What is a Branch Office (“BO”)?

A BO is a suitable business model for foreign companies looking to establish a temporary presence in India. The BO serves as an extension of the head office business and carries on the same business and activity as that of its parent company. The foreign company can have any revenue from the Indian BO only from the activity allowed by the Reserve Bank of India (“RBI”). It has to meet all its expenses of Indian office through remittances from the head office or through the revenue generated from the Indian operation permitted by the RBI.

BO is suitable for a foreign company to test and understand the Indian market with a very strict control by the RBI, as it does allow the companies to do business but just to do the activity which are mentioned in the application of BO. The Master Direction on Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities shall be relevant for setting up of the BO.

Permitted Activities

Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up BO in India and undertake the following activities in India;

i.         Export/import of goods. 

ii.       Rendering professional or consultancy services (other than practice of legal profession in any matter). 

iii.       Carrying out research work in which the parent company is engaged. 

iv.       Promoting technical or financial collaborations between Indian companies and parent or any overseas group company. 

v.        Representing the parent company in India and acting as buying/ selling agent in India. 

vi.       Rendering services in information technology and development of software in India. 

vii.      Rendering technical support to the products supplied by parent/group companies. 

viii.    Representing a foreign airline/shipping company. 

General Criteria

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

An application from a person resident outside India for opening of a BO 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: 

a.    The applicant is a citizen of or is registered/incorporated in Pakistan; 

b.  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 BO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands; 

c.    The principal business of the applicant falls in the four sectors namely Defence, Telecom, Private Security and Information and Broadcasting. However, prior approval of RBI shall not be required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted. 

d.    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 22. 

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

Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called].

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

Procedure for setting up a BO

i.       The application for establishing BO in India may be submitted by the non-resident entity in Form FNC 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 LOC, wherever applicable. The AD Category-I bank shall after exercising due diligence in respect of the applicant’s background, and satisfying itself as regards adherence to the eligibility criteria for establishing BO, antecedents of the promoter, nature and location of activity of the applicant, sources of funds, etc., and compliance with the extant KYC norms grant approval to the foreign entity for establishing BO in India.

ii.         However, 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 BO. After receipt of the UIN from RBI, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing BO in India.

iii.       An applicant that has received a permission for setting up of a BO shall inform the designated AD Category I bank as to the date on which the BO has been set up. The AD Category I bank in turn shall inform RBI accordingly. The approval granted by the AD Category I bank should include a proviso to the effect that in case the BO for which approval has been granted is not opened within six months from the date of the approval letter, the approval shall lapse. 

iv.   All applications for establishing a BO in India by foreign banks and insurance companies will be directly received and examined by the Department of Banking Regulation (DBR), Reserve Bank of India, Central Office and the Insurance Regulatory and Development Authority (IRDA),

v.      There is a general permission to non-resident companies for establishing BO in the Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to the conditions that:

o   such BOs are functioning in those sectors where 100% FDI is permitted;

o   such BOs comply with Chapter XXII of the Companies Act, 2013; and

o   such BOs function on a stand-alone basis.

vi.    A BO may approach any AD Category-I bank in India to open an account for its operations in India. Credits to the account should represent the funds received from Head Office through normal banking channels for meeting the expenses of the office and any legitimate receivables arising in the process of its business operations. Debits to this account shall be for the expenses incurred by the BO and towards remittance of profit/winding up proceeds.  Any foreign entity except an entity from Pakistan who has been awarded a contract for a project by the Government authority/Public Sector Undertakings or are permitted by the AD to operate in India may open a bank account without any prior approval of the Reserve Bank. 

Annual Activity Certificate by BO

The Annual Activity Certificate (“AAC”) as at the end of March 31 each year along with the required documents needs to be submitted by the following: 

a.          In case of a sole BO, by the BO concerned;

b.         In case of multiple BOs, a combined AAC in respect of all the offices in India by the nodal office of the BOs. 

The BO needs to submit the AAC to the designated AD Category -I bank as well as Director General of Income Tax (International Taxation), New Delhi.

The designated AD Category - I bank shall scrutinize the AACs and ensure that the activities undertaken by the BO are being carried out in accordance with the terms and conditions of the approval given. In the event of any adverse findings reported by the auditor or noticed by the designated AD Category -I bank, the same should immediately be reported to the General Manager, Reserve Bank of India, CO Cell, New Delhi, along with the copy of the AAC and their comments thereon. 

Registration with police authorities 

Applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, Macau or Pakistan desirous of opening BO 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.

Remittance of profit/surplus 

BOs are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the AD Category-I bank through whom the remittance is effected: 

a.       A certified copy of the audited balance sheet and profit and loss account for the relevant year. 

b.       A Chartered Accountant’s certificate certifying -

i. the manner of arriving at the remittable profit;

ii. that the entire remittable profit has been earned by undertaking the permitted activities; and 

iii. that the profit does not include any profit on revaluation of the assets of the branch. 

General Conditions

·           BO is allowed to open non-interest-bearing current accounts in India. Such Offices are required to approach their AD for opening the accounts.

·           A BO is required to register with the Registrar of Companies (ROCs) once it establishes a place of business in India under the Companies Act, 2013. 

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

·           Acquisition of property by BO shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations. 

·           AD Category-I bank can allow term deposit account for a period not exceeding 6 months in favour of a BO provided the bank is satisfied that the term deposit is out of temporary surplus funds and the BO furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity. 

Steps in brief
There are two routes available under the FEMA 1999 for setting up the BO in India:

·           Reserve Bank Approval Route

·           Automatic Route.

i.           Designate a Bank and branch where the account will be opened (post approval of RBI) who will be an Authorized Dealer Bank (AD Bank) for BO in India.

ii.         File an application for BO, with all necessary documents to the RBI through the AD Bank.

iii.       Obtain approval of RBI.

iv.        Apply to ROC to obtain a "Certificate of Establishment of Place of Business in India" within 30 days of approval by RBI.

v.         Apply for Permanent Account Number with Income Tax Authority.

vi.        Apply for TAN with Income Tax Authority.

vii.      Open account with Bank and to obtain bank account number.

viii.    Registration with police authorities if required.

Disclaimer:

      The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write-up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife Consulting is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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