Liaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time without committing major resources. In contrast to other business structures, LOs allow foreign companies to establish a light footprint in India while keeping their financial, legal, and administrative commitments low. Here, we outline the functions and requirements for liaison offices operating in India.
Prospective companies and investors looking to enter India must carefully consider their options for investment and available avenues for establishing a business presence in India. Foreign Investor or Foreign companies can open a liaison office in India for promoting and facilitating the parent company business activities and which can act as a communication channel between the foreign parent company and India. With the liaison office, the foreign parent company will get help in entering into Indian market and exploring and studying the Indian market situation for their business growth. Foreign corporations are permitted to open liaison/representative offices in India (subject to obtaining specific approval from the RBI), to undertake liaison activities in India on behalf of their principal.
What Is a Liaison Office?
The Foreign Exchange Management Act (FEMA) defines Liaison Office as "a place of business to act as a channel of communication between the Principal place of business or Head Office 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".
The master circular of RBI states that a Liaison Office ("LO") can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of a Liaison Office should be met entirely through foreign exchange from your Head Office outside India. Therefore, the role of a Liaison Office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an "AD Category I bank".
Liaison office cannot conduct business activities, whereas a Branch Office (BO) foreign companies can conduct full-fledged business in India. A Branch Office can carry same or substantially the same business activities as carried out by their parent or group companies. However, a Branch Office is not allowed to directly carry out manufacturing activities in India, though it is permitted to sub-contract manufacturing contract to an Indian manufacturer.
Setting Up a Liaison office in India:
Foreign companies can open a liaison office in India to facilitate and promote the parent company's business activities, and act as a communications channel between the foreign parent company and Indian companies. Unable to engage in commercial, trading, or industrial activities; liaison offices must be sustained by private, inward remittances received from their foreign parent company.
Cases Which Requires Prior Approval of RBI:
Any application from a foreign entity for opening a liaison office in India shall require prior approval of Reserve Bank in the following cases;
- The applicant is a citizen of or the entity is registered/incorporated in Pakistan;
- the applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a liaison or branch office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
- The principal business activity of the applicant falls in the four sectors; namely Defence, Telecom, Private Security and Information and Broadcasting:
- The applicant is a Non-Government Organization, Non-Profit Organization, Body/ Agency/ Department of a foreign government.
Such applications shall be forwarded to the Reserve Bank, Foreign Exchange Department, Central Office Cell, New Delhi by the Authorized Dealer Category-I bank and be considered in consultation with the Government of India.
A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. A liaison office is permitted to engage in the following activities;
- Facilitate communication between the overseas head company and parties in India to establish market opportunities;
- Promote imports/exports between countries;
- Establish financial and technical cooperation between overseas and Indian companies; and,
- Represent the overseas head company in India.
The Foreign Exchange Management Act (FEMA) governs the application and approval process for the establishment of a liaison office or branch office in India. Under the Act, foreign enterprises must receive specific approval from the Reserve Bank of India's (RBI) Foreign Exchange Department to operate a liaison office in the country. Foreign insurance companies can establish Liaison Office in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Foreign banks can establish Liaison Office only after obtaining approval from the Department of Banking Regulation (DBR), RBI.
Applications are to be submitted through Form FNC Annex-1 (Application for Establishment of Branch/Liaison Office in India). Following documents are required for opening of liaison office:
- Form FNC – 1 – Three copies
- Letter from the principal officer of the Parent company to RBI.
- Letter of authority from the parent company in favor of Local Representative.
- Letter of authority/ Resolution from parent company for setting up liaison office in India.
- Comfort letter from the parent company intending to support the operation in India.
- Two copies of the English version of the Certificate of Incorporation, Memorandum & Articles of association (Charter Document) of the parent company duly attested by the Indian embassy or notary public in the country of registration.
- Certification of Incorporation – Translated & Duly Notarized and Certified by Indian Consulate
- The Latest audited Balance sheet and annual accounts of parent company duly Translated notarized for past Three years. & Certified by Indian Consulate & Directors
- Name, Address, email ID and telephone number of the authorized person in Home Country.
- Details of Bankers of the parent company along with the bank account number
- Expected funding level for operations in India.
- 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
- Details of Activity carried out in Home Country by the parent company in brief about the product and services of company in Brief.
- Report from the bank of parent company showing the number of years the applicant has had banking relations with that bank.
- Latest Proof of identity of all the Directors – Certified by Consulate and Banker in Home Country
- Latest Proof of address all of Directors – Certified by Consulate and Banker in Home Country
- Structure of the parent company w.r.t Shareholding pattern
- Resolution for Opening up Bank Account with the Banker
- Duly Signed Bank Account Opening Form for Indian Bank
Investment route and other conditions:
The applications from these entities will be considered by the RBI under two routes:
- RBI route – Where principal business of the foreign entity falls under sectors where 100 percent FDI is permissible under the automatic route.
- Government route – Where principal business of the foreign entity falls under the sectors where 100 percent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from non-government organizations are considered by the RBI in consultation with the Ministry of Finance, Government of India.
The approval process generally takes 20 to 24 weeks and permission to operate a liaison office is granted for a three-year period, which can be extended at a later date (maximum three-year extension).
An enterprise must also meet the following net-worth conditions before qualifying for the establishment of a liaison office:
- Must have a three-year record of profitable operations in the home country; and,
- Must have a minimum net worth of US$50,000 verified by the most recent audited balance sheet or account statement.
- If a company does not meet these requirements, but is a subsidiary of a company that does, the parent company may submit a Letter of Comfort on the subsidiary's behalf, as per Annex-2.
To begin the process of setting up a liaison office, a company must submit a certificate of incorporation, Memorandum and Articles of Association (MOA and AOA), and a copy of the parent company's latest audited balance sheet.
The liaison office must also obtain a Permanent Account Number (PAN) from the income tax department and a Unique Identification Number (UIN) from the RBI.
Within 30 days of establishment, the liaison office must register with the Registrar of Companies (RoC) through the Ministry of Corporate Affair's online portal [Form FC-1]. The following documents must also be provided:
- A notarized and apostilled copy of the liaison office charter or Memorandum and Articles of Association in English;
- Full address of the enterprise's principal place of operation outside of India;
- Name and address of the liaison office in India;
- List of directors; and,
- Name and address of the company's official representative based in India (the person authorized to accept delivery of notices and documents served to the company).
- RBI approval letter.
Starting Operation of Liaison Office:
- Designate a Bank and branch where account will be opened (post approval of RBI) who will be an Authorized Dealer Bank (AD Bank) for Liaison Office in India.
- File an application for Liaison Office, with all necessary documents to the Reserve Bank of India (RBI) through the AD Bank.
- Obtain approval of RBI.
- Apply to ROC to obtain a "Certificate of Establishment of Place of Business in India" within 30 days of approval by RBI.
- Apply for Permanent Account Number with Income Tax Authority.
- Apply for TAN with Income Tax Authority.
- Open account with Bank and to obtain bank account number.
- Obtain registration under Shop and Establishment Act (depends upon local laws based on location).
- Obtain registration under Professional Tax (depends upon local laws based on location).
- Obtain Import Export Code (if samples have to be imported).
Registering with State Police Authorities:
Only applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong, Kong, Macau, and Pakistan have to register with the state police authorities. A copy of the approval letter for persons from these countries shall be marked by Authorized dealer bank to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New Delhi for necessary action and record. All other countries are exempted from registering with the state police authorities.
Each year, the liaison office must file an Annual Activity Certificate (AAC), prepared by a chartered accountant, to the RBI verifying the office's activities are within its charter. An AAC should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year. If an LO wants to open more than one bank account in India, it has to obtain prior permission of the RBI through its AD Category – I bank justifying the reason for the additional account. An LO can also be upgraded into a branch office (BO) structure once its bank account is re-designated as a BO account. The entity will not require a new PAN. Following regular compliances are required to be done:
- Reporting to RBI about address and others: The Liaison Office has to report its office address to the RBI within 6 months of approval. It also has to report RBI about its Permanent Account Number (PAN) and "Certificate of Establishment of Business Place in India" issued by office of ROC.
- Annual Activity Certificate: The Liaison Office has to obtain Annual Activity Certificate from practicing Chartered Accountant and to file the same with the following;
- Authorized Dealer Bank
- Director General of Income Tax (International Taxation)
- Return with ROC: The Liaison Office is required to file the following: annual receipt and payment statement, an assets and liabilities statement duly audited by practicing local Chartered Accountants to the office of Registrar of Companies (ROC); along with the latest consolidated financial statement of parent company (duly notarized and certified by Indian Embassy / Consulate office that has proper jurisdiction in the office location of the parent company). If the language of the parent company is other than English, then this will have to be translated by certified translator before starting the process of notarization and certification. Apart from the financials, LO must also provide the list of all place of business, along with copy of approval obtained if any. ROC filing has to be done before 6 months from the date of closure of books of accounts of LO.
The process of setting of Liaison offices takes around 3-4 months. Post RBI approval activities takes another 2 months. Thus, it takes around 6 months time for a liaison office to be operational in India.
Initial approval to set up an LO is granted by RBI to establish India Liaison office for a 3-years period. If desired, LO can apply for extension of the same to its authorized dealer Bank. The AD Bank, in consultation with RBI, has the power to grant an extension for a further period of 3 years (subject to confirmation of certain compliance requirements). The LO should apply for extension at least 2 months before the expiry of the initial time period.
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.