Author: Treelife

What Is a Liaison Office?

The Foreign Exchange Management Act (FEMA) defines Liaison Office (“LO”) 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”.

Permitted activities for a liaison office in India of a person resident outside India 

1. Representing the parent company / group companies in India.
2. Promoting export / import from / to India.
3. Promoting technical/ financial collaborations between parent / group companies and companies in India.
4. Acting as a communication channel between the parent company and Indian companies.

Criteria

Applications from foreign companies (a body corporate incorporated outside India, including a firm or other association of individuals) for establishing LO in India shall be considered by the AD Category-I bank as per the guidelines given by Reserve Bank of India (RBI).

An application from a person resident outside India for opening of a LO in India shall require prior approval of Reserve Bank of India and shall be forwarded by the AD Category-I bank to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi – 110 001 who shall process the applications in consultation with the Government of India, in the following cases:

1. The applicant is a citizen of or is registered/incorporated in Pakistan;
2. 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 LO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
3. The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting.
4. The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. However, if such entity is engaged, partly or wholly, in any of the activities covered under Foreign Contribution (Regulation) Act, 2010 (FCRA), they shall obtain a certificate of registration under the said Act and shall not seek permission under FEMA.

The non-resident entity applying for a LO in India should have a financially sound track record viz: a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.

An applicant that is not financially sound and is a subsidiary of another company may submit a Letter of Comfort (LOC) (Annex A) from its parent/ group company, subject to the condition that the parent/ group company satisfies the prescribed criteria for net worth and profit.

Procedure

The application for establishing LO in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category – I bank (i.e. an AD Category – I bank identified by the applicant with whom they intend to pursue banking relations) along with the prescribed documents mentioned in the Form and the Letter of Consent (LOC), wherever applicable.

Before issuing the approval letter to the applicant, the AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the General Manager, Reserve Bank of India, CO Cell, New Delhi, for allotment of Unique Identification Number (UIN) to each LO. After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing LO in India.

The validity period of an LO is generally for three years, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years.

An applicant that has received a permission for setting up of a LO shall inform the designated AD Category I bank as to the date on which the LO has been set up. The AD Category I bank in turn shall inform Reserve Bank accordingly.

Opening of bank account by LO 

An LO may approach the designated AD Category I Bank in India to open an account to receive remittances from its Head Office outside India. It may be noted that an LO shall not maintain more than one bank account at any given time without the prior permission of Reserve Bank of India.

The Annual Activity Certificate (AAC) as at the end of March 31 each year along with the required documents needs to be submitted: the LO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi.

Registration with police authorities 

Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening LO in India shall have to register with the state police authorities. Copy of approval letter for ‘persons’ from these countries shall be marked by the AD Category-I bank to the Ministry of Home Affairs, Internal Security Division-I, Government of India, New Delhi for necessary action and record.

Other points to be kept in mind

A LO is required to register with the Registrar of Companies (ROCs) once it establishes a place of business in India if such registration is required under the Companies Act, 2013. This shall be filed in Form FC-1.

The LOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the AACs.

Each LO are required to transact through one designated AD Category-I bank only who shall be responsible for the due diligence and KYC norms of the LO. LO, present in multiple locations, are required to transact through their designated AD.

Acquisition of property by BO/PO shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations. The BO /PO of a foreign entity, excluding an LO, are permitted to acquire property for their own use and to carry out permitted/incidental activities but not for leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Nepal, Bhutan, China, Hong Kong and Macau require prior approval of the Reserve Bank to acquire immovable property in India for a BO/PO. BOs/LOs/POs have general permission to carry out permitted/ incidental activities from leased property subject to lease period not exceeding five years.

Steps in brief

There are two routes available under the FEMA 1999 for setting up the LO in India:

• Reserve Bank Approval Route
• Automatic Route.

1. 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.
2. File an application for Liaison Office, with all necessary documents to the Reserve Bank of India (RBI) through the AD Bank.
3. Obtain approval of RBI.
4. Apply to ROC to obtain a “Certificate of Establishment of Place of Business in India” within 30 days of approval by RBI.
5. Apply for Permanent Account Number with Income Tax Authority.
6. Apply for TAN with Income Tax Authority.
7. Open account with Bank and to obtain bank account number.
8. Registration with police authorities if required.

Whether Liaison office can hire employees

Form FNC specifically asks for the number of expected employees in the proposed LO and at the time of closing of the office the payments of gratuity etc. has to be certified by the Auditor.

Approval of Chinese Company

Chinese Company’s will need the specific approval of RBI as per the website of Consulate General of Shanghai

“Setting up Liaison /Representative /Branch/Project Office

Liaison Office/Representative Office:

A Liaison Office could be established with the approval of Reserve Bank of India. The role of Liaison Office is limited to collection of information, promotion of exports/imports and facilitate technical/financial collaborations.

Liaison office cannot undertake any commercial activity directly or indirectly.”

FAQs about LOs in India

1. What is a liaison office? 

A liaison office is a communication channel established by a foreign company in India between the parent company and Indian companies. It represents the parent company / group companies in India.

2. What is the difference between a branch office and a liaison office in India? 

A branch office can carry out commercial and industrial activities, while an LO cannot. LOs are merely a communication channel between the parent company and Indian companies.

3. Can a liaison office be converted to a branch office? 

Yes, an LO can be converted to a branch office with RBI’s approval.

4. What activities are permitted in an LO? 

An LO is permitted to promote exports and imports, facilitate technical or financial collaborations, represent the parent company or group companies and act as a communication channel between the parent company and the Indian companies.

5. What are the liaison office compliances under the Companies Act 2013? 

Under the Companies Act, 2013, an LO, if required, should register as a foreign company with the Registrar of Companies (ROCs) by filing Form FC-1.

6. What is the validity of an LO?

The validity period for an LO is three years, except in the case of Non-Banking Financial Companies (NBFCs) and construction and development sectors, for which it is two years.

7. How can I open a liaison office in India?

To open an LO, foreign companies must follow the guidelines set by RBI. The company must submit Form FNC along with the necessary documents to an AD Category-I bank and seek prior approval from RBI.

8. What is the difference between a project office and a liaison office?

A project office is a temporary office used for executing a specific project, while an LO is a communication channel between a foreign company and Indian entities. An LO cannot undertake any commercial activity, while a project office can be used for project-related commercial or financial activities.

Introduction

A company is an artificial person as we all know, having an identity separate from the members or the directors. However, since it is an artificial person it requires the Board of Directors (“BOD”) or the members to take decisions on its behalf. These decisions can be in the form of day to day decisions or bigger decisions such as taking a loan or entering into a merger etc.

The decisions are either taken in a Board Meeting (“Board Meeting”) held among the BOD or in a General Meeting (“General Meeting”) held among the members of the company.

Types of Resolutions

Ordinary Resolutions

As per the provisions of Section 114 (1) of the Companies Act, 2013 (“Act”)-

A resolution shall be an ordinary resolution if the notice required under this Act has been duly given and it is required to be passed by the votes cast, whether on a show of hands, or electronically or on a poll, as the case may be, in favour of the resolution, including the casting vote, if any, of the Chairman, by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy or by postal ballot, exceed the votes, if any, cast against the resolution by members, so entitled and voting.

This resolution is passed by a simple majority and simply means that the votes cast in favour of the resolution are higher than the ones against it.

Some of the matters requiring ordinary resolutions are –

1. Where Registrar directs to change the name of the company within 3 months
2. Alteration of Memorandum of Association (increase /consolidate/ sub-divide/ convert/ cancellation of share capital)
3. Where Central Government direct to change the name of the company within 3/6 months
4. Capitalization of company profit or reserves to issue fully paid bonus shares
5. Accepting deposits from public
6. Ordinary Business transacted at Annual General Meeting (“AGM”) only. “Ordinary Business” means business to be transacted at an AGM relating to (i) the consideration of financial statements, consolidated financial statements, if any, and the reports of the BOD and auditors; (ii) the declaration of any dividend; (iii) the appointment of directors in the place of those retiring; and (iv) the appointment or ratification thereof and fixing of remuneration of the Auditors.
7. Contribution to charitable trust in excess of 5 % of its Average Net Profit for 3 immediately preceding financial years
8. Appointment of Managing Director, Whole Time Director, Manager, subjected to provision of Section 197. Along with remuneration to be paid to directors.

Special Resolutions

As per the provisions of Section 114 (2) of the Act –

A resolution shall be a special resolution when-

• the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution;
• the notice required under this Act has been duly given; and
• the votes cast in favour of the resolution, whether on a show of hands or electronically or on a poll, as the case may be, by members who, being entitled so to do, vote in person or by proxy or by postal ballot, are required to be not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.

The key considerations for passing a special resolution are –

1. The notice duly specified the intention to propose a resolution as a special resolution.
2. Notice was given as required by the Act.
3. The votes cast in favor of the resolution shall not exceed three times the total vote cast by members against the resolution. In other words, the resolution is adopted with 75% of the valid votes.

Some of the matters that require special resolution are –

1. Alteration of Article of Association while converting from Private Limited to Public Limited and Vice Versa
2. To change the Registered office of the company outside the Local limits of the city, town or village
3. For Alteration of Memorandum of Association and Article of Association of the Company
4. For issuing further shares to Employees of the Company under the scheme of Employee Stock Option Plan & to determine the terms of issuing Debentures convertible into shares
5. Reduction of share capital and buyback of shares
6. To issue debenture convertible into shares, wholly or partly
7. Restriction on power of board
8. To make an application to Registrar for striking off the name of company
9. Approval of scheme of Merger and Amalgamation

Process of passing resolutions

The resolution is proposed as a ’motion’. A motion becomes a resolution only after the requisite majority of members have adopted it. A motion should be in writing and signed by the mover and put to the vote at the meeting by the chairman. In case of company meetings, only such motions are proposed as are covered by the agenda. However, certain motions may arise out of the discussion and may be allowed where no special resolution is mandated in the Act. Para 7.1 of Secretarial Standard 2 provides that every resolution shall be proposed by a member and seconded by another member.

The motion under consideration can be amended during the debate. An alteration is any change of a member’s essential motion until it is voted on and adopted. A member who has not previously spoken on the main motion or has not previously moved an amendment may suggest an amendment, but a formal motion cannot be amended.

The chairman can consider or reject an amendment for different reasons such as inconsistency, duplication, irrelevance, etc. When an amendment is passed, the key motion is adopted and seconded and the discussion on the amendment begins. Anyone who has already spoken on the main motion may speak on amendment, but nobody is permitted to talk on the same amendment twice. After detailed consideration of the proposal, it will be put to the ballot. When the amendment is approved, it shall be included in the central motion form.

General Meeting

The Secretarial Standard 2 issued by the Institute of Company Secretaries of India and approved by the Central Government governs the compliance requirement for General Meetings. Adherence by a company to Secretarial Standard is mandatory, as per the provisions of the Act.

The Act read with the Companies (Management and Administration) Rules, 2014 deals with the convening of AGM. It makes it compulsory to hold an AGM to discuss the yearly results, Auditor’s appointment and other such matters.

Convening a General Meeting

The BOD shall, every year, convene or authorise convening of a meeting of its members called the AGM to transact items of Ordinary Business specifically required to be transacted at an AGM as well as Special Business (“Special Business” means business other than the Ordinary Business to be transacted at an AGM and all business to be transacted at any other General Meeting.), if any.

The BOD may also, whenever it deems fit, call an Extra-Ordinary General Meeting (“EGM”) of the company.

Notice in writing of every meeting shall be given to every member of the company. Such notice shall also be given to the Directors and Auditors of the company, to the Secretarial Auditor, to Debenture Trustees, if any, and, wherever applicable or so required, to other specified persons.

Notice shall clearly specify the nature of the meeting and the business to be transacted thereat. In respect of items of Special Business, each such item shall be in the form of a resolution and shall be accompanied by an explanatory statement which shall set out all such facts as would enable a member to understand the meaning, scope and implications of the item of business and to take a decision thereon. In respect of items of Ordinary Business, resolutions are not required to be stated in the notice.

Notice and accompanying documents shall be given at least twenty-one clear days in advance of the meeting. The day of sending the notice and the day of meeting shall not be counted. Further in case the company sends the notice by post or courier, an additional two days shall be provided for the service of notice. In case of a private company, the period of sending notice including accompanying documents shall be as stated above, unless otherwise provided in the articles of the company.

A resolution shall be valid only if it is passed in respect of an item of business contained in the notice convening the meeting or it is specifically permitted under the Act.

Every company shall hold its first AGM within nine months from the date of closing of the first financial year of the company and thereafter in each calendar year within six months of the close of the financial year, with an interval of not more than fifteen months between two successive AGMs.

Passing of resolution by Postal Ballot 

Every company, except a company having less than or equal to two hundred members, shall transact items of business as prescribed, only by means of postal ballot instead of transacting such business at a General Meeting.

As per section 110 of the Act –

(1) A company 

(a) shall, in respect of such items of business as the Central Government may, by notification, declare to be transacted only by means of postal ballot; and 

(b) may, in respect of any item of business, other than ordinary business and any business in respect of which directors or auditors have a right to be heard at any meeting, transact by means of postal ballot, in such manner as may be prescribed, instead of transacting such business at a general meeting. 

(2) If a resolution is assented to by the requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf.

The following shall be passed only by a postal ballot –

1. Alteration of the objects clause of the Memorandum and in the case of the company in existence immediately before the commencement of the Act, alteration of the main objects of the Memorandum
2. Alteration of Articles of Association in relation to insertion or removal of provisions which are required to be included in the Articles of a company in order to constitute it a private company
3. Change in place of Registered Office outside the local limits of any city, town or village
4. Change in objects for which a company has raised money from public through prospectus and still has any unutilised amount out of the money so raised
5. Issue of shares with differential rights as to voting or dividend or otherwise
6. Variation in the rights attached to a class of shares or debentures or other securities
7. Buy-back of shares by a company
8. Appointment of a director elected by small shareholders
9. Sale of the whole or substantially the whole of an undertaking of a company or where the company owns more than one undertaking, of whole or substantially the whole of any of such undertakings.
10. Giving loans or extending guarantee or providing security in excess of the limit specified.
11. Any other resolution prescribed under any applicable law, rules or regulations.

The Board may however opt to transact any other item of Special Business, not being any business in respect of which directors or auditors have a right to be heard at the meeting, by means of postal ballot. Ordinary Business shall not be transacted by means of a postal ballot.

The results of the voting done through postal ballot shall be declared with details of the number of votes cast for and against the resolution, invalid votes and whether the resolution has been carried or not, along with the scrutiniser’s report shall be displayed for at least three days on the Notice Board of the company at its Registered Office and also be placed on the website of the company, in case of companies having a website. The resolution, if passed by requisite majority, shall be deemed to have been passed on the last date specified by the company for receipt of duly completed postal ballot forms or e-voting.

Board Meeting 

The Secretarial Standard 1 issued by the Institute of Company Secretaries of India and approved by the Central Government governs the compliance requirement for Meetings of the Board of Directors. Adherence by a company to this Secretarial Standard is mandatory, as per the provisions of the Act.

As per Section 173 of the Act states that –

Every company shall hold the first meeting of the BOD within thirty days of the date of its incorporation and thereafter hold a minimum number of four meetings of its BOD every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the Board.

The BOD of a company shall exercise the following powers on behalf of the company by means of resolutions passed at meetings of the board by simple majority, namely:—

1. to make calls on shareholders in respect of money unpaid on their shares;
2. to authorise buy-back of securities under section 68;
3. to issue securities, including debentures, whether in or outside India;
4. to borrow monies;
5. to invest the funds of the company;
6. to grant loans or give guarantee or provide security in respect of loans;
7. to approve financial statement and the board‘s report;
8. to diversify the business of the company;
9. to approve amalgamation, merger or reconstruction;
10. to take over a company or acquire a controlling or substantial stake in another company;
11. any other matter which may be prescribed

The Board of Directors of a company shall exercise the following powers only with the consent of the company by a special resolution, namely:—

1. to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company or where the company owns more than one undertaking, of the whole or substantially the whole of any of such undertakings.
2. to invest otherwise in trust securities the amount of compensation received by it as a result of any merger or amalgamation;
3. to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company‘s bankers in the ordinary course of business:
4. to remit, or give time for the repayment of, any debt due from a director.

Passing of Resolution by Circulation

The Act requires certain business to be approved only at meetings of the board. However, other business that requires urgent decisions can be approved by means of resolutions passed by circulation. Resolutions passed by circulation are deemed to be passed at a duly convened meeting of the board and have equal authority.

Illustrative list of items of business which shall not be passed by circulation and shall be placed before the Board at its Meeting

General Business Items

1. Noting minutes of meetings of audit committee and other committees.
2. Approving financial statements and the board’s report.
3. Considering the compliance certificate to ensure compliance with the provisions of all the laws applicable to the company.
4. Specifying list of laws applicable specifically to the company.
5. Appointment of secretarial auditors and internal auditors.

Specific Items

1. Borrowing money otherwise than by issue of debentures.
2. Investing the funds of the company.
3. Granting loans or giving guarantee or providing security in respect of loans.
4. Making political contributions.
5. Making calls on shareholders in respect of money unpaid on their shares.
6. Approving remuneration of Managing Director, Whole-time Director and Manager.
7. Appointment or removal of Key Managerial Personnel.
8. Appointment of a person as a Managing Director / Manager in more than one company.
9. In case of a public company, the appointment of Director(s) in casual vacancy subject to the provisions in the Articles of the company.
10. According sanction for related party transactions which are not in the ordinary course of business or which are not on arm’s length basis.
11. Sale of subsidiaries.

Voting in a General Meeting 

An equity shareholder has the right to vote for every motion. However, as per the Section 47 of the Act preference shareholder is entitled to vote only for a resolution pertaining to his rights.

Methods –

1. Show of hands –

As per Section 107, a resolution put to the vote of the meeting shall, unless a poll is demanded under section 109 or the voting is carried out electronically, be decided on a show of hands.

2. Polls –

As per Section 109 a poll may be demanded by such number of members holding, shares worth minimum value of Rs. Five Lakh or 10% voting power in the company.

Every member entitled to vote on a resolution and present in person shall, on a show of hands, have only one vote irrespective of the number of shares held by him. A member present in person or by proxy shall, on a poll or ballot, have votes in proportion to his share in the paid up equity share capital of the company, subject to differential rights as to voting, if any, attached to certain shares as stipulated in the Articles or by the terms of issue of such shares. Preference shareholders have a right to vote only in certain cases as prescribed under the Act. In case of a private company, the voting rights shall be reckoned in accordance with this para, unless otherwise provided in the Memorandum or Articles of the company.

Foreign companies can expand their operations to India by setting up a place of business, either by themselves or through agents, physically or electronically. To be considered a ‘Foreign Company,’ one must fulfill both criteria mentioned above.

The foreign company incorporation in India is divided into four categories: Project Offices (PO), Branch Offices (BO), Liaison Offices (LO), and Foreign subsidiaries. Each entry route has its set of conditions, rules and regulations that need to be followed.

Project Offices (PO)

If a foreign company plans to execute a specific project in India, it can set up a Project Office (PO) to represent its interests. Essentially, a PO is a branch office with a limited purpose of executing a specific project. Foreign companies engaged in construction or installation typically set up a PO for their operations in India.

Branch Offices (BO)

Branch Offices (BO) are suitable for foreign companies who wish to test and understand the Indian market with stringent control by the Reserve Bank of India (RBI). With BOs, companies can conduct business activities listed in the BO application.

An application from a person resident outside India for BO requires prior approval from the RBI. The AD Category-I bank forwards it to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi – 110 001, who processes the application in consultation with the Government of India.

When applicants belong to certain countries such as Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau and apply for a BO in Jammu and Kashmir, North East region, and the Andaman and Nicobar Islands, the authority consults with the Government of India. Additionally, if the applicant’s principal business falls in the defense, telecom, private security, and information and broadcasting sector, government approval is mandatory.

Furthermore, entities such as Non-Government Organization (NGO) and Non-Profit Organization, Body/ Agency/ Departments of foreign governments, must obtain a certificate of registration as per the Foreign Contribution (Regulation) Act, 2010.

The non-resident entity for BO in India should have a financially sound track record of a profit-making track record during the preceding five financial years in the home country and net worth of not less than USD 100,000.

The general conditions for setting up a BO in India include registering with the Registrar of Companies under the Companies Act, 2013. BOs can open non-interest bearing current accounts in India, obtain Permanent Account Number (PAN) from Income Tax Authorities, transact through one designated AD Category-I bank, and acquire property following the guidelines issued under Foreign Exchange Management.

Liaison Office

A Liaison Office (LO) does not conduct commercial or trading activity; it’s a place of business to act as a communication channel between the principal place of business or head office and entities in India. LO maintains itself through inward remittances received from abroad through a normal banking channel.

Permitted Activities for LO in India of a person resident outside India

• Representing the parent company/group companies in India.
• Promoting export/import from/to India.
• Promoting technical/financial collaborations between parent/group companies and India.
• Acting as a communication channel between the parent company and Indian companies.

Applications from foreign companies for establishing an LO in India shall be considered by the AD Category-I bank as per the guidelines given by RBI. An application from a person resident outside India for opening an LO in India requires prior approval from RBI.

The non-resident entity applying for an LO in India should have a financially sound track record, viz: a profit-making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.

Steps in setting up an LO

There are two routes available under the Foreign Exchange Management Act 1999 (FEMA) for setting up an LO in India: Reserve Bank Approval Route and Automatic Route.

• Designate a bank and branch where an account will be opened (post-approval of RBI) and an Authorized Dealer Bank (AD Bank) for LO in India.
• Apply LO with all necessary documents to the RBI through the AD Bank.
• Obtain approval of RBI.
• Apply to the Registrar of Companies (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 the Income Tax Authority.
• Open an account with the bank and obtain a bank account number.
• Registration with police authorities if required.

Foreign Subsidiary in India

A foreign subsidiary company is any company where 50% or more of its equity shares are owned by a company incorporated in another foreign nation. In such a case, the said foreign company is called the holding company or the parent company.

To operate in India through a subsidiary company, any foreign company (parent company) registered/incorporated outside India must hold at least 50% of the shareholding of the subsidiary company. The subsidiary can be registered as either a public limited company or a private limited company in India, with the latter being the preferred mode.

The subsidiary company must comply with additional Reserve Bank of India (RBI) regulations since it receives foreign investment through Form FC-GPR and FC-TRS. Additionally, the subsidiary company must be compliant with FC-1, FC-3 & FC-4 forms.

The subsidiary company must have a registered office in India, and out of the minimum requirement of two directors, the company must have at least one Indian citizen (a person who has stayed in India at least 182 days in the previous year) as a Director.

The foreign subsidiary must be compliant with the Foreign Direct Investment policies filed through FC-TRS, which report the transfer of foreign subsidiary company shares between an Indian resident and a non-resident investor. Additionally, the foreign subsidiary must be compliant with FC-GPR which reports on the remittance received by the shareholders of the foreign subsidiary company.

Steps in brief

To set up a foreign subsidiary company in India, companies must:

• Apply for the company’s name reservation in Spice+ Part A with the Registrar of Companies (ROC).
• Post-approval of the company’s name, apply for incorporation of the company through Spice+ Part B, attaching the Memorandum and Articles of Association of the Company. ROC fees and Stamp duty must be paid online.
• Post verification of documents, ROC will issue the Certificate of Incorporation (COI), PAN and TAN of the company simultaneously by the department.
• The subsidiary must open a current account and bring share subscription money from all the shareholders.
• Intimate RBI regarding the receipt of share subscription, which will be considered as FDI, and within 30 days must file e-Form FC-1.

Foreign subsidiaries are treated at par with any other Indian company. Therefore, general requirements pertinent to any private/public company follows. By following these guidelines, foreign companies can easily enter the Indian market and establish a subsidiary company. Compliance is key to meet all legal and regulatory requirements for each entry route, and compliance with the OPC annual compliance checklist can help ensure that all regulations are being adhered to.

As long as laws for foreign companies in India are adhered to, these subsidiaries are treated at par with any other Indian company. Whether via project office, branch office, liaison office or a foreign subsidiary, each mode of entry has its own advantages and disadvantages, hence the choice depends on the business’ objectives and requirements.

FAQs about Foreign Company Incorporation in India

Q: What documents are required to register a foreign company in India?

A: The documents required to register a foreign company in India include the Memorandum and Articles of Association of the company, attested by a notary public or Indian embassy/consulate. Other documents include a certificate of incorporation, a certificate of good standing, and a resolution from the board of directors of the foreign company authorizing the opening of a branch office in India. Additionally, the documents must be translated into English and notarized.

Q: What is the difference between an Indian company and a foreign company?

A: An Indian company is a company that is incorporated in India, according to the Companies Act, 2013. In contrast, a foreign company is a company that is incorporated outside India. Indian companies require registration with the Registrar of Companies in the state in which it is registered, while foreign companies can operate in India through various entry routes such as Project Offices (PO), Branch Offices (BO), Liaison Offices (LO), and Foreign Subsidiaries. Foreign companies are also subject to different regulations compared to Indian companies and must comply with additional regulations under the Foreign Exchange Management Act (FEMA) and the Companies Act, 2013.

Introduction

A Limited Liability Partnership (“LLP”) is an alternative business form that gives the benefits of limited liability of a company and the flexibility of a partnership. It has a separate legal entity distinct from that of its partners. It is capable of entering into contracts and holding property in its own name. Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus individual partners are shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its other obligations as a separate entity.

Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called a hybrid between a company and a partnership.

All LLP’s are governed by the Limited Liability Partnership Act, 2008 (“LLP Act”).

Features of LLP

• It has a separate legal entity.
• Each partner’s liability is limited to the contribution made such partner.
• Less compliance and regulations.
• No requirement of minimum capital contribution.

The minimum number of partners to incorporate an LLP is 2. There is no upper limit on the maximum number of partners of LLP. Among the partners, there should be a minimum of two designated partners who shall be individuals, and at least one of them should be resident in India.

The rights and duties of designated partners are governed by the LLP agreement. They are directly responsible for the compliance of all the provisions of the LLP Act 2008 and provisions specified in the LLP agreement.

Advantages

Separate legal entity:

An LLP is a separate legal entity. This means that it has assets in its own name and can sue and be sued in its own capacity. No partner is responsible or liable for any other partner’s misconduct or negligence.

No owner/manager distinction:

An LLP has partners, who own and manage the business. Just like a private limited company, whose directors may be different from shareholders. Primarily for this particular reason, venture capital funds do not invest in the LLP structure.

Flexible agreement:

The partners are free to draft the LLP agreement with respect to their rights and duties.

Limited liability:

The liability of the partners is limited to the extent of their contribution made to the LLP. At the time of winding up, only the LLP’s assets are used for the clearing of debts. The partners have no personal liabilities and hence are free to conduct the business in the best manner possible without the fear of attachment of their property.

Fewer compliance requirements:

An LLP is much easier and cheaper to run than a private limited company as there are only a few compliances per year. On the contrary a private limited company has a lot of compliances to fulfil along with conducting an audit or other such compliance requirements. The LLP is required to get an audit done when turnover  exceeds, in any financial year, forty lakh rupees, or when contribution exceeds twenty five lakh rupees. Other Compliances which are not required in LLP Vis-à-vis a private limited company are having no requirement of minimum number of board meetings in the financial year, no requirement to distribute dividend and no payment of dividend distribution tax. However the tax compliances for both a private limited company and a LLP is similar. A LLP is charged a flat rate of 30% on its total income. The amount of income-tax shall be further increased by a surcharge at the rate of 10% of such tax, where total income exceeds one crore rupees.

Easy to wind-up:

Not only is it easy to start, it’s also easier to wind-up an LLP, as compared to a private limited company.

No requirement of minimum capital contribution: 

The LLP can be formed without any minimum capital. There is no requirement of having a minimum contribution before preparing an agreement. It can be formed with any amount of capital contributed by the partners.

Disadvantages

Difficulty in raising capital and funding:

The LLP does not have the concept of equity or shareholders like a company. Angel investors and venture capitalists can only invest in the form of partners in a LLP if they would want to. This would entail them to take up all the responsibilities of a partner. Thus, angel investors and venture capitalists prefer to invest in a company rather than an LLP making it difficult for the LLPs to raise capital. Also, Foreign Direct Investment (FDI) in LLP is more restrictive as compared to companies.

Public disclosure:

The documents filed through the MCA portal are public documents. Any person can pay a small fee and can access the copy of LLP’s incorporation documents other than the LLP agreement and financial statements. These documents are not accessible in the case of sole proprietorship or traditional partnership firm are not available for public viewership.

Non-Compliance is Expensive:

Even though the compliance requirements for an LLP are relatively low, it is essential to adhere to them, else it can lead to heavy penalties. In case of non-compliance, penalty of ten thousand rupees shall be levied and in case of continuing contravention, with a further penalty of one hundred rupees for each day after the first during which such contravention continues, subject to a maximum of one lakh rupees for the LLP and fifty thousand rupees for every partner of such LLP.

In the case of a proprietorship or traditional partnership firm, there is no such requirement to bear non-compliance expenses.

Who should prefer a LLP?

From the business perspective it is essential to understand the advantages and disadvantages of setting up a LLP in general, however it is also essential to understand if it is the best structure for your business.

To understand if setting up a LLP is the right start to your business journey it is also essential to view the below mentioned points from the point of view of taxation and the operations. Let us also look at these additional points.

• If the business is engaged in manufacturing/ production and the dividend pay-out ratio will be relatively low: Incorporating a private company shall be beneficial as manufacturing companies can opt for lower taxation @ 20% as per section 115BAB of the Income-tax Act, 1961 and no deduction or allowance in respect of any expenditure or allowance shall be allowed in computing such income.
• If the business is going to be engaged in trading a partnership firm / sole proprietorship would be a better choice as the benefit of presumptive taxation under section 44AD of the Income-tax Act can be taken. The total turnover or gross receipts can be charged to 6% or 8% tax, provided that total turnover doesn’t exceed INR 2 crores. Also the requirements to maintain formal books of accounts is not there in case of presumptive taxation.

E-Commerce is India’s fastest growing and most exciting channel for online commercial transactions. It deals with cross-border transactions and eases the international brands to reach Indian customers.

To outline, many E-Commerce businesses or person dealing with such platform are unaware of the applicable tax compliances resulting from conceptual flaws.

What is E-Commerce

E-Commerce refers to buying and selling of goods/ services via internet- For e.g., Online shopping. Any person who supply goods/ service through the portal is called “E-Commerce Participant”. Further, any person who manages the portal is referred as “E-Commerce Operator”.

Fouls under Goods and Services Tax (GST)

Registration

• E-Commerce operator

Usually, when suppliers reaches the threshold limit is required to get GST registration. However, the GST law has prescribed few classes of person including E-Commerce Operator to register mandatorily irrespective of the threshold limit. (as per Section 24 of the Central GST Act)

• E-Commerce participant

Any person who supplies goods/ services or both, through an e-commerce operator (except notified supplies) needs to obtain GST registration irrespective of the threshold limit.

Notified supplies: It namely includes such as restaurant services, including cloud kitchens, housekeeping and accommodation services, and motor cabs – the GST liability falls on the E-Commerce Operator. (as per Section 9(5) of the Central GST Act)

Analysis of Tax Collected at Source (TCS)

TCS means the tax collected by an E-Commerce Operator from the consideration received by it on behalf of the supplier and remit the same to his GST account. It will be charged as per prescribed percentage of the net taxable supplies depending upon the supplies. (as per Section 52 of the Central GST Act)

TCS will be deducted during the month in which the supply is made and will be deposited within 10 days from the month-end of supply.

Fouls under Income-tax (IT)

Tax Deduction at Source (TDS)

The Finance Bill 2020 widened the scope of TDS by bringing E-Commerce Participants within tax range and asked E-commerce Operators to deduct TDS while making a payment to resident E-Commerce Participant basis the defined criteria in the IT Act. (as per Section 194-O of the IT Act)

TDS to be deducted on the Gross amount of sales/ services along with an exception to the Individual/ HUF subject to the transaction limit of 5 Lakhs in case if PAN is furnished.

Equalization Levy 2.0 (EL)

The first EL was introduced via Finance Act, 2016 and is made applicable to the specified services (namely advertisement services) provided by non-resident service providers.

The government has extended the scope and introduced EL 2.0 via the Finance Act, 2020. This EL 2.0 imposes the tax mandate on consideration receivable by the non-resident E-Commerce Operator.

Applicability

The EL 2.0 will be charged at the rate of 2% on the amount of consideration and unlike in the case of EL 1.0, the deduction of the levy is the responsibility of the non-resident E-Commerce Operator and is to be discharged by the operator itself.

Further, the levy has to be discharged on a quarterly basis.

This EL 2.0 covers the following E-commerce supplies subject to the condition that the recipient should be Indian resident or IP address shall be located in India:

• Online sale of goods owned by the e-commerce operator;
• Online provision of services provided by the e-commerce operator;
• Online sale of goods or provision of goods facilitated by the e-commerce operator;
• Any combination of the above

It also provide few exceptions on EL 2.0 applicability:

• The non-resident E-Commerce Operator has a permanent establishment in India and the supply are effectively connected to such permanent establishment;
• The EL 1.0 is applicable;
• The gross receipts/ turnover of such Operator from online supply is less than 2 crores in a year.

The EL 2.0 payment schedule stated below:

Payment Schedule

In case of defaults, simple interest will be imposed on late payments, and failure to pay the levy will incur a penalty equivalent to the amount of the levy.

An Annual Statement in Form-1 to be furnished to the tax authorities (Income-tax portal) on or before 30th June of the subsequent financial year.

If a taxpayer fails to furnish the statement within the prescribed time, he has to pay a penalty of INR 100 per day till the default continues.