Branch office of Foreign Company
India sets up several rules under the RBI (Reserve Bank of India) and FEMA,1999. The establishment of a BO is regulated as per Section 6(6) of FEMA, 1999 read along with notification no FEMA 22/2000-RB dated May 3, 2000. Under Section 11 of the aforementioned Act, RBI issues directions to the authorised persons regarding the regulations to be followed when conducting foreign exchange business with the customers or constituents. The BOs that were established in the pre-FEMA period are now required to regularise their offices under FEMA through the RBI, as per the recent regulations.
PROCEDURE FOR THE ESTABLISHMENT OF BRANCH OFFICE IN INDIA
A BO can be established by a body incorporated outside India, including a firm or association of persons, involved in manufacturing or trading activities. The process of setting up is an easy one with minimal compliance requirements. The permission to set-up a BO has to be obtained by the RBI under the FEMA, 1999 provisions. RBI provides guidelines to be followed for establishing a BO; the former also reserves the right to reject an application on the non-fulfilment of the same. The Applications are to be made in form FNC and are considered by the RBI under two routes determined by the degree of Foreign Direct Investment (FDI):
• The Reserve Bank Route: taken when the principle business of the foreign company falls under sectors where 100% FDI is permissible.
• The Government Route: when the sectors do not permit 100% FDI investment. The RBI considers applications under this in consultation with the Ministry of Finance of India.
The RBI has a few other considerations:
• Track Record: For a BO a company will require a profit making track record in the in the immediately preceding five financial years in the home country.
• Net Worth: “a 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”. The net worth has to be equal to or more than USD 100,000. The application by the foreign company has to be made through a designated AD Category-I bank to the General Manager of the Foreign Exchange Department of RBI. Some prescribed documents have to be attached with the application. The RBI Master Circular of 2016 provides two of the documents that have to be attached:
“1. English version of the Certificate of Incorporation / Registration or Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration.
2. Latest Audited Balance Sheet of the applicant entity.”
Even if applications do not satisfy the criteria if an agent files them on behalf of a parent company, that parent company ought to satisfy the criteria. The AD-I Category bank involved in the process will conduct due diligence on the Applicant in the following areas- “background, antecedents of the promoter, nature and location of activity, sources of funds, etc.”, along with compliance of the Know Your Customer (KYC) norms.
The BO hence, once approved by the RBI, will be allotted a Unique Identification Number (UIN). Once the offices have been set up, the BO must also obtain a Permanent Account Number (PAN) from the Income Tax Authorities. This should be reported in the Annual Activity Certificate (AAC) that the BO is required to present at the end of each ear to show that the activities are undertaking in the permitted categories only.
Section 382 of the Companies Act, 2013, states that the company has to ‘conspicuously’ exhibit outside the office, the company’s name and the specify country it was incorporated in. The name must be in English Language and in the local language of the area where the office is set-up. If the members of the company have limited liability, then the same has to be specified with the name of the company outside the office and also mentioned in all the broachers, prospectus and any other circulars generated by the company. The Act also provides for the registration of the prospectus of the company with the registrar before it circulates and spreads any information about the issuance of securities by the company.