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Introduction
India stands among the world’s fastest-growing economies with a large and dynamic market. India presents immense opportunities for business expansion and fresh investment. These advantages have positioned India as a highly attractive destination for Foreign Direct Investment (FDI), drawing sustained interest from global enterprises seeking to establish their operations.
The Government of India (GoI) actively promotes the Public-Private Partnership (PPP) model and foreign collaborations to strengthen the infrastructure and foster employment and sustainable development in India Public sector undertakings (PSUs) across sectors such as infrastructure, energy, manufacturing, oil and gas. The GoI regularly invite bids for both short-term and long-term projects. These tenders are often open to foreign entities as well. Since projects in India may be awarded to foreign companies, it becomes essential for such foreign entities to establish a place of business in India to effectively execute the awarded projects.
It is often assumed that setting up a subsidiary company is necessary for establishing a place of business in India by foreign entities. However, this is not always required. Foreign entities can also undertake business activities in India by establishing a Project Office subject to the regulatory framework prescribed by the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs (MCA).
A Project Office is generally established for executing a specific project in India, typically awarded by an Indian entity. The Project Office is not a separate legal entity unlike a private or public limited company rather it is an extension of the foreign entity. The tenure of Project Office remains valid for the duration of the project.
The regulatory framework governing project office are primarily provided under Foreign Exchange Management Act, 1999, 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 (Foreign Exchange Laws of India).
Establishment framework, approval process and regulatory conditions for setting up a project office in India
Establishment of Project Office in India is comparatively easier than incorporating a limited liability company. In fact, the ongoing compliance of the Project Office is substantially lower in comparison to a limited liability company. The RBI has given general permission to foreign entities for opening of Project Office in India subject to the conditions that the foreign entity must have secured a contract from an Indian entity to execute a project in India and the project must be funded directly by inward remittance from abroad or by other prescribed means.
Before making an application with the AD Bank, the foreign entity must ensure that there is a valid written contract to evidence that the project is awarded to the foreign entity, in India. A mere memorandum of understanding is generally not acceptable.
A foreign entity can make an application in the specified format to an Authorized Dealer Category-I Bank (AD Bank) with required documents, including contract details, charter documents, letter of comfort, banker’s report and authorizations. After due diligence on background, promoters, activities, and fund sources, and ensuring KYC compliance, the AD Bank may approve setting up a Project Office in India under the general permission route. However, if a foreign applicant is a citizen of / is registered in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau desires to open a Project Office in certain locations of India such as Jammu and Kashmir, North East region and Andaman and Nicobar Islands, then the prior approval of RBI is required for opening of Project Office. Further, for applicants from Pakistan, prior approval of RBI is mandatory in all cases.
If a Project Office operates in Defence, Telecom, Private Security, or Information & Broadcasting, the prior RBI approval is needed unless the concerned ministry or regulator has already granted approval. Further, in the defence sector, no separate Government approval is required if the foreign entity has a contract from Ministry of Defence or Service Headquarters or Defence PSUs.
The approval granted by the AD Bank for setting up a Project Office is valid for six months from the date of approval. Therefore, the foreign entity is required to operationalize the Project Office within this period, including entering into a lease agreement (with a lease term not exceeding five years at a time) and entering into the necessary service agreements with third parties. These initial six months period may be extended by a further six months by the AD Bank in appropriate cases, however, any extension beyond this period requires prior approval from the RBI.
As per the provisions of Indian Companies Act, once the Project Office is set up in India, it is also required to be registered with the Registrar of Companies (ROC) and comply with the applicable norms of the Indian Companies Act. In addition to this, the foreign entity from the neighbouring nations of India; i.e. Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening Project Office in India are also required to register with the state police authorities.
One of the prime benefit of Project Office is that project offices are allowed to send project profits abroad after deducting applicable Indian taxes. The AD Bank may approve periodic remittances before project completion if the transaction is genuine, provided the Project Office submits an auditor’s certificate confirming adequate provisions for liabilities and an undertaking ensuring project completion and coverage of any funding shortfall from abroad.
Post-Establishment Registrations and Ongoing Compliance Requirements for Project Offices in India
Once the Project Office is set up in India it is also required to meet the ongoing statutory compliances such as opening of bank account in India, obtaining necessary registrations such as Permanent Account Number, TDS registration, GST registration, employment related registrations.
As a routine compliance, the Project Office is required to submit an Annual Activity Certificate (AAC) to the designated AD Bank. AAC is prepared as at 31st March of each financial year. The AD Bank is responsible for scrutinizing the AAC to ensure that the activities carried out are in conformity with the terms and conditions of RBI approval and applicable regulatory requirements.
The Project office is also required to submit its annual return and annual accounts with the ROC within the prescribed timeline. Further, if there is any change in the information already submitted with the Registrar of Companies such as change in directors or secretary of foreign entity, change in the address of the principal place of business in India, change in the authorised representative, then such change is also required to be intimated to Registrar of Companies within the prescribed timeline.
Closure of Project Office
Upon completion of the project in India, the foreign entity may close its Project Office and remit the winding-up proceeds by applying to the designated AD Bank along with the prescribed documents, including the approval for establishment of the Project Office and an auditor’s certificate confirming inter alia, no income remains unrepatriated in India. The foreign entity is also required to confirm that no legal proceedings are pending in India and that the Project Office has filed its AACs. The AD Bank will review the documentation and ensure compliance with the applicable foreign exchange laws before approving the closure and permitting the remittance of funds.
Conclusion
Project Offices offer a focused and practical route for foreign entities to execute awarded projects in India without establishing a full-fledged corporate presence. Backed by a clear regulatory framework under the Foreign Exchange Management Act, 1999 and oversight from the RBI, they strike a balance between ease of entry and regulatory discipline.
From obtaining approvals and setting up operations to meeting ongoing compliance and eventually closing the office, the lifecycle of a Project Office is well-defined. For foreign entities looking to tap into India’s project driven opportunities particularly in infrastructure and allied sectors, a Project Office serves as a strategic, cost-effective, and efficient gateway that too with a lighter compliance burden.
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.
