During Last couple of decades India has seen large amount of foreign investment as number of MNC`s watch India as a potential market, which is indeed very much true. The Govt. of India is also supporting and promoting investment by abroad which is evident as India has adopted liberalized monetary policies. Along with this, we have also promoted exports by various means and allowed 100% FDI in various sectors.
We do not seek progress for the sake of progress, hence government has regulated the Inflow as well. Usually the modus operandi for this MNCs is to incorporate a Company in India or enter into a JV whereby it can penetrate the India Market. The other ways are establishment of Branch office or a Liaison Office in India.
What is a Branch office?
A Branch office (BO) is the office established by the Company Incorporated outside India and engaged in trading or manufacturing process. As per the notification of RBI, a Branch office is allowed to carry out following functions;
- Export or Import of Goods.
- Rendering professional or Consultancy Services.
- Carrying out research work in the areas in which the Parent Company is engaged.
- Promoting technical and Financial collaboration between Indian Company and Parent Company or overseas group Company.
- Representing the parent Company in India and acting as buying/selling agent.
- Rendering services in Information Technology and development of software in India.
- Rendering Technical support for products supplied by parent Company.
- Airline Company/Shipping Company.
Normally speaking a BO can engage in those activities in which Parent Company is engaged. However there are some restrictions imposed as per the RBI notification which are;
- Retail Trading activity of any nature is allowed in India by Branch Office.
- A branch office is not allowed to carry out manufacturing or processing activity in India.
What is a Liaison office?
A liaison office is very much different from a branch office. A LO has got large number of restrictions as to functioning in India. A Liaison office or a Representative office is allowed to do only liaisoning activities only. When we say liaisoning, it refers to activities as intermediary or channel of communication between Head office and parties in India.
It is not allowed to do any business activity in India or earn income in India. The role of such office shall be limited as to gathering information about possible market opportunities and providing information about the Company and its products to the Indian Customers. Thus following type of functions can be undertaken by the Liaison office.
- Representing parent Company or group Company in India.
- Promoting export or import to or from India.
- Promoting technical or financial collaboration between parent company and Indian parties.
- Acting as communication channel between Parent Company and Indian Party.
Routes for Establishing Branch office or Liaison office In India
If a Foreign Company wants to establish a Branch office or a liaison office in India, RBI has stipulated 2 routes for the same, namely automatic route and approval route. The Company has to choose between these two routes on the basis of its nature of business and amount to be invested in India.
A] Automatic Route:
Where principle business of foreign entity falls under 100% approved FDI, then the Company can follow automatic route for their proposed establishment of BO or LO.
B] Approval Route:
Where the principle business of the foreign entity does not fall under 100% approved FDI, then it has to undergo through Approval route which involves following process.
The Applicant shall file appropriate form as specified by RBI via Authorized Dealer Bank to the department of Foreign Exchange, Reserve Bank of India. The Department shall grant permission on the basis of Companies Past performance, India`s Trade relations with the Country of origin of the Applicant and other relevant factors. The BO or LO will be allotted a Unique Identification Number.
RBI has laid down detailed documentation under its notification in this regard. The applicant can refer the same before taking any steps in this regard.
Criteria for Applicant
In order to regulate and control the establishment of BO or LO in India, RBI has laid down the criteria for the applicants. This qualification criteria mainly aims at past track records and net worth of the Company. Accordingly any applicant entity who wishes to open a Branch office in India must have a profit making track record of not less than 5 years and a Net Worth of USD 100,000 or equivalent. Similarly if an entity wants to open a liaison office in India, it must be having a profit making track record of not less than 3 years and Net Worth of USD 50,000 or equivalent.
Earnings In India
Profits earned in India by a Branch Office are freely remittable from India, after payment of all necessary taxes and producing certain documents to the satisfaction of the Authorised Dealer through whom the remittance is to be effected. We need to submit the certified copy of the audited balance sheet and profit & loss account to AD Bank in this regard.