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The Reserve Bank of India (“RBI”) has modified the procedure1 related to opening of Branch office (“BO”) and liaison office (“LO”) in India by foreign entities2, the annual filings to be done by such entities as well as the closure of such offices. Accordingly, a foreign entity would need to fulfill the eligibility criteria laid down to open a BO / LO in India and thereafter comply with the prescribed procedural guidelines.
Eligibility Criteria
1. Basic criteria• Reserve Bank route – principal business of foreign entity falls under sectors where 100%
FDI is permissible under the automatic route.
• Government route – principal business of foreign entity falls under sectors where 100%
1 Vide A.P. (DIR Series) Circulars No. 23 and 24 dated 30 December, 2009
2 A body corporate incorporated outside India, and includes a firm or other association of individuals
FDI is not permissible under the automatic route. Such applications are considered by RBI in consultation with the Government.
2. Additional Criteria
Criteria BO LO
Track Record
Profit making record during immediately preceding five financial years in home country
Profit making record during immediately preceding three financial years in home country Net
worth3
Not less than USD 1,00,000 or its equivalent
Not less than USD 50,000 or its equivalent
3 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 called.
Establishment of branch office / liaison office in India by foreign entities Tax & Regulatory Services
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4 January, 2010
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Applicants not satisfying the above eligibility criteria may submit a letter of comfort, in the prescribed format from its parent company, provided the parent company satisfies the above criteria.
The RBI or the Government has the power to reject an application based on any other conditions / in the public interest.
Procedural guidelines and delegation of powers to Authorised Dealer
1. Set-up of new BO / LOApplications in Form FNC 1 (except applications from foreign banks and insurance companies) for establishing BO / LO would need to be submitted to RBI through a designated Authorised Dealer Category–I bank (“AD”) (applicant’s potential banker in India). The AD has to exercise due diligence of applicant background, nature and location of activity, etc. and forward the application to the RBI with its comments / recommendations.
The scope of activities permitted for BO and LO shall be as per Schedules 1 and 2 of Notification No. 22 dated 3 May, 2000. Generally, the BO shall engage in the activity in which the parent company is engaged.
There would be no change in procedures for applications from foreign banks and insurance companies requesting permission to open a new LO / BO in India.
2. Set-up of additional offices or undertaking additional activities
The above procedure is to be followed for request for establishing additional BO / LO in India. If the number of offices exceeds four (i.e. one BO / LO in each zone viz., East, West, North and South), the applicant will need to justify the need for additional office(s).
Requests for undertaking additional activities (other than approved by RBI) have to be forwarded through the AD (with its comments) to the RBI.
3. Extension of validity period of LOs
RBI has delegated powers to ADs, effective 1 February, 2010, to consider requests for extension of validity of approvals granted to LOs (except LOs of entities in insurance and banking sector) for a period of 3 years. The AD, while considering such request shall examine compliance of approval conditions, submission of annual activity certificates.
No extensions are permitted for LOs of entities which are Non-Banking Financial Companies (“NBFCs”) and those engaged in construction and development sectors (excluding infrastructure development companies). Such LOs will have to be closed down or converted into joint venture / wholly owned subsidiary, in conformity with the extant foreign direct policy, post expiry of the validity period.
4. Closure of BO / LO
The RBI has delegated powers to ADs, effective 1 February, 2010, to consider request for closure of BO / LO and permitting remittance of winding-up proceeds. AD shall obtain the documents prescribed in Regulation 6(1)(iii) of Notification No. 13 dated 3 May, 2000 / any other specified documents and satisfy themselves about the bonafides before permitting closure of office. If AD is not satisfied with the documents submitted, it may forward the application to the RBI for necessary action.
5. Submission of annual activity certificate (“AAC”)
With effect from 1 February, 2010, the AAC as at the end of 31 March shall be submitted, on or before 30 April, to the AD (as opposed to filing with RBI earlier) and a copy to the Directorate General of Income-tax (International Taxation), New Delhi, by the following:
(i) In case of a sole BO / LO, by the concerned BO /LO
(ii) In case of multiple BO / LOs, a combined AAC of all offices by Nodal office4 of the BOs / LOs.
The BO / LO would now need to provide the permanent account number obtained from income-tax authorities in AAC.
4 One of the offices in India identified by applicant, which will coordinate the activities of all of its offices in India
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The ADs are required to immediately report to the RBI in case of any adverse comments in the AAC.
6. Unique Identification Number
In order to provide a uniform framework, RBI shall allot a Unique Identification Number (“UIN”) to both existing and new BOs / LOs to be quoted in future references to RBI. With effect from 1 February, 2010, existing BO / LO will also have to necessarily approach RBI through its AD for their requests / references.
Our Comments
The RBI has been constantly amending / liberalizing the procedures to bring about greater transparency and smooth functioning of business operations in India. The above modifications in the existing procedures of BO / LO is a step further in this direction. While the opening of BO / LO in India would eventually require the RBI’s clearance, one may not have to wait for RBI’s approval for extension of LO or closure of BO / LO unless there are irregularities / non-compliance with the terms and conditions laid down in the RBI approval.
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