FOREIGN EXCHANGE MANAGEMENT (ESTABLISHMENT IN INDIA OF A BRANCH OFFICE OR A LIAISON OFFICE OR A PROJECT OFFICE OR ANY OTHER PLACE OF BUSINESS) REGULATIONS, 2016 – AN OVERVIEW

[Mr. M. GOVINDARAJAN]

Vide Notification No. FEMA 22/2000-RB, dated 03.05.2000, RBI made the ‘Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000 with effect from 01.06.2000 by virtue of power conferred by Section 6(6) of FEMA Act.

Now, in supersession of the above regulations, RBI made new Regulations called ‘Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 which came into effect from 31.03.2016.

Definitions

Regulation 2(d) defines the term ‘branch office’ in relation to a company as any establishment described as such by the company.

Regulation 2(e) defines the term ‘liaison office’ as a place of business to act as a channel or communication between the principal place of business or Head Office or by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly and maintains itself out of inward remittances received from abroad through normal banking channel.

Regulation 2(f) defines the term ‘project office’ as a place of business in India to represent the interests of the foreign company executing a project in India but excludes a liaison office.

Regulation 2(g) defines the term ‘site office’ as a sub office of the project office established at the site of a project but does not include a liaison office.

Regulation 2(h) defines the term ‘stand alone basis’ as such branch offices would be isolated and restricted to the Special Economic Zone alone and no business activity/transaction will be allowed outside the Special Economic Zones in India which includes branches/subsidiaries of its parent office in India.

Procedure for opening a branch office etc.,

The Regulations prescribes the procedure for opening a branch office or a liaison office or a project office or any other place of business in India.

Permissible activities

Regulation 4(b) provides that a person may under or carry on any activity specified in Schedule I or II.

Schedule I permits the following activities to be undertaken for a branch office in India of a person outside India-

• 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 the parent/group companies;
• Representing a foreign airline/shipping company.

Schedule II permits the following activities for a liaison office in India of a person resident outside India-

• Representing the parent company/group companies in India;
• Promoting the 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.

Prior approval

Regulation 3 provides that the prior approval of the Reserve Bank of India shall be obtained to open in India a branch office or a liaison office or a project office or any other place of business by whatever named called.   The following companies are not required to get approval under these regulations-

• A banking company resident outside India if such company has obtained necessary approval under the provisions of Banking Regulations Act, 1949;
• An insurance company resident outside India if such company has obtained approval from the Insurance Regulatory and Development Authorityestablished under Section 3 of the Insurance Regulatory and Development Authority Act, 1999;
• A company resident outside India in the Special Economic Zone to undertake a manufacturing and service activities subject to the conditions that-

• Such branch offices are functioning in those sectors where 100% FDI is permitted;
• Such branch offices comply with Chapter XXII of the Companies Act, 2013; and
• Such branch offices function on a standalone basis.

Conditions

Regulation 4(a)  provides that a person resident outside India can establish a branch office or a liaison office in  India provides it meets the following criterion-

• For branch office – a profit making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100000 or its equivalent;
• For liaison office – a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50000 or its equivalent;

A person resident outside India that is not financially sound and are subsidiaries of other companies may submit a Letter of Comfort from their parent company subject to the condition that the parent company satisfies the prescribed criterion for net worth and profit.

Application

Regulation 4(c) provides that an application in Form FNC is to be submitted to an Authorized Dealer Category-I bank.  The Authorized Dealer, subject to Regulations 5, grants approval as per the directions and/or guidelines issued by RBI.

The applicant is to be open office within six months from the date of approval otherwise the approval will be cancelled.  If the applicant is not able to open the office within six months beyond his control the Authorized Dealer may consider granting extension of time for setting up the office by a further period of six months.  Any further extension shall require the prior approval of the RBI.

Approval of RBI in certain cases

Regulation 5 provides that any application in the following cases shall require the prior approval of RBI-

• The applicant is a citizen of or is registered/incorporated in Pakistan;
• The applicant is a citizen of or is registered/incorporated in Bangaladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a liaison, branch or project office in Jammu and Kashmir, North East Region and Andaman and Nicobar Islands;
• The principal business of the applicant falls in the four sectors – defence, telecom, private security and Information and broadcasting.In the case of proposal for opening a project office to defence sector, no separate approval of Government of India shall be required if the said nonresident applicant has been awarded a contract by/entered into an agreement with the Ministry of Defence or Service Headquarters of Defence Public Sector Undertaking;
• The applicant is a Non Government Organization, Non Profit Organization, Body, Agency/Department of a foreign Government.

Validity period for liaison office

The validity period for a liaison office is three years.    Entities engaged in construction and development sectors and which are NBFCs are permitted to open a Liaison office for 2 years only.

The application for extension of the validity period in respect of banks and insurance has to be directly submitted to the Department of Banking Regulation, Reserve Bank and the Insurance Regulatory Authority of India, respectively.

Extension of validity period for liaison office

The nonresident entity may apply to the Authorized Dealer Category I bank for extension of the validity period of approval.  The bank, on receipt of such an application, may extend the validity period of approval for a further period of 3 years from the date of expiry of the original approval/extension granted subject to such directions issued by RBI in this regard.

No further extension would be considered for liaison office of entities which are NBFC and those engaged in construction and development sectors, excluding infrastructure development companies.   Upon expiry of the validity period, the offices shall have either to be close down or to be converted into Joint venture/wholly owned subsidiary in conformity with the extant FDI policy.

Registration with State Police Authorities

Regulation 4(g) requires that a person from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau opening a branch office or a liaison office or a project office or any other place of business in India shall have to register with the concerned State Police Authorities.  Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New Delhi.

Opening of a Project Office

Regulation 4(f) provides that a foreign company may open project office in India provided it has secured from an Indian company, a contract to execute a project in India, and-

• The project is funded directly by inward remittance from abroad; or
• The project is funded by a bilateral or multilateral International Financing Agency; or
• The project has been cleared by an appropriate authority; or
• A company or entity in India awarding the contract has been granted term loan by a Public Financial Institution or a bank in India for project.

A person from any country other than Pakistan who has been awarded a contract for a project by a Government authority/Public Sector Undertaking may open a bank account with an Authorized Dealer category – I bank without any prior approval from RBI.

Opening of additional offices

Regulation 4(e) provides that a person resident outside India desiring to establish additional branch office or liaison office may submit to the Authorized Dealer Category – I bank a fresh FNC form along with the justification for the need for additional office.

Fund/Non fund based facilities

Regulation 4(h) provides that Authorized Dealer Category – I bank may extend fund and/or non fund based facilities to branch office and project offices based on the guidelines issued by the RBI.

Remittance of profit or surplus

Regulation 4(i) I  provides that branch office may remit outside India profit of that office net of applicable taxes in India.  This is subject to the production of the following documents to the satisfaction of the Authorized Dealer through whom the remittance is effected-

• A certified copy of the audited Balance Sheet and Profit and Loss Account for the relevant year;
• A Chartered Accountant’s certificate certifying-

• The manner of arriving at the remittable profit;
• That the entire remittable profit has been earned by undertaking the permitted activities; and
• That the profit does not include any profit on revaluation of the assets of the branch.

Intermittent remittance

Regulation 4(i) II provides that the Authorized Dealer may permit intermittent remittances by project offices pending winding up/completion of the project subject to the submission of the following:

• Certified copy of the final audited project accounts;
• The statutory auditor’s certificate showing the manner of arriving at the remittable surplus and confirming that the sufficient provisions have been made to meet the liabilities in India including income tax etc., ;and
• An undertaking from the project office that the remittance will not, in any way, affect the completion of the project in India and that any shortfall of funds for meeting any liability in India will be met by inward remittance from abroad.

Acquisition of property

Regulation 4(j) provides that acquisition of property by branch/project office shall be governed by the guideline issued under FEM (Acquisition and transfer of Immovable Property outside India) Regulations.

Transfer of assets

Regulation 4(k) provides that a person resident outside India may apply to the concerned Authorized Dealer for transfer of its assets to a joint venture/wholly owned subsidiary or any other entity in India.  Authorized Dealer bank shall be guided by the instructions laid down by RBI in this regard.

Annual Activity Certificate

Regulation 4(l) provides that branch office/liaison office may submit the Annual Activity Certificate as at the end of 31^st March along with the audited financial statements including receipt and payment account, on or before 30^th September of that year.  If the annual accounts are finalized after 31^st March, the Annual Activity Certificate shall be submitted within six month from the due date of the balance sheet.  The said certificate shall be submitted to the authorized dealer and the Director General of Income Tax (International Taxation).  The Annual Activity Certificate form a Chartered Accountant showing the project status and certifying that the accounts of the project office have been audited and the activities undertaken are in conformity with the general/specific permission given by the RBI  may be submitted to the designated authorized dealer.

Closure of office

Regulation 4(m) provides that the requests for closure of the branch office or liaison office may be submitted to the authorized dealer along with the following documents-

• Copy of the RBI’s/authorized dealer category – I bank’s approval for establishing the office;
• 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;

• Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the 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, 2013, in case of winding up of the branch office/liaison office;
• Any other documents specified by RBI/authorized dealer while granting approval.

Remittance of winding up proceeds of branch or liaison office shall be governed by the guidelines issued under Foreign Exchange Management (Remittance of Assets) Regulations.