RBI Guidelines for the Opening of Representative Office Abroad By NBFC

Swetha Dhinesh

28 May, 2024

India’s entrepreneurship is expanding its horizons around the world. Of course, anyone entering a foreign nation must observe the local laws, rules, and regulations. It might be difficult to stay current on the laws of other nations because they are all unique. The Non Banking Financial Companies (Opening of Branch/Subsidiary/Joint Venture/Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 2011, are a set of guidelines for NBFCs. This guideline provides the regulatory framework and requirements for NBFCs seeking to establish a representative office outside India. In this blog, we will discuss the RBI guidelines for the opening of representative offices abroad by NBFC.

Understanding the Concept of Representative Office

A representative office is a location set up by a business or legal body to carry out non-transactional tasks like marketing, usually abroad when a branch office or subsidiary is not necessary. Since they are not utilized for actual “business” (like sales), representative offices are typically simpler to open than a branch or subsidiary office. As a result, there is less motivation to govern them.

Opening of representative office is another name for a liaison office. Liaison offices are subject to restrictions and are not permitted to conduct business activities or generate money.

Only the following actions can be carried out by the Representative office:

• Represent international business.
• Encourage imports or exports.
• Encourage parent or group corporations to work together on technical and financial projects.
• Serve as a communication channel between the Representative office and the parent company.

As a result, a representative office is established to serve as a communication tool for boosting collaboration as well as the business of its parent firm there. In India, a representative office is not permitted to make money. It is not allowed to engage in any business, commerce, or industrial activity directly or indirectly through another firm. It must receive funding from its parent firm in order to cover its expenses.

All costs associated with the representative office will be covered by inbound foreign currency remittances from the parent company’s head office. Therefore, the functions of such offices are restricted to gathering data on potential market prospects and informing potential clients about the business and its products.

Without the Reserve Bank’s previous consent, no person outside India can open a branch, a Representative Office, or any other type of business in India. In some circumstances, the RBI has given AD (Authorised Dealer) Bank the authority.

Regulatory Approval for Opening of Representative Office

Before opening a representative office abroad, NBFCs must obtain previous RBI approval. The planned representative office, its goals, the host nation, its legal system, and the financial commitment involved should all be covered in the application for approval.

Opening of representative offices abroad by NBFCs 

The representative office is subject to regulation by a regulator in the host nation. It may be established overseas for liaison work, market research, and study without engaging in any activity requiring funds’ outlay. No line of credit should be granted because such an office is not envisaged to be engaged in anything other than liaison work.

• Periodic updates about the activities of the representative office abroad must be obtained by the parent NBFC. The approvals given for the purpose must be examined or recalled if the representative office has not engaged in any activity or if such reports have not been provided.
• Based on the experience obtained, the Policy will be evaluated.
• Penalties under the 1934 Reserve Bank of India Act will be applied if these directives are violated.

Opening a branch, subsidiary, joint venture, representative office, or conducting investment abroad by NBFCs requires prior RBI approval.

• No NBFC shall open affiliates, joint ventures, representative offices, or investments in foreign companies without first obtaining Reserve Bank of India approval in writing. Subject to these instructions, the application from the NBFC seeking No Objection would be taken into consideration. 
• These guidelines are in addition to those that the Foreign Exchange Department has established for the opening of foreign branches and investments in joint ventures and wholly owned subsidiaries.
• An NBFC (both deposit-taking and non-deposit taking) registered with the RBI shall open joint ventures, subsidiaries, representative offices, or make investments abroad under the general and specific requirements.

General conditions for Opening of Representative Office, Branch, Subsidiary or Joint Ventures .etc

• Investments must be made in the financial services sectors.
• Direct investment in activities is not and won’t be restricted by FEMA or sectoral funding.
• Investments must be made in companies whose primary business is governed by a financial sector regulator in the receiving jurisdiction.
• Investments made abroad that involve multi-layered, cross-jurisdictional arrangements are not allowed. However, investments made abroad in a single intermediate holding corporation are acceptable.
• The NBFC must have been profitable for three years in the past, and it should have performed satisfactorily overall throughout its existence.
• The amount of the NBFC’s Net Non-Performing Assets shall not exceed 5% of the net advances.
• Conditions for Post Overseas Investment: Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015, as amended from time to time, requires that non-deposit accepting NBFCs that invest in subsidiaries abroad maintain the CRAR (Capital Adequacy Asset Ratio); Non-deposit taking NBFCs (other than NBFC-ND-SI) that invest in subsidiaries abroad must maintain 10% CRAR post overseas investment.
• After taking into account investments in the planned subsidiary and foreign investments, as required by the explanation to Section 45-IA of the RBI Act, 1934¹, NBFC should continue to maintain the required level of NOF.

Reporting and Compliances

• The NBFC must periodically abide by the rules established by FEMA 1999.
• The NBFC must adhere to the KYC requirements.
• The NBFC must submit a quarterly return to the Regional Office of DNBS and the Department of Statistics and Information Management (DSIM). 
• An annual certificate from statutory auditors must be submitted by the NBFC to the Regional Office of the Department of Non-Banking Supervision (DNBS), where it is registered, certifying that it has fully complied with all the conditions stipulated under the Guidelines for overseas investment.

Conclusion

In conclusion, a Non-Banking Financial Company (NBFC) must carefully evaluate and abide by all regulations set forth by the Reserve Bank of India (RBI) before operating a representative office abroad. Although opening a representative office abroad might open up the potential for market expansion and global visibility, doing so also necessitates careful planning, resource allocation, and continuing regulatory compliance.

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Read Our Article: Issue of RBI NOC for Setting up of Subsidiary By NBFC

1. https://en.wikipedia.org/wiki/Reserve_Bank_of_India_Act,_1934