India: Establishment Of Branch Office In India

A Branch Office ("BO") is one of the models for a foreign company to enter India and understand the Indian market with a very strict control by the Reserve Bank of India (RBI), as it does allow the foreign companies to test and do business in India; subject to certain conditions.

Establishment of a BO of a foreign entity in India is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 ("FEMA") read with Notification No. FEMA 22/2000-RB dated May 3, 2000 as amended from time to time.

The Reserve Bank of India ("RBI") issued the Master Circular No.7/2014-15 on July 01, 2014 ("Master Circular")1 thereby consolidating the existing instructions on the subject of "Establishment of Branch/ Liaison/Project Offices in India by Foreign Entities" at one place.

As per section 2(14) of the Companies Act 2013 ("2013 Act") a BO, in relation to a company, means any establishment described as such by the company. One would note that there is a slight deviation in the definition of BO from the one provided under the Companies Act 1956 ("1956 Act") wherein as per section 2(9) a BO in relation to a company was defined as (a) any establishment described as a branch by the company; or (b) any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or (c) any establishment engaged in any production, processing or manufacture, but does not include any establishment specified which has been declared by the Central Government not to be a branch office under section 8 of 1956 Act.

In the present article the procedure of registration of BO, nature of business, related regulations, reportings, permissible activities and the closure of BO have been discussed.

Application to RBI

The RBI may consider the application for setting up a BO in prescribed format [application in Form FNC with documents to be filed with Authorized Dealer Bank (AD Bank) for onward transmission to RBI] under two routes, i.e. automatic route or the approval route.2

There are certain criterions which are considered by the RBI while entertaining an application for registration of a BO, namely:

  1. Profit making track record of the foreign entity during the immediately preceding five financial years in the home country;
  2. Net Worth3 of the foreign entity of not less than USD 100,000 or its equivalent.

The prescribed documentation to be filed for registration of a BO will generally include the following:

  1. Request letter detailing the facts of the company, proposed activities in India by the Branch Office. Any other information, which a company wishes to furnish, that would strengthen the application;
  2. Duly filled Form FNC (in three copies);
  3. Copy of the Certificate of Incorporation / Registration attested by the Notary Public in the country of registration [if the original certificate is in a language other than in English, the same may be translated into English and notarized as above and cross verified/attested by the Indian Embassy/ Consulate in the home country];
  4. Memorandum of Association and Articles of Association [if the original certificate is in a language other than in English, the same may be translated into English and notarized as above and cross verified/attested by the Indian Embassy/ Consulate in the home country];
  5. Audited Balance sheet of immediate 5 financial years;
  6. Certificate issued by Chartered Accountant (CA) / Certified Public Accountant (CPA) summarizing the FY-wise Profit/Loss details of the preceding 5 years;
  7. Name, Address, email ID and telephone number of the authorized person in Home Country;
  8. Details of Bankers of the Organization the Country of Origin along with the bank account number;
  9. Commitment from the Organization to the effect that it will be open to report / opinion sought from its banker by the Government of India / Reserve Bank of India;
  10. Expected funding level for operations in India;
  11. Details Relating to address of the proposed local office, number of persons likely to be employed, number of Foreigners among such employees and address of the head of the Local office, if decided;
  12. Details of Activity carried out in Home Country by the applicant organization in brief about the product and services of company in Brief.
  13. Banker's Report from the applicant's banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank;
  14. CA certificate confirming the Net Worth (total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance);
  15. Applicants who do not satisfy the eligibility criteria and are subsidiaries of other companies can submit a Letter of Comfort from their parent company as per Annex-2 (as provided in RBI's Master Circular dated July, 01, 2014), subject to the condition that the parent company satisfies the eligibility criteria as prescribed in the Master Circular of RBI;
  16. Power of Attorney / Board Resolution authorizing the concerned person to sign the Form FNC (along with Passport copy to validate the signatures).

The AD Bank (through which an applicant liaison with the RBI) may seek further documentation, including the above mentioned documents, in order to fulfill its KYC requirement, namely:

  1. Valid addresses proof of parent entity for registered address;
  2. Photograph, photo ID and Address Proof of all authorized signatories, key individuals, such as two senior most directors, all partners, all office bearers in case of society / association of persons, all trustees, settlers, protectors, ultimate individual shareholders/beneficiaries holding 10% and above shares/interest etc. of the parent entity as applicable;
  3. Individuals related to the account as authorized signatories /POA holders/directors are required to self attest all identity and residence address proofs and their photographs duly signed on the face of the photograph;
  4. All entity documents to be duly certified by director/company secretary/trustee as applicable.

The above stated list of documents / information is not exhaustive and may differ depending upon the requirement from the AD Bank. It is to be noted that all foreign documents have to be notarized and self attested. Further, KYC review has to be completed for all the accounts maintained by the applicant organization.

The BOs established with the RBI's approval are allotted a Unique Identification Number (UIN). BOs are also required to obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.

Every BO after being registered with the RBI ought to get itself registered with the Ministry of Corporate Affairs (MCA), for it to be registered as an establishment of a foreign company in India. The following documents4 shall be filled with the Registrar of Companies (RoC):

  1. Form 44;
  2. Charter, statutes or memorandum and articles of association or other Instrument constituting or defining the constitution of the company(In the manner provided under Rule 16, 17 of the Companies (Central Government's) General Rules and Forms, 1956);
  3. Director(s) details – individuals;
  4. Director(s) details - bodies corporate;
  5. Reserve bank of India approval letter;
  6. Secretary(s) details;
  7. Power of attorney or board resolution in favor of the authorized representative(s).

Once registered with the MCA, a Corporate Identity Number (CIN) is allotted to the BO by the RoC.

Other business licenses which are applicable and are required to be obtained by a BO include:

  1. Permanent account number (PAN);
  2. Tax deduction number (TAN);
  3. Shop & Establishment Registration;
  4. Service Tax Registration (if the BO provides any services in India);
  5. VAT & CST Registration (if the Branch carries out trading activities in India).

A BO is permitted to acquire immovable property by way of purchase for its own use and to carry out permitted/incidental activities.5 BOs have general permission to carry out permitted / incidental activities from lease property subject to lease period not exceeding five years.

Permissible Activities

A BO should be engaged in the activity(ies) in which the parent company is engaged. The Permissible Activities of a BO of companies incorporated outside India and engaged in manufacturing or trading activities, include:

  1. Export / Import of goods (procurement of goods for export and sale of goods after import are allowed only on wholesale basis);
  2. Rendering professional or consultancy services;
  3. Carrying out research work, in areas in which the parent company is engaged;
  4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company;
  5. Representing the parent company in India and acting as buying / selling agent in India;
  6. Rendering services in information technology and development of software in India;
  7. Rendering technical support to the products supplied by parent/group companies; and
  8. Foreign airline / shipping company.

Retail trading activities of any nature is not allowed for a BO in India. Further, a BO is not allowed to carry out manufacturing or processing activities in India, directly or indirectly. An entity may file a request for undertaking activities in addition to what has been permitted initially by the RBI. Such a request may be submitted through the designated AD Category -I bank to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai, justifying the need with comments of the designated AD Category - I bank.

Notably, profits earned by a BO are freely remittable from India, subject to payment of applicable taxes, on production of the following documents to the satisfaction of the AD Bank through whom the remittance is made and the following is required for the same:

  1. A certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year;
  2. CA's certificate certifying:

    1. the manner of arriving at the remittable profit,
    2. That the entire remittable profit has been earned by undertaking the permitted activities,
    3. That the profit does not include any profit on revaluation of the assets of the branch.

A BO is permitted (with the AD Bank) to open noninterest bearing INR current accounts in India. AD Bank may allow term deposit account for a period not exceeding 6 months in favor of a BO, provided the AD Bank is satisfied that the term deposit is out of temporary surplus funds and the BO furnishes an undertaking that the maturity proceeds of the term deposit will be utilized for its business in India within three months of maturity.6

The RBI has also given general permission to foreign companies for establishing BO in Special Economic Zones (SEZs) for undertaking manufacturing and service activities, subject to the following conditions:

  1. such units are functioning in those sectors where 100 per cent FDI is permitted;
  2. such units comply with part XI of the Companies Act,1956 (Section 592 to 602) which relates to companies incorporated outside India;
  3. such units function on a stand-alone basis.

Reporting

A BO is required to submit a report containing information, as per format provided in Annexure 3 to the Master Circular within five working days of the BO becoming functional (and then on an annual basis) to the Director General of Police (DGP) of the state concerned in which BO has established its office. In case a foreign entity has more than one office, them the report has to be filed with each of the DGP concerned of the state where it has established an office in India.

A BO is also required to file Annual Activity Certificates (AAC), as prescribed in Annexure 4 to Master Circular from CA, at the end of March 31, along with the audited Balance Sheet on or before September 30 of that year. In case the annual accounts of the 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 to the designated AD Bank, and a copy to the Directorate General of Income Tax (International Taxation), New Delhi along with the audited financial statements including receipt and payment account.

The designated AD Bank scrutinizes the AAC in order to ensure that the activities undertaken by the BO are being carried out in accordance with the terms and conditions of the approval given by the RBI. In the event of any adverse findings being reported by the Auditor or noticed by the designated AD Bank, the same are reported by the designated AD Bank to the Central Office of the RBI, along with the copy of the AAC and their comments thereon.

Transfer of Assets

The AD Banks have been delegated that power relating to transfer of assets of a BO. However, such power is subject to compliance of certain conditions, namely:

  1. Transfer of assets to be allowed by AD banks only when the foreign entity intends to close their BO operations in India.
  2. Adherence to the operational guidelines by the BO (stipulated in AP DIR Circular No.23 & 24 of December 30, 2009) such as (a) has submitted AACs (up to the current financial year) at regular annual intervals with copies endorsed to DGIT (International Taxation) and (b) has obtained PAN from IT Authorities and have got registered with Registrar of Companies under Companies Act 1956, if necessary.
  3. Submission of certificate from the Statutory Auditor furnishing details of assets to be transferred indicating their date of acquisition, original price, depreciation till date, present book value or written-down value and sale consideration (which should not be more than the book value in each case) to be obtained. The Certificate should also include a confirmation by the Statutory Auditor that the assets were not re-valued after their initial acquisition.
  4. Acquisition of the asset by the BO should be from inward remittances and no intangible assets such as good will, pre-operative expenses should be included. No revenue expenses such as lease hold improvements incurred by a BO can be capitalized and transferred to joint venture/wholly owned subsidiary. AD Bank are required to ensure that the payment of all applicable taxes while permitting transfer of assets.
  5. Credits to the bank accounts of BO on account of such transfer of assets will be treated as permissible credits.

Closure of BO

A foreign entity has to approach the AD Bank for its request regarding closure of its BO. Such request has to be supported by the following documents:

  1. Copy of the RBI's permission / approval from the sectoral regulator(s) for establishing the BO;
  2. Auditor's certificate

    1. 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;
    2. 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; and
    3. confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
  3. No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s;
  4. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance;
  5. A report from the RoC regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the Office in India;
  6. Any other document/s, specified by the RBI while granting approval.

The AD Bank has to ensure that the BO had filed their respective AACs with the RBI for the previous years, in respect of the existing BO. Closure of such BO has to be reported by the AD Bank to the RBI (the Regional Office concerned for LOs and Central Office for BOs), along with a declaration stating that all the necessary documents submitted by the BO have been scrutinized and found to be in order. If the documents are not found in order or cases are not covered under delegated powers, the AD Bank may forward the application to the RBI, with its observations, for necessary action. All the documents relating to the BO operations may be retained by the AD Bank for verification by the internal auditors of the AD Bank and/or inspecting officers of the RBI.

Footnotes

1. http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9050

2. Automatic 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.

Approval 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 Organizations / Non - Profit Organizations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

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.

4. If the above documents are not in English then the translated version of the documents.

5. Except in cases of foreign entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China which are not allowed to acquire immovable property in India for a BO without prior RBI approval.

6. Term deposit facility may not be extended to shipping/ airline companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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