Setting up a Liaison Office in India

A liaison office (LO), also known as a representative office, has a specific and limited scope of operation. Its primary function is to serve as a communication channel between the Head Office abroad and parties in India. Unlike a branch office or a subsidiary, a LO is not allowed to conduct any business or generate income in India. The expenses incurred by such offices must be covered solely through inward remittances of foreign cash from the Head Office outside of India.

The purpose of a LO is confined to activities such as gathering information about potential market prospects and presenting information about the company and its products to prospective Indian clients. These offices are crucial for market research, establishing initial contacts, and understanding the business environment in India.

Permission to open a LO is initially granted for a period of three years. This period can be extended from time to time by the Reserve Bank of India (RBI) through an Authorized Dealer Category-I bank, allowing the LO to continue its communication and information-gathering activities in India.

Benefits of opening an LO in India

Foreign corporations aiming to establish a presence in India have several options, and the choice of business structure depends entirely on their ultimate goals. When it comes to entering India, there are primarily two possibilities:

• Branch Office: A branch office is an extension of the foreign company and is permitted to carry out business activities in India. While it can generate income, it is subject to higher regulatory requirements and taxation in India.
• LO (Representative Office): A LO serves as a communication channel between the foreign company's head office and entities in India. It is prohibited from conducting any commercial, trading, or industrial activities. However, it is useful for market research, gathering information, and building initial contacts. One of the advantages of a LO is that it does not generate income in India, making it a suitable choice for foreign companies that do not intend to engage in business operations but want to establish a presence for communication and information-gathering purposes.

The choice between a branch office and a LO depends on the specific goals, business activities, and regulatory compliance preferences of the foreign corporation. In certain scenarios, particularly when the primary aim is communication and market understanding without revenue generation, establishing a LO can be more advantageous due to its limited scope of operation and lower regulatory complexities.

LOs are a popular choice among foreign investors who are new to the Indian markets and may be uncertain about how India's evolving foreign direct investment (FDI) regulations will impact their business operations. Unlike other business structures such as branch offices or subsidiaries, LOs offer foreign companies an opportunity to establish a limited presence in India while keeping their financial, legal, and administrative responsibilities to a minimum.

One significant advantage of LOs is that they are not considered separate legal entities. Consequently, the cost of compliance is generally lower in comparison to other options for establishing a business in India. Additionally, if an investor decides to withdraw from the Indian market, closing a LO is a relatively swift process. Instead of going through complex winding-up procedures, LOs only need to file a closure application with the RBI, simplifying the exit process for foreign investors. This flexibility makes LOs an attractive option for those seeking a low-cost and straightforward way to establish a presence in India.

Activities carried out by the liaison office

In India, a LO is permitted to undertake specific tasks, which include:

• Representation: A LO can represent the parent company or a group of companies in India, acting as their communication channel and facilitating necessary interactions.
• Facilitating trade: It can promote export and import activities from and into India, fostering international trade relationships on behalf of the parent company or group of companies.
• Encouraging collaborations: LOs are allowed to encourage technical and financial collaborations between the parent or group companies and Indian companies. This involves facilitating partnerships, collaborations, and knowledge exchanges in various sectors.
• Communication hub: A LO serves as a liaison between the parent company and Indian companies, facilitating discussions, negotiations, and other forms of communication necessary for business interactions.

Procedure for setting up a LO in India

The procedure for opening a LO in India involves adherence to regulations and specific steps. Here is an outline of the process:

1. FEMA regulations: The application and approval process for opening a LO in India is governed by the Foreign Exchange Management Act (FEMA). Foreign firms are required to comply with FEMA regulations when establishing a liaison office.
2. Permission from RBI: Foreign firms intending to open a LO must obtain specific permission from the RBI's Exchange Department. RBI is responsible for granting approval for the establishment of LOs in India.
3. Application submission: Body corporates formed outside India, including businesses or associations of individuals, can apply for the establishment of LOs in India. The application is typically submitted in a specific format, such as Form FNC Annexure 1. This form contains the necessary details about the foreign company and its proposed LO in India.

Foreign companies must carefully follow these steps and fulfill all the necessary requirements to successfully open and operate a LO in India. Compliance with regulations and timely adherence to the stipulated procedures are essential throughout the process.

Determining if the target industry is restricted

The RBI evaluates petitions from foreign entities through two approval channels:

1. RBI route: This route is applicable if the foreign entity's primary business falls under sectors where 100 percent FDI is permitted through the automatic route. In these sectors, foreign entities can establish a LO in India without prior approval from the RBI.
2. Government route: If the foreign entity's primary business does not fall under the 100 percent automatic FDI route, the RBI considers applications from these entities under the Government route. In such cases, consultations are made with the Ministry of Finance, Government of India.

Specifically, if the foreign entity is conducting business in sectors such as defense, telecom, private security, and information and broadcasting, no prior RBI approval is required if the government or the concerned ministry has granted clearance for the establishment of a liaison office.

For non-governmental/non-profit organizations intending to set up a liaison office, they are required to obtain a certificate of registration under the Foreign Contribution (Regulation) Act 2010 (FCRA) instead of seeking permission through the RBI under the Foreign Exchange Management Act (FEMA). This certification is essential for such organizations to operate in India legally.

Eligibility criteria

• The enterprise must have a three-year record of profitable operations in the home country.
• The enterprise must have a minimum net worth of not less than US$50,000 or its equivalent, verified by the most recent audited balance sheet or account statement.

Applicants who do not meet the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company in accordance with Annexure- 2, provided that the parent company meets the eligibility criteria as outlined above.

Approval process

The approval process for operating LOs in India typically spans a duration of 90 days. Initially, approval is granted for a period of three years, and subsequent extensions can be obtained subject to approval by the RBI.

Application submission

A company must submit a certificate of incorporation, Memorandum and Articles of Association (MOA and AOA), and a copy of its constitution to begin the process of establishing a LO sheet.

Registration and documentation

The LO must also obtain a Permanent Account Number (PAN) from the income tax department and a Unique Identification Number (UIN) from the RBI. A designated AD Category-I bank must transmit the registration application to the RBI.

The LO must register with the Registrar of Companies (RoC) Within 30 days of its establishment, by submitting e-form FC-1 through the Ministry of Corporate Affair's online portal (mca.gov.in) with the following documents:

• A notarized and apostilled copy of the LO's 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 the LO in India.
• List of directors.
• Name and address of the company's official representative based in India.

Prerequisites for compliance

Annual Activity Certificate (AAC):

• The LO must submit an Annual Activity Certificate (AAC) to the RBI each year.
• The AAC, certified by a chartered accountant, verifies that the office's activities are within the scope of its charter.

Filing with Directorate General of Income Tax:

• The AAC, along with Form 49C, must be filed with the Directorate General of Income Tax within 60 days of the close of the financial year.

Opening multiple bank accounts:

• If an LO intends to open more than one bank account in India, it must obtain prior permission from the RBI through its Authorised Dealer (AD) Category-I bank.
• The LO needs to justify the reason for the additional bank account to obtain approval.

Registration renewal

The RBI grants initial approval to set up an LO for a three-year period. If desired, the LO can apply for an extension of the same to its authorized dealer Bank. The AD Bank, in consultation with RBI, has the power to grant an extension for a further period of three years (subject to confirmation of certain compliance requirements). The LO should apply for an extension at least one to two months before the expiry of the initial time period.

The closure of an Indian LO

ROC closure procedure for LO:

• Pass a Board Resolution in the parent company to close the LO in India.
• Identify a closure date for LO activities.
• Terminate employment contracts, settle dues with employees.
• Obtain a Board Resolution for LO closure, authorizing a person to file an application with ROC.
• File an e-form with ROC and obtain approval.

RBI closure procedure for LO:

• Pass a Board Resolution in the parent company to close the LO in India.
• Provide original approval letter from RBI and any extension letters.
• Present auditor's certificate.
• Confirm no pending legal proceedings and no impediment to remittance.
• Submit ROC closure report.
• Transfer assets (e.g., computers, cars) by selling to joint venture or wholly owned subsidiary with prior RBI approval.
• Complete all reporting.
• Request AD Bank to remit remaining funds to the parent company before closing the bank account.

Is it possible for a foreign corporation to open more than one LO in India?

All proposals for the establishment of additional LOs must be submitted to the AD Category-I bank in a fresh FNC form. However, if there are no modifications to the documents submitted previously mentioned in form FNC need not be submitted again.

• If the number of LO offices exceeds four (one LO in each zone - East, West, North, and South India), the applicant has to justify the need for additional office/s and prior approval of RBI is required.
• The applicant may identify one of its offices in India as the Nodal Office, which shall coordinate the activities of all its offices in India.
• In case the existing LO is shifting to another city in India, prior approval from the AD Category-I bank is required. However, no permission is required if the LO is shifted to another place in the same city, subject to the condition that the new address is intimated to the designated AD Category-I bank.