Regulation 16 of FEMA 20R has been provided by the Reserve Bank of India wide circular Notifica...
Prior to economic reforms and liberalisation in India, foreign companies were not allowed to set up their business in India. Only after liberasation a green signal was provided to foreign companies to establish the business in India. Under the current laws in force, foreign offices are set up in India with lesser restrictions that affect their business. Different forms of foreign offices can be set up in India. Out of them, a branch office and project office can be set up by foreign companies.
Before the economic liberalisation in 1991, the Monopolistic Restrictive and Trade Practices Act, 1969 (MRPT) affected the way in which domestic companies would operate in India. This law restricted the operation of foreign companies in India and opposed a monopoly for Indian companies. After this law was repealed, foreign companies were allowed to establish a branch office and project office. However, setting up of foreign offices in India has to be in compliance with the respective foreign exchange laws in India.
The primary regulatory authority for setting up a branch office and project office in India is the Reserve Bank of India (RBI). There are specific laws that affect the regulation of branch office and project office in India. One such law is the Foreign Exchange Regulation Act, 1973. However, due to its stringent policies and restrictive trade practices, this law was abolished and replaced by the Foreign Exchange Management Act, 1999 (FEMA).
Foreign companies that are established in India are subject to different regulations. Hence it is important to understand what is the business structure required for the foreign company to establish an office.
|Sl No||Information||Branch Office||Project Office|
|1||Definition||As per the foreign exchange management act, a branch office is an entity which is formed by a foreign parent company in India. As explained above, the meaning of branch office is also present under the definition of the Companies Act 2013. All types of Activities can be carried out by the branch office.||The definition of a branch office and project office is not similar. While an entity that is formed by a foreign parent company, to complete a specific project is considered as a project office. Even under the companies’ act 2013, the definition of a project office is included under the foreign office.|
|2||Permission||Prior Permission of the RBI is required for setting up a branch office in India. If a foreign bank wants to establish a branch office in India, then specific approval would be required from the Department of Banking and Supervision of the RBI. Foreign Insurance companies that have to set up branches in India would have to obtain specific permission from the Insurance Regulatory and Development Authority of India (IRDAI).||Both branch offices and foreign offices require prior permission from the requisite authorities. Even a project office would require permission from the RBI to set up an office in India. Apart from this permission, a project office would require permission from other authorities such as regulatory agencies and international institutions. Regulatory approval is required under domestic law as well as foreign law.|
|3||Routes for Foreign Investment||For a branch office, foreign investment can either come through the automatic route or the approval route. The automatic route does not require any prior approval from the Government of India. However, the government route will require prior approval from the government of India. Foreign companies that want to establish branch offices and project offices would have to comply with the required investment criteria and norms related to foreign investment.||Like branch offices, even project offices would have to comply with the routes which are prescribed by the government of India. The automatic route does not require any prior approval from the government of India. However, the government route requires prior approval from the government of India. For example, if the foreign office is setting up a project office for the purposes of coal mining activity, then this would be allowed under the automatic route. Previously, this was covered under the government route.|
|4||Comply with Rules||Setting up a branch office and project offices requires the entity to comply with specific rules. Apart from the rules set by the RBI, the branch office would have to comply with the specific requirement of other authorities. For example, Branch Offices are allowed to operate from SEZ (Special Economic Zones). Hence they would have to comply with the requirements of the SEZ rules as well as the rules which are established by the Companies Act, 2013.||Branch offices and project offices which are set by a foreign parent company has to follow specific prescribed rules. However, project offices are allowed to operate on any premises if they are compliant with the relevant regulations.|
|5||Eligibility Criteria for Branch Office and Liaison Office||The eligibility criteria for a branch office and project office would be different, as the main activities which are carried out by these offices are not similar. To set up a branch office, the following criteria have to be satisfied: Eligible Activities have to be carried out by the branch office.RBI will grant a specific license for carrying out the activities of a branch office.Documents have to comply with the conditions which are required.All the required criteria have to be fulfilled for applying for a branch office.||The eligibility criteria would be different for a project office. The foreign parent company has to ensure the following is satisfied while making an application for the establishment of a project office:|
A foreign company wanting to establish as a project office must ensure that the activities carried out by the project office will be for a specific project or a certain period of time.The Foreign parent company that is establishing a project office must receive remittance for carrying out the activities in India.The funding or remittance must be made by an international multilateral agency or a bilateral agency. There must be a specific agreement or a contract between the foreign parent company and the Indian Company planning to take part in the project office.An international institution such as the World Bank or the International Monetary Fund would be the appropriate institution that is funding the project.Specific clearances are required from domestic as well as international authorities.A loan must be required from a Public Financial Institution. This institution must take part in the contract.
|6||Procedure for Establishing a Branch Office and Project Office||The procedure for establishing a branch office and the project office would be similar. However, the period of time for seeking consent from the respective authorities may vary according to the guidelines. The following procedure has to be considered for setting up a branch office in India: An application has to be made to the Foreign Exchange Division, RBI.This application will not be made directly by the applicant to the RBI. The application will go through the authorised dealer or the authorised agency.The applicant has to fulfil the above criteria for applying for a branch office in India.If this is carried out, then the applicant has to make the application in Form- FNC.With the application, requisite documentation must be submitted to the authorised dealer.||Like establishing a branch office, the procedure for establishing a project office would be the same. However, as the activities which are carried out by the project office are different, they may be some difference in the procedure for establishment. A similar procedure is followed by the applicant to establish a project office. The applicant has to make an application to the foreign exchange division of the RBI.The application must be made in Form FNC.With the application, specific documents must be submitted by the applicant.|
|7.||Documentation for Branch Office and Project Office||The documents required to be submitted for establishing a branch office and a project office would not be the same. The following documents are required for establishing a branch office in India: Company Incorporation Documents such as the Certificate of Incorporation.Memorandum of Association of the CompanyArticles of Association of the Company.Audited Statements of the Company.Audited Balance Sheets of the company.Letter of Comfort if required- This would only be necessary if the branch office does not satisfy the eligibility criteria for establishing an office in India. In such an instance, the LOC or letter of comfort must be submitted through the foreign parent company.|
All the above documents must be provided or translated in the English Language.
|Branch office and Project office have different documentation requirements. However, the documentation requirements for a project office would be more based on financial statements and loan agreements from the respective international agencies. However, the following documents have to be submitted to the authorised dealer:|
Contract or Agreement between the Indian company and foreign parent company.Term Loan AgreementOther respective documents required for sanctioning the project.
|8.||Other Reporting Requirements for Branch Office and Project Office||For setting up a branch office and project office in India, the applicant would also have to provide crucial information such as : Name and address of the registered foreign company.Cost of carrying out the activities by the company.Types of activities which will be carried out by the company.||Like the branch office, similar information has to be provided by the project office to the respective authorities. The following information is required to be provided: Address and name of the companyTenure of project activities which are carried out by the company. Cost of the Project Activity.|
|9.||Exempt from RBI –Branch Office and Project Office.||Branch Offices which are formed as Insurance companies and banking companies are exempted from seeking consent from the RBI to set up. Instead, they would require advice from the Department of Banking Supervision, RBI or the IRDAI as required.||Branch offices and project offices require compliance from respective authorities. However, a project office is not exempt from the RBI for securing a license to operate.|
|10.||Permissible Activities – branch office and Project Office||There are different activities which are permitted for a branch office and project office. However, the activities which are permitted for a branch office will not be permitted for a project office. The following activities are carried out by a branch office.|
Export and Import of goods and servicesAny form of consultancy business.Any form of Research and Development Activities for the parent company.Development of Software and Technology Services for the Parent Company.Transportation Company can also start this form of business.
|The activities carried out by project office include: Carrying out different types of projectsProject can include manufacturing projects.Other form of turnkey and construction contracts.|
Read our article:Foreign Investment: Compliance under RBI/FEMA