How to Establish a Place of Business in India: A Complete Guide for Foreign Entities

One of the traditional ways of establishing of place of business in India is the formation of a company, wherein a company is incorporated and is governed by the provisions of the Companies Act, 2013 and it has a perpetual succession.
However, on the other hand, if the purpose of establishment is for a limited period or to explore the Indian market, then in such cases what options do the Indian legislations have?
If the purpose of establishment is for a limited period or execution of a specific project or to understand the Indian market, then as per the provisions of the Foreign Exchange Management Act, 1992, the same can be achieved by setting up of Branch/Project/Liaison Office.
The Liaison Office (LO) and Branch Office (BO) provide a window for foreign investors to have an initial understanding of the business environment in India. The activities that can be undertaken by BO and LO are specified and they cannot undertake any other activity which is not specified.
The Project Office (PO) is opened for the limited purpose of execution of the project and the life of the project office is limited to the tenure of the project. LO, BO and PO are unincorporated places of business of foreign companies in India and are regulated by the Companies Act, 2013 as well under FEMA.

Permission for the Establishment of the BO/LO in India

1. General Approval by the RBI (Commonly known as the ‘RBI’ Route):

Foreign eligible entities are required to file an application with the RBI through a designated AD Category-I bank for establishing BO/LO/PO in India in Form FNC under the general approval route if the foreign entity is engaged in the sector where 100% FDI is permitted in India.

2. Specific Approval by the Govt. of India (Commonly known as ‘Govt.’ Route):

Foreign entities are required to file an application with the RBI through a designated AD Category-I bank for establishing BO/LO/PO in India in Form FNC under a specific approval route where the RBI requires specific approval from the concerned Ministry or Department of Government of India. The prior approval of RBI and a specific Ministry or department of the Government of India is required in the following circumstances.

1. Establishment of BO/LO by Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government.
2. The applicant is a citizen of or registered/incorporated in Pakistan.
3. 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/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
4. The principal business of the applicant falls in the following sectors: Defence, Telecom, Private Security, Information and Broadcasting; and the foreign entity is engaged in the sector where 100% FDIs are ‘not’ permitted in India.
3. Conditions for opening of BO/PO/LO

The RBI while considering the application for setting up, considers the following two conditions:

1. Track Record
2. Net worth criteria




Track Record:

1. For BO set up: Foreign entity should have profit-making track record during immediate preceding 5 (five) financial years in the home country.
2. For LO set up: Foreign entity should have profit-making track record during immediate preceding 3 (three) financial years in the home country.
3. For PO setup: There is no pre-condition of having profit profit-making track record.




Net Worth:

1. For BO set up: Minimum net worth should be USD 1,00,000 in the home country.
2. For LO set up: Minimum net worth should be USD 50,000 in the home country.
3. For PO setup: There is no pre-condition of having net worth.

How to make the application:

The application is required to be submitted in form FNC for the establishment of BO/LO/PO and should be forwarded by a foreign entity to the RBI through a designated AD Category-I bank for approval along with the following indicative documents:

1. Certificate of incorporation or registration and Memorandum and Article of Association (M&A)
2. Audited Balance Sheet as attested by the Indian Embassy or notary public in the country of registration Outside India
3. Letter of Comfort (LOC) from the parent company is to be submitted where the applicant not satisfying the eligibility criteria like track record and/or net worth.
4. Board Resolution of the foreign entity
5. Power of attorney in the favour of person signing the documents on behalf of the foreign company
6. Details of the shareholder, director, and key employees of the foreign entity.
7. Bankers Report issued by the host county banker
8. Bried particular of the proposed business.
9. Copy of passport and address proof of the authorized signatory and director of the foreign entity.
10. Proposed office of the BO/LO/PO in India.

The AD Bank scrutinizes the documents and on being satisfied forward the same to the RBI for allotment of Unique Identification Number (UIN). The RBI may ask for additional documents, if any, and on being satisfied allows the foreign entity to set up BO/LO/PO in India.
After receipt of the UIN from the Reserve Bank, the AD Category-I bank shall issue the approval letter to the applicant entity for establishing BO/LO/PO in India. Permitted activities for a branch office in India

Normally, the branch office should be engaged in the activity in which the parent company is engaged.

1. Export/import of goods.
2. Rendering professional or consultancy services (other than practice of legal profession in any matter)
3. Carrying out research work in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
5. Representing the parent company in India and acting as buying/ selling agent in India.
6. Rendering services in Information Technology and development of software in India.
7. Rendering technical support to the products supplied by parent/group companies.
8. Representing a foreign airline/shipping company.

Permitted activities for a liaison office in 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.

Permitted activities for a project office in India

There are no specific permitted activities for a project office. The validity period of the project office is for the tenure of the project and it can undertake the task as per the requirement of the project.

Conclusion:

The establishment of Branch Offices (BO), Project Offices (PO), and Liaison Offices (LO) by foreign entities plays a crucial role in fostering international business relations and facilitating the entry of foreign investment into new markets. Each type of office serves distinct purposes and offers unique advantages, allowing foreign companies to choose the structure that best aligns with their strategic goals and operational needs.
Branch Offices enable foreign entities to carry out business activities directly within a host country, providing a robust platform for executing full-scale operations and engaging with the local market. Project Offices, on the other hand, are specialized setups designed for executing specific projects within a defined timeframe, offering flexibility and a focused approach to project management. Liaison Offices act as representatives, maintaining communication channels and conducting market research without engaging in commercial activities, thus serving as an effective means of establishing a market presence and building relationships.
While each setup comes with its own set of regulatory requirements and operational limitations, understanding these nuances is essential for foreign entities to navigate the complexities of international business expansion effectively. By carefully assessing the objectives and nature of their intended operations, foreign companies can make informed decisions on whether to establish a BO, PO, or LO, ensuring compliance with local regulations and maximizing their potential for success in the global market. In conclusion, the strategic selection and establishment of BO, PO, or LO not only facilitate smoother market entry and operational efficiency for foreign entities but also contribute to the economic growth and development of host countries. As globalization continues to expand, the role of these office setups will remain integral to the dynamic landscape of international business.