO/LO or their Nodal Office, as the case may be.
• The application for winding up may be submitted along with the following documents:
  • Copy of the RBI’s permission / approval from the sectoral regulator(s) for establishing the BO/ LO.
  • Auditor’s certificate:

-    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;

-    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;

-    confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India.

o No-objection or Tax clearance certificate from the Income-Tax authority for the remittance.

o Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the BO / LO and there is no legal impediment to the remittance.

o A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the BO /LO in India.

• Designated AD Category-I bank in addition to the above documents may also ensure that the BO / LOs had filed their respective AACs with the RBI for the previous years, in respect of the existing BO / LOs.
• In case of offices of banks and insurance companies, designated authorised dealers may allow remittance of winding up proceeds after obtaining copies of closure permission from the sectoral regulators along with the documents mentioned above.

> General provisions

• The Circular also provides that in order to provide a uniform framework, UIN would be allotted to both, the existing as well as the new BOs / LOs. The UIN will have to be quoted in all references to the Reserve Bank by the BO/LO and the designated AD Category – I bank.
• The RBI or the Government of India, as the case may be, may reject an application for non-fulfillment of any other condition/s not specifically referred to in the circular, and the fulfilment of which is necessary for grant of such permission or in the public interest. The RBI or the Government of India, also reserves the right to verify / examine the activities of the BO / LO of the foreign entities established in India and to withdraw the permission already granted, after due notice, if the circumstances so warrant or due to changes in the policy.
• The BOs / LOs shall obtain Permanent Account Number from the Income Tax Authorities on setting up of their office in India and report the same in the Annual Activity Certificate.