Prospective companies and investors looking to enter India must precisely consider the options available for investment and avenues for establishing a business presence in the country.up to explore the Indian markets and understand the business and investment climate, as it does not allow the companies to do business but just to be in the market and understand the Indian market or carry out the research and development activities or to understand the problem of existing clients of the company and serve them better. As compared to other business structures, liaison offices permit foreign companies to build a light footprint in India keeping their financial, legal, and administrative commitments low.
General features of liaison office
Name of Indian liaison office shall be same as parent company.
Governing body for a liaison office License is Reserve Bank of India.
It is suitable for foreign Companies looking to setup a temporary office in India to liaison its existing business with Indian clients.
A Liaison office does not have any ownership; it is just extension of the exiting company in the foreign country.
Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India.
License for a liaison office is given for three years and shall be renewed every 3 years.
Activities allowed to liaison office in India
Representing in India the parent company / group companies.
Promoting export / import from / to India.
Promoting technical /financial collaborations between parent / group companies and companies in India.
Collecting information about possible market opportunities, source of supply, providing information about the parent company and its products to the prospective Indian customers or vice versa to its vendor.
Acting as a communication channel between the parent company and Indian companies.
Restrictions on activities of a liaison office
A Liaison Office is not permitted to undertake any commercial / trading / Industrial activity, directly or indirectly and therefore cannot earn any income in India.
A liaison office can neither borrow, nor lend money.
It cannot acquire, Hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India, without prior approval of RBI.
The Foreign Exchange Management Act (FEMA) governs the application and approval process for the setting up of a liaison or branch office in India.
Under the Act, foreign enterprises obtain permissions from the Reserve Bank of India’s (RBI) Foreign Exchange Department to establish a liaison office in the India.
Foreign insurance companies can set up liaison offices in India after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).
Foreign banks can establish liaison offices in India only if they get approval from the Department of Banking Regulation (DBR), RBI.
The applications from such entities are to be submitted through Form FNC Annex-1 (Application for Establishment of Branch / liaison Office in India).
Investment route The applications from these entities will be considered by the RBI through 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).
Condition for setting up liaison office An enterprise must also meet the following 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.
Documents required to begin the process of setting up a liaison office, a certificate of incorporation, Memorandum and Articles of Association (MOA and AOA), and a copy of the parent company’s latest audited balance sheet.
A liaison office must also obtain a Permanent Account Number (PAN) from the income tax department and a Unique Identification Number (UIN) from the RBI. The application for registration should be forwarded to the RBI by a designated AD Category - I Bank.
Within 30 days of establishment, a liaison office must register with the Registrar of Companies (RoC)through the Ministry of Corporate Affair’s online portal. The following documents are required for the same:
A notarized and apostilled copy of a 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 a liaison office in India.
List of directors.
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).
Compliance and conversion to another business structure
Each year, a 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 (Annex-3).
An AAC should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year.
If a liaison office 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.
A liaison office 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.
If you require any assistance in setting up a liaison office in India, please contact Itseki Mercurius India. If you have any query regarding this, please click here.