In the globalized world of business, the desire to expand into new markets often leads corporations to explore opportunities in diverse regions. For a body corporate incorporated outside India, the prospect of opening a Liaison Office (LO) or Branch Office (BO) in India is an avenue that requires careful consideration of regulatory frameworks outlined in the Foreign Exchange Management Act of 1999 (FEMA). Let’s delve into the essential aspects and criteria involved in obtaining permission for such establishments.
Regulatory Routes: Reserve Bank or Government?
Entities seeking to open a Liaison or Branch Office in India must submit applications through Form FNC (Annex-1) to the Reserve Bank. The Reserve Bank evaluates these applications based on two distinct routes:
- Reserve Bank Route:
- Applicable when the principal business of the foreign entity falls under sectors with 100% Foreign Direct Investment (FDI) permissible under the automatic route.
- Government Route:
- Applicable when the principal business falls under sectors where 100% FDI is not permissible automatically.
- Applications from Non-Government Organizations, Non-Profit Organizations, Government Bodies, and Departments are also considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.
Additional Criteria: Ensuring Financial Stability
The Reserve Bank considers additional criteria to assess the eligibility of foreign entities looking to establish Liaison or Branch Offices in India. These include:
- Track Record:
- For Branch Offices: A profit-making track record during the immediately preceding five financial years in the home country.
- For Liaison Offices: A profit-making track record during the immediately preceding three financial years in the home country.
- Net Worth:
- For Branch Offices: Not less than USD 100,000 or its equivalent.
- For Liaison Offices: Not less than USD 50,000 or its equivalent.
Application Process: Key Documents and Due Diligence
To initiate the process, the foreign entity must forward the application through a designated AD Category – I bank to the Chief General Manager-in-Charge, Reserve Bank of India. The application should include essential documents such as:
- English version of the Certificate of Incorporation/Registration or Memorandum & Articles of Association attested by the Indian Embassy/Notary Public in the Country of Registration.
- Latest Audited Balance Sheet of the applicant entity.
Entities not meeting the eligibility criteria but are subsidiaries of other companies can submit a Letter of Comfort from their parent company, subject to the condition that the parent company satisfies the prescribed criteria. The designated AD Category – I bank must conduct due diligence regarding the applicant’s background, promoter’s antecedents, nature and location of activity, sources of funds, etc. They must also ensure compliance with KYC norms before forwarding the application to the Reserve Bank.
Unique Identification Number (UIN) and PAN: Essential Steps
Upon approval from the Reserve Bank, the Branch or Liaison Office will be allotted a Unique Identification Number (UIN), crucial for regulatory compliance. Additionally, these offices must obtain a Permanent Account Number (PAN) from the Income Tax Authorities upon establishment in India. These identifiers streamline financial and regulatory processes, ensuring smooth operations and adherence to legal requirements.
Conclusion: Navigating Opportunities in India
Establishing Liaison or Branch Offices in India is a strategic move that demands meticulous attention to regulatory details. The dual evaluation routes provided by the Reserve Bank accommodate various business sectors, while the financial criteria ensure stability and viability. As entities venture into the diverse and dynamic Indian market, understanding and adhering to the regulatory landscape outlined by FEMA 1999 become instrumental in fostering successful and compliant business operations. With the right approach and compliance, foreign entities can unlock the vast potential and opportunities that India offers in the ever-evolving global business ecosystem.
