IRDA

IRDAI Guidelines for establishment and closure of Liaison Office

Foreign companies open liaison offices (LO) in India to promote their business activity. It also acts as a communication channel between the company and various sectoral regulatory authorities in India. Similarly, foreign insurance companies are allowed to establish the LO in India to carry on their business activities and comply with the regulatory requirements with the IRDAI. Henceforth, the IRDAI has issued various frameworks on establishing and closing the LO in India from 2005 onwards.

Therefore, keeping in view the recommendations, the IRDAI has issued comprehensive guidelines, “Establishment and Closure of Liaison office in India by an Insurance Company registered outside in India“, on 17^th October 2022. The present article will discuss in detail the provisions of these guidelines.

What is a Liaison Office?

A liaison office (LO) means a place of office located in India by the name of an overseas insurer. The LO will act as an intermediary between the principal place of business and the head office. It will undertake all the activities of business except Commercial, trading, soliciting, and industrial activity, and maintains itself from the foreign remittances received from the overseas insurer.

What is the eligibility for establishing a Liaison office in India?

An overseas insurer company shall have a sound financial track record. The overseas insurer company shall maintain a good profit margin in immediately preceding 3 financial years in the home country. Further, the company shall have a net worth of USD 65 million before opening LO in India. The net worth shall be calculated as follows:

Net worth: (Paid-up Capital + Free Reserves) – Intangible assets

What are the main steps in establishing a Liaison office in India?

The overseas insurer company willing to open a LO in India shall follow the below-mentioned steps.

• Application and Processing fee

An application is to be made to IRDAI  in Form IRDAI-FIC-1 along with the processing fee of USD 6000 payable by DD or Pay Order or Online Transfer. Further, the application shall be accompanied by the following documents:

1. Copy of registration certificate of overseas Insurer Company
2. Copy of Incorporation Certificate of overseas Insurer Company
3. Details of subsidiaries and associate companies.
4. Copy of MOA and AOA or any other charter
5. Copy of last audited financial statements
6. Certificate from home country insurance regulator signifying the insurer’s authorisation
7. Letter of comfort from overseas insurer to assist the LO in India
8. Copy of board resolution of the overseas insurer company signifying authorisation to officer to sign and file the application.

• Due diligence by authority

After receiving the application, the authority shall examine all the documents and cross-check the background of the overseas insurer company. Based on the examination, the authority either rejects or approves the application.

• Review of application

An applicant can appeal to the authority for review of their application within 30 days of receiving the rejection notice.

• Seek recommendations from Ministry

Before granting any approval, the authority may seek a view from the Ministry of External Affairs regarding an application received from an overseas insurer company that shares a land border with India.

• Validity and Extension

The validity of the application shall be for 3 years. Moreover, an overseas insurer company can ask for an extension of 1 year by making an application to the authority in the format IRDAi-FIC-1 mentioning “Application for Extension of validity of Liaison Office” before 2 months from the expiry date and the processing fee for such application shall be charged at USD 2500.

Moreover, the overseas insurer company that opened LO in India before issuing these guidelines can apply for an extension to the authority.

The overseas insurer company that has been granted an extension by the authority and operating liaison offices for more than 3 years till date of these guidelines shall close their office within 6 months.

• Establishment of office

An overseas insurer company that the authority has approved shall open a LO within 6 months from the approval date. In case if the LO is not open within this period, then said authority shall withdraw approval.  

What are the permissible activities for a liaison office in India?

The LO shall carry out the following activities from its office:

1. It shall represent the overseas insurer company in India.
2. It shall carry out market and feasibility research in the insurance field.
3. It shall act as a channel of communication between the overseas insurer and authorities in India.

What are the conditions for the opening of a liaison office?

The conditions for opening LO in India are:

1. The LO shall not carry out any activity other than the activities for which approval is needed.
2. All the expenses of the LO shall be met through inward remittances from the overseas insurer company.
3. The LO shall nor lend neither borrow any money from/to any person in India.
4. The LO shall not acquire, transfer, hold, or dispose of any property in India.
5. The LO shall not enter into a contract except to conduct business activities.
6. The LO will not have any signing or commitment powers.
7. The LO shall hold a valid PAN.
8. The LO shall register itself with the Registrar of Companies Act 2013.
9. The LO shall comply with the terms & conditions of the general permission granted by FEMA 1999.
10. The LO shall obey every law in India.
11. There shall be a principal officer (PO) of LO who will handle all the compliance with the provision of these guidelines and the name, address, contact no. and E-mail of such officer shall be made to authority within 15 days.
12. The officials of LO shall not participate in the management of any other entity.
13. The IRDAI must be notified within 15 days of any action taken against an overseas insurer company.
14. The approval is not transferable to any entity, even in the case of a merger or acquisition.
15. The authority shall be supplied with an application along with the board resolution and documents for the change of name of LO.
16. A fresh application is to be made in case of a merger or acquisition.
17. The authority may investigate or inspect the activities of the LO in India.
18. Any adverse findings by the auditor shall be reported to the authority within 15 days.

What is the manner of keeping records and books by the liaison office?

The manner of keeping books and records are:

1. The LO shall have only one bank account. In case if the office has more than one account, then all accounts shall be closed within 3 months and an approval be needed from IRDAI for operating multiple bank accounts.
2. There shall be proper books of accounts and records that will reflect all the received funds and incurred expenses.
3. There shall be an audited balance sheet, a statement of income & expenditure and a statement of Receipts & Payments. Moreover, such accounts shall be signed by CA and PO and submitted to the authority within 60 days after the end of financial year.

What is the Annual Activity Certificate?

The liaison office in India shall submit an annual activity certificate from an independent CA or CS, which will act as a certification that:

1. The LO has only undertaken authorised activities.
2. The expenses of the LO are met by funds received through approved means
3. There are no receipts from the Head office other than for the expenses of LO.
4. The credits of the bank account of LO shows the amount received from the Head office through approved means.
5. The debits of the bank account of LO shows all the expenses incurred.

Moreover, the certificate shall be furnished to the authority within 60 days from the end of the financial year, along with the reports or returns and the statement of research activities or information reports.

What is the process of closure of the Liaison office in India?

The main steps in the closure of the Liaison office in India are:

• Submitting a Request and Publishing the notice

The liaison office shall request the authority before 2 months from the expiry date for the closure of LO and it shall publish the same notice in one English newspaper and one regional newspaper of the state where the office is situated.

• Application and Supporting Documents

The application for closure of LO shall be submitted to the authority with the following documents:

1. Copy of permission letter from IRDAI for the establishment of the office

2. Copy of public notice issued in newspapers

3. Independent Chartered Accountant’s Certificate signifying:

1. The manner of receiving the remittable amounts and their disposal, along with a statement of assets and liabilities.
2. That all the liabilities of the office have been fully met.
3. No proceeds from sources outside India have remained unrepatriated to India.

4. Confirmation letter signifying no court proceedings against LO in India.

5. Report of the registrar in case of winding up of office.

• Approval for Closure and Remittance of Proceeds

The approval for closure and remittance of proceeds shall be granted only when the LO has submitted the annual activity certificate.

• Approval for Closure

After examining the documents, the authority shall order for closure of the liaison office and intimate to the RBI^[1].

• Closure of LO for opening Branch Office

The overseas insurer company can open a branch office in India provided that the existing LO in India is closed at the time of taking approval to open a branch office.

• Timeline for closure

The liaison office of an overseas insurer and a joint venture partner in an Insurance company in India shall close the LO within 6 months from the date of these guidelines. Moreover, the application for such closure shall be made to the authority at least 2 months before the date of expiry of 6 months period.

What is the withdrawal of approval by the authority?

The authority, after giving an opportunity of being heard to LO, can withdraw the approval if they have not complied with the following:

1. Did not furnish any document, statement, account, return or report
2. Does not cooperate with the investigating authority of IRDAI or RBI.
3. Fails to comply with any directions
4. Fails to comply with the terms & conditions of the approval.

Moreover, the authority can also direct the overseas insurer company to remove the principal officer from the liaison office in India and share the said result with the insurance regulatory authority of the home country of the overseas insurer.

Conclusion

The IRDAI authority is an insurance regulatory body that handles all the activities in the field of insurance. One such activity is granting approval for the opening and closure of the Liaison Office in India of the overseas Insurer Company. Henceforth, to regulate the structure of opening and closure of LO in India and to maintain transparency in the remitted funds, the authority has made it mandatory to comply with the current guidelines. Further, the authority also has the power to withdraw the said approval if the provisions of the guidelines are not complied with.