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Liaison Office and Project Office under FEMA
Varun Hariharan | Updated: Sep 24, 2020 | Category: FEMA
Foreign companies have started their business in India since 1990. Before this year, there were stringent laws and restrictive practices which did not allow regulation of foreign businesses in the country. Now businesses can set up branch offices, liaison offices, and project offices in India. Depending on the requirement of the business, a foreign-owned entity can establish a liaison office and project office in India. This article is going to speak about the differences between a liaison office and project office in India.
Regulatory Authority for Liaison Office and Project Office in India
The primary regulatory authority for opening a liaison office and project office in India is the Reserve Bank of India (RBI). The RBI, along with the government of India, brought out the Foreign Exchange Management Act, 1999 (FEMA) to regulate foreign exchange dealings as well as foreign exchange transactions within the country. Foreign businesses that want to establish a liaison office or a project office in India have to comply with the FEMA regulations.
Along with the Foreign Exchange Management Act, 1999 companies have to comply with the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any other place of business) Regulations, 2016. Foreign businesses that want to set up a (LO) and (PO) in India have to comply with the relevant rules of FEMA and the regulations.
The Reserve Bank of India[1] authorises specific banks to handle foreign exchange transactions on behalf of companies. These banks are known as authorised dealers or authorised agencies. All foreign exchange transactions occur through authorised banks under FEMA.
Differences between the Liaison Office and Project Office
To understand the benefits of choosing and establishing the above offices in India, it is crucial to understand their differences.
The following are the differences between the liaison office and project office:
| Sl No | Information | Liaison Office | Project Office |
| 1. | Office Establishment | Any form of office or establishment would require prior approval from the Reserve Bank of India. This approval would also be required for a (LO) and (PO) in India. | Like the Liaison office, even the project office would require specific approval from the relevant authorities to set up business in India. |
| 2. | Main Regulation | The Foreign Exchange Management Act, 1999 along with the Foreign Exchange Management ( Establishment in India of a Branch office or Liaison Office or a Project Office ) Regulations, 2016 govern the establishment of a liaison office in India. | The establishment of the project office is also governed by the rules related to FEMA and regulations which have to be read with it. |
| 3. | Definition of Liaison Office and Project Office | As per section 2(e) of the Foreign Exchange Management Regulations, a branch office can be defined as a place which carries out representation activities for the foreign-owned entity outside India. The above office is not permitted to carry out any activities such as manufacturing; trading, commercial activities which helps it generate profits within India. The above activities cannot be carried out by the liaison office either directly or indirectly. | The (LO) and (PO) have been provided with meaning under regulations. As the liaison office, a project office is defined under section 2(f) of the Foreign Exchange Management Regulations. A project office is understood as an office established in India to carry out a specific project or activity for a limited period. For example, if a foreign business wants to invest in India through FDI to carry out the construction of the dam, then the foreign-owned entity can establish a project office. However, the definition of a project office will not include the definition of a liaison. A liaison office and project office are different when it comes to terms related to functioning. |
| 4. | Approval | Any form of office set up in India would require prior approval from the RBI. Suppose a foreign company is operating as an insurance company or a banking company. In that case, specific permission has to be taken out from the Insurance Regulatory and Development Authority of India (IRDAI) or the Department of Banking Supervision, RBI. For the above, no form of permission is required from the RBI. | The (LO) and (PO) require specific approval for establishing their business in India. The project office would require approval from the RBI to carry out a specific project for a particular period. |
| 5. | Permission | Both liaison office and project office requires specific permission from the respective authorities for setting up activities in India. For setting up a liaison office in India, the permission is required from the following authorities: Authorised Bank. Reserve Bank of India. Insurance Regulatory and Development Authority of India. Department of Banking Supervision RBI. | Like the liaison office, the project office also would require specific permission from the requisite authority. The following conditions have to be satisfied with the project office to establish a business in India: The company which is assisting the foreign entity set up a project office in India must have a specific contract or agreement in place. The activity or the project must be directly funded by the foreign company established abroad. Hence there must be inward remittance for the project coming from abroad through proper banking channels. The funding must be secured either through a bilateral or multilateral agency. This would mean that the project must be important for the development of the country and supported through institutions which foster international development. Examples of such institutions would include the International Monetary Fund and the World Bank. Appropriate approval is required from the appropriate institution. Apart from this, the Indian company that is assisting the foreign-owned entity must have some form of grant or license from a public financial institution established in India. |
| 6. | Exemption from Seeking UIN (Unique Identification Number) | For ease of business reference, a liaison office is known as LO. A liaison office carries out activities on behalf of the foreign parent company. As a representative office, once the liaison office is set up, there is no need for a Unique Identification Number. | A project office established in India is also understood as a PO. UIN requirement is different for a liaison office and a project office. Once a project office takes the required permission, a UIN would be generated by the RBI for activities carried out by a project office. |
| 7. | Minimum Eligibility Criteria | A liaison office and project office have minimum eligibility criteria to be met. The following eligibility criteria are required for setting up a liaison office in India: Financial Track Record, which is required for the company. The above financial track record has to be maintained for a minimum period of three years. Apart from this, the liaison company must maintain a minimum net worth requirement of USD 50,000. | Like a liaison office, the project office also has the requirement of fulfilling specific minimum criteria. The following criteria are required for setting up a project office in India: The relevant regulatory license must be obtained for sanctioning the project in India. To set up a project office in India, there must be a relevant contract in place. An entity company or entity must be a party to the agreement. The sanction must be taken from a relevant bilateral or multilateral agency. The Indian company assisting the setting up of a project office must have proper regulatory clearance from a public sector bank which is established in India. |
| 8. | Procedure for Application of the (LO) and (PO) | The following steps have to be considered for opening a liaison office and a project office in India: The applicant (foreign entity) has to provide respective information in the application form. Along with the respective information, the applicant has to fill up Form FNC. The applicant has to provide the respective documents along with the application. The application form, along with the respective documents, is provided to the authorised dealer. Once, it is received by the authorised dealer, the same is forwarded to the RBI. Before providing the approval for the same, the RBI will provide a Unique Identification Number along with a PAN number. For identification, this number is provided to the applicant. After this, the RBI will send back the completed application to the authorised dealer. Along with the application, the RBI will provide the approval letter to the liaison office to commence operations. | The procedure for applying for a project office is similar to that of a liaison office. The following steps are required to be considered for establishing a project office in India. Applicant (foreign-owned entity )has to fill in the application form FNC along with the prescribed documents. This form must be submitted to the authorised bank. The authorised bank will forward the application form along with respective documents to the reserve bank of India. The RBI will review the application form and grant the application. The form, along with the approval, wills b provided to the project office. The operations must commence for the project office once approval from the RBI is granted. |
| 9. | Main Activities | A liaison office and project office will carry out their respective activities to promote business within India and outside India. A liaison is also known as a representative office to carry out work on behalf of the foreign parent company. The main activities which are carried out by a liaison office are: Marketing Activities such as market research for the foreign parent company. Promoting any form of export and import activities of the foreign entity in India. Technical and Financial Collaboration activities for the parent company. Apart from this the liaison office can co-ordinate activities between India and the country where the foreign company is registered. | Activities which are carried out by the liaison office and the project office are not similar. While the liaison office carries out activities for the promotion of marketing and research-based activities, the project office predominantly concentrates on the development of project activities in India. These activities are not limited to a specific sector. The following sectors are allowed to establish project offices in India: Construction Sector Turnkey and Different Form of Construction Contracts Construction of major townships and bridges would also be included under this. |
| 10. | The time limit for commencing operations | When the liaison office and project office have received permission to carry out activities, then the same must be commenced by the foreign company within six months. If the liaison office and project office does not carry out their business within the stipulated period, then their license will be suspended. However, they can make an application to the concerned authorised bank citing reasons for a delay in carrying out their business. If this is carried out, the authorised bank will grant the liaison office for 6 months. | For a project office, the operations have to commence within six months. The same requirement is present for the liaison office. |
| 11. | Validity Period | Once the respective authority grants the permission, the (LO) and (PO) will have a respective period of validity. The validity period is usually three years for a liaison office. However, this period can be extended by the authorised bank if an application is put forth. There are specific conditions which have to be followed by the applicant if an extension is granted. The following are the conditions: The applicant must follow the terms and conditions of the licence at all times. Apart from this, compliance must be maintained under respective FEMA laws. | A validity period would also apply to a project office as a liaison office. However, the validity period for the project office would depend on different circumstances. This is because the foreign office is establishing as a project office in India only for a particular period. Once this period is expired, the applicant may apply for granting the extension of the project office. This extension may be granted depending on the prevailing conditions. |
| 12. | Documents | The liaison office and project office requires specific documentation for starting operations. The following documents are required for a foreign parent company establishing a liaison office in India: Certificate of incorporation. MOA and AOA. All the documents must be translated into the English Language. | The project office would require specific documents for sanctioning the scheme. The following documents would be required to be submitted by the project office: Contract with the Foreign Company. Loan Scheme. Information or Details of Multilateral Agreements or Bilateral Agreement with an International Institution. Sanctioning or Loan agreement with the Public Sector Bank established within India. |
What to Choose: Liaison Office or Project Office?
When choosing the office, it is the ultimate decision of the foreign parent entity. Depending on the prospective activities carried out in India, the foreign company should make a decision.
If the foreign company wants to appoint a representative for the business of the foreign company, then establishing a liaison office would be suitable. Even if the foreign company wants to carry out marketing based activities, then this office would be suitable when compared to a project office.
However, if the foreign company wants to carry out a particular project for a specific period, then establishing a project office would be suitable.
Conclusion for Liaison Office and Project Office
The Reserve Bank of India has brought out different rules regarding the regulation of liaison office and project office in India. These rules have to be complied by the applicant at the time of establishing a foreign office in India. Depending on the requirements of the foreign parent company, either a liaison office or a project office can be established.
Read our article:Branch Office and Liaison Office under FEMA
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