Every business is represented by its unique identity which makes others to get to know it.  It is known by its Name and work. As the business starts to grow it expands in different regions. Business expansion is a process which has different steps and each step leads you to a different way. To grow your business you need to access the market of different regions but then arises many questions relating to how, when and where. There are different compliances and business laws to be followed with the regulatory authority in order to step up your business in different regions. Following are the three different modes of entering the business market of a country by any foreign company:

By setting up liaison office

By setting up branch office

By setting up project office

                       In order to expand the business and attract and interact with people of different countries for business growth one of the easiest and reasonable way is by setting up a liaisoning office. Reserve Bank of India can permit us to do the following activity after compiling the provisions of FEMA, 1999 and other laws and regulations regarding the same. But despite this if the Company only wants to represent the business entity in other countries it can go through by following a simple procedure like by setting up liaison office. The meaning of the word Liaison is communication or co-operation which facilitates a close working relationship between people or organizations. Hence to explore our market base we can appoint a liaisoning officer in Indian market as a representative to represent our company as well as to analyzing market structure, opportunities, customer base etc.

This article is written with a view to solve the questions of setting up of liaison office in India. It gives a detailed explanation on the compliances to be made with different laws relating to a liaison office. The article gives the detailed procedure from setting up of liaison office to the closure.

 

 

 

 

CONTENTS

• INTRODUCTION
• HOW TO SETUP LIAISING OFFICE
• PROCEDURE  OF FILING APPLICATION
• TENURE AND EXTENTION PERIOD
• ACTIVITIES UNDERTAKEN BY LIAISING OFFICE
• RESTRICTIONS ON ACTIVITIES UNDERTAKEN
• SALIENT FEATURE OF LIAISON OFFICE
• REPORTING BY  LIAISON OFFICE
• DOCUMENTS REQUIRED FOR SETTING UP OF LIAISING OFFICE
• ANNUAL ACTIVITIES CARRIED OUT BY LIAISING OFFICE
• EXCEPTION (COUNTRY WISE)
• PROCEDURE FOR GETTING RBI LICENSE
• CLOSURE OF LIAISION OFFICE

 

 

 

WHAT IS LIAISON OFFICE:-

A liaison is someone who acts an intermediary between the business and the clients. It is usually the people who call with complaints or questions and you answer them and try to resolve any problems. Liaison is nothing it is just like a representative of another, and the office means a place from where the activity can be carried out.

Liaison office word mostly used when a foreign entity want to setup any office in India only for marketing or for representation purpose so it can go through liaison office it can act as a channel of communication between the Head Office (out of India) and parties in India, A liaison officer is responsible for ensuring communication and cooperation between two or more entities.

E.g.:- Mc Donald’s is a US based company  wants to explore its market structure in other countries so it go through by setting up liaisoning office  as a representative of its (Mc Donald’s) so that person of other country can easily co-ordinate with it through the liaisoning office.

 (The below diagram shows how a liaison office can act as a communication channel between both countries)

 

                     (Fig 1:-Flow of information b/w two countries)

HOW TO SETUP LIAISON OFFFICE IN INDIA BY FOREIGN ENTITY:-

Anyone desirous of opening a Liaison Office (LO) / Branch Office (BO) in India has to obtain permission from the Reserve Bank.

 The applications should be in Form FNC (Annex-1) and it will be considered by Reserve Bank under two routes:

Reserve Bank Route —Where the principal business of the foreign entity falls under sectors, permitting 100 per cent Foreign Direct Investment (FDI) under the automatic route.

Government Route — Where principal business of the foreign entity falls under the sectors, not permitting 100 per cent FDI under the automatic route. Applications falling under this category are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

PROCEDURE FOR FILING APPLICATION TO SETUP LIASON OFFICE (LO);

The application for establishing BO / LO in India should be forwarded by the foreign entity through a designated AD Category - I bank to the General Manager, Foreign Exchange Department, Central Office Cell, Reserve Bank of India, New Delhi Regional Office, 6, Parliament Street, New Delhi-110 001, India, along with the prescribed documents.

                        (The below diagram shows how a foreign entity can file required application to the designated authorities)

                         (Fig 2:-Hierarchy of filing application)

ADDITIONAL CRITERIA TO SETUP LIAISON OFFICE:

                                                     

                                                                        TRACKRECORD
For Branch Office — A foreign entity should have profit making track record during the immediately preceding five financial years in the home country.

For Liaison Office —A foreign entity should have profit making track record during the immediately preceding three financial years in the home country.

• Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement.

• For Branch Office — Not less than USD 100,000 or its equivalent.
• For Liaison Office — Not less than USD 50,000 or its equivalent.

                       (This figure prescribe the calculation of net worth)

                               (Fig 3:-Formula of net worth calculation)

TENURE OF APPROVAL GRANTED INCLUDING EXTENTION THEREOF:-

Any foreign company intending to establish a Liaison Office in India is required to obtain prior approval from the RBI, The Supreme Bank of India, Which may take up to 3-4 weeks for processing of the application. Approval is usually granted for 3 years and can be renewed on expiry thereof.

 The designated AD Category - I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted by the Reserve Bank, if the applicant has complied with the following conditions:

• The LO should have submitted the Annual Activity Certificates for the previous years and
• The account of the LO maintained with the designated AD Category – I bank is being operated in accordance with the terms and conditions stipulated in the approval.

 * No extension would be granted to NBFCs and those engaged in construction and development sectors (excluding infrastructure development companies).

(The below diagram describes period of approval & extension given by respective authorities to setup liaison office)

(Fig4:-Tenure and Extension Calculation)

** In the case of the Bar Council of India vs. A.K. Balaji & Ors. , SC has directed RBI not to grant any permission to any foreign law firm, on or after interim order dated July 4, 2012 and September 14, 2015 for opening of LO in India. Hence, no foreign law firm shall be permitted to open any LO in India.

ACTIVITIES UNDERTAKEN BY LIAISONING OFFICE

• Representing in India parent or group Company.
• Promoting Import/export from/to India.
• Promoting technical/financial assistance.
• Working as a communication channel.

(The below mention diagram shows as an exporter in India and a importer in Foreign countries (HQ) communicate through Liaison office)

 

                    

 

(Fig 5:-Representing Liaison office as a communication channel)

RESTRICTIONS ON ACTIVITIES OF THE LIAISON OFFICE

• A Liaison Office is not permitted to undertake any commercial/trading/Industrial activity
• A Liaison Office cannot earn any income in India
• The liaison office can neither borrow, nor lend money
• It cannot acquire, Hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India, without prior approval of RBI.

 

 SALIENT FEATURES OF LIAISON OFFICE

• The name of Indian liaison office shall be same as Parent company.
• The governing body for the Liaison office License is Reserve Bank of India.
• It is like a temporary office in India.
• The Liaison office does not have Ownership; it is just extension of the exiting company in the foreign country.
• All the expenses of the Liaison office are met by the head office
• The License for the Liaison office is given for three years and shall be renewed in every 3 years.
• The liaison office is not subjected to taxation in India.
• The liaison office must maintain a QA22C account with the bank. This is a special account that only allows inflows from abroad.

 

  REPORTING BY LIAISON OFFICE

• All new entities shall submit a report containing information, in annex-3 within five working days of the LO becoming functional to the Director General of Police (DGP) of the state in which LO has established its office.
• Liaison Offices have to file Annual Activity Certificates (AAC) of March 31^st  of every year,
• File form 49C as per Section 285 of the Income Tax Act, 191 together with prescribed documents.

 

 DOCUMENTS REQUIRED FOR SETTING UP OF LIAISING OFFICE

• Form FNC – 1 – Three copies.
• Letter from the principal officer of the Parent company to RBI.
• Letter of authority from the Parent company in favor of Local Representative.
• Letter of authority/ Resolution from Parent company for setting up liaison office in India.
• Comfort letter from the parent company intending to support the operation in India.
• Two copies of the English version of the Certificate of Incorporation, Memorandum & Articles of association of the Parent company duly attested by the Indian embassy.
• The Latest audited Balance sheet and annual accounts of parent company duly translated notarized for past three years. & Certified by Indian Consulate & Directors

• Name, Address, email ID and telephone number of the authorized person in home Country.
• Expected funding level for operations in India.
• Details relating to address of the proposed local office, number of persons likely to be employed.
• Details of Activity carried out in Home Country by the applicant.
• Bankers Certificate
• Latest Proof of identity of all the Directors - Certified by Consulate and Banker in Home Country
• Latest Proof of address all of Directors - Certified by Consulate and Banker in Home Country
• Details of the Individuals / Company holding more 10% of Equity
• Structure of the Organization w.r.t Shareholding pattern
• Complete KYC of Shareholders holding more than 10% Equity in the Applicant Company
• Resolution for Opening up Bank Account with the Banker
• Duly Signed Bank Account Opening Form for Indian Bank

• Maintenance of Books of Account
• Getting Annual Accounts audited
• Filling of Annual Activity Certificate with RBI
• Filling of Annual Return and Balance sheet with Registrar of Companies
• Intimating any change in constitution of Foreign Company to RBI & ROC
• Intimating any change in Directors of Foreign Company to RBI & ROC
• Intimating each and every change in the Liaison office to RBI & ROC
• No additional place of business can be started unless approval is taken from RBI.

EXCEPTIONAL COUNTRIES

(i) Any person being a citizen of / registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, ²Hong Kong or Macau can’t establish a liaison office or any other business entity in India, without prior approval from RBI.

(ii) Entities from Nepal are allowed to establish only Liaison Offices in India.

 

Documents required for getting CIN

Following documents shall be filed with the Registrar of Companies for getting corporate identification number (CIN)

• Form 44
• Charter, statutes or memorandum and articles of association or other Instrument constituting or defining the constitution of the company.
• All documents should be in English language otherwise translated version of the same
• Director(s) details – individuals
• Director(s) details - bodies corporate
• Reserve bank of India approval letter
• Secretary(s) details
• Power of attorney or board resolution in favor of the authorized representative(s)

Generally the Liaison office licenses is given for three years, if at any time the Company plans to close the Liaison office setup in India it shall file following documents with the Authorized Dealer along with application

• Copy of the Reserve Bank's permission/ approval from the secretarial regulator(s) for establishing the BO / LO.
• Auditor’s certificate
• No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s.
• Confirmation from the applicant/parent company has no legal proceedings are pending in any Court in India.
• A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, in case of winding up of the Office in India.
• Any other document/s, specified by the Reserve Bank while granting approval.

 

 

 

 

 

KEY LEGAL ADVISORS CAN PROVIDE YOU FOLLOWING ASSISTANCE

• Obtaining approval of RBI for Establishment of Liaison office in India.
• RBI on approval will grant you unique identification number (UIN).
• Getting Liaison office registered with Registrar of Companies.
• Obtaining CIN of Liaison Office
• Obtaining Permanent Account Number – PAN Number
• Obtaining Tax Deduction Number – TAN Number
• Obtaining Shop & Establishment Registration
• Maintenance of Financial books of Accounts of Liaison office.
• Payroll Processing of Liaison office.
• Annual Audit of Books of accounts
• Getting Statutory Compliances done in prescribed timelines.
• Reporting of Liaison office on annual basis with concerned authority.

 

CONCLUSION

There are many issues involved while setting up any new entity and the procedural requirement and compliances of law are very high so we have to go through a complicated procedure to set up any office or any business entity. When setting up any liaison office one should always keep in mind these various legal concept which might/will be helpful at the sooner or later stage, such issue are to kept in mind and one should always take necessary steps not to attract any future liability. This article might be helpful for the companies looking for setting up of liaison office and the various compliances to be made in India.

By Prachi Jain