FEMARBISEBISetting Up a Liaison Office in India: An Overview

INTRODUCTION

A Liaison Office (“LO”), as defined under Clause 2(e) of 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, serves as a communication channel between the principal place of business or head office of a foreign entity and entities in India. An LO is not permitted to engage in commercial, trading, or industrial activities—either directly or indirectly—and must sustain its operations solely through inward remittances from abroad via normal banking channels.

An LO is valid for three years, except for entities engaged in construction, development, or non-banking financial services, where the validity period is only two years.

CONCERNED AUTHORITY FOR ESTABLISHING AN LO

Applications for setting up an LO in India are processed by an Authorized Dealer (AD) Bank in compliance with:

• The RBI Master Directions on the establishment of Branch Offices, Liaison Offices, and Project Offices by Foreign Entities.
• 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.

The RBI under Section 11 of the Foreign Exchange Management Act (FEMA) ,1999 can also issue directions as to how this foreign exchange business has to be conducted by the authorized persons with their customers.

PROCESS FOR APPLYING FOR LO IN INDIA

The foreign entity must submit the application for the establishment of a LO in India to a designated AD Bank in the form FNC by attaching the relevant annexures.

The AD Bank has to conduct due diligence with respect to the background of the applicant and satisfy itself with the required standards for establishing LO, like the antecedents of the Promoter, sources of funds, location and nature of the activity of the applicant and compliance with extant KYC norms etc.

After the AD bank is satisfied that all the standards have been complied with, the details of the approval will be granted along with the FNC form to the General Manager, RBI (CO Cell, New Delhi).

RBI will then allot a unique identification number (UIN) to every LO. The bank issues the approval letter to the foreign entity for establishing a LO after receiving a UIN from the RBI. This procedure in turn helps RBI to maintain, keep and remain up to date with the list of all foreign entities that have been given permission for establishing a Branch Office or Liaison Office in India.

ELIGIBILITY REQUIREMENTS

The foreign entity which is applying to establish an LO in India should have a financially sound record. Also, the foreign entity should not have its net worth less than USD 50,000 or its equivalent and it should also have a profit making track record for the immediately preceding 3 financial years.

Exemption- The applicant, being a subsidiary of another company and not meeting the required financial criteria, may submit a Letter of Comfort (LOC) from its parent or group company. In the LOC, the parent or group company must commit to providing financial support to the LO and assume responsibility for discharging liabilities if the LO defaults. Furthermore, the parent or group company must fulfil the prescribed net worth and profit criteria.

REQUIREMENT FOR OPENING A BANK ACCOUNT FOR A LO

An LO is allowed to maintain and open a bank account for permitted debits and credits. In order to receive remittances from its head office, which is situated outside India, an LO may approach the AD Bank to open its account. At any given time, a LO can have only 1 (one) bank account. The permitted debits and credits are as follows: –

Debits – Debits can only be used for meeting the local expenditure of the office.

Credits –

1. Funds transferred from the Head Office through regular banking channels to cover the office’s expenses.
2. Refund of Security deposits made either from the LO’s account or directly by the Head Office via regular banking channels.

• Refund of taxes, duties or similar payments received from the tax authorities originally paid from the LO account.

1. Sale proceeds of the asset of LO.

ANNUAL ACTIVITY CERTIFICATE (AAC)

The LO must submit the Annual Activity Certificate (AAC) as of March 31^st, to its designated Authorized Dealer (AD) bank and the Directorate General of Income Tax (DGIT), New Delhi. This submission, along with the audited financial statements, including the receipt and payment account, must be completed by September 30^th of the same year.

PROCEDURE TO BE FOLLOWED BY LO FOR OPENING ADDITIONAL OFFICES IN INDIA

To establish additional Branch Offices or LOs, applicants should submit a fresh FNC form to their AD Category-I bank. If the documents provided earlier remain unchanged, there is no need to resubmit them.

Here are the key points to note:

1. If the total number of offices exceeds four (one in each zone: East, West, North, and South), the applicant must provide a valid justification for the additional offices. Opening these offices will require prior approval from the RBI.
2. The applicant can designate one of its offices in India as the Nodal Office. This office will be responsible for coordinating the activities of all other offices in the country.
3. If an existing LO is moving to another city in India, prior approval from the AD Category-I bank is required. However, if the relocation is within the same city, no approval is necessary, provided the new address is promptly communicated to the designated AD Category-I bank. Additionally, any change in postal address should be reported to the CO Cell, New Delhi, by the AD Category-I bank at the earliest.

PROCEDURE TO BE FOLLOWED BY AN LO TO REQUEST FOR EXTENSION OF VALIDITY PERIOD

LOs can request an extension of their validity period by submitting an application to the AD bank before the current validity period expires. This request should be submitted to the AD bank responsible for the jurisdiction of the LO’s nodal office (if the entity has multiple LOs).

The designated AD bank can grant an extension for up to 3 years from the expiry date of the original approval or the last extension. Extensions may be granted at least twice if the following conditions are met:

1. Submission of Annual Activity Certificates (AACs) for the previous years.
2. Proper operation of the LO’s account with the designated AD bank, adhering to the terms and conditions outlined in the approval letter.

Extensions are processed promptly, usually within a month of receiving the request. The AD bank must inform the RBI’s General Manager (CO Cell, New Delhi), including the original approval letter’s reference number and the UIN. The Reserve Bank updates this information on its website without delay.

Typically, an LO is valid for 3 years. However:

• For Non-Banking Finance Companies (NBFCs) or entities in construction and development (excluding infrastructure development companies), the validity period is limited to 2 years.
• No extensions are granted for these specific entities. Upon expiry of their validity period, these LOs must either shut down or convert into a Joint Venture (JV) or Wholly Owned Subsidiary (WOS), in line with the current Foreign Direct Investment policy.

TRANSFER OF ASSETS

Here are the key considerations for asset transfer:

1. Transfer upon closure: The AD bank allows asset transfers by sale only when the foreign entity plans to close its LO operations in India. The transfer is permitted to a Joint Venture or Wholly Owned Subsidiary.
2. Auditor’s certificate: The LO must provide a certificate from its Statutory Auditor, detailing the assets to be transferred. The certificate should include:

• Date of acquisition.
• Original Purchase Price.
• Depreciation till date.
• Current book value (or written down value)
• Sale consideration to be received, the certificate must confirm that the assets were not re-valued after acquisition and that the sale consideration does not exceed the book value.

3. Eligible assets: Only assets acquired using inward remittances can be transferred. Intangible assets like goodwill and pre-operative expenses cannot be transferred. Revenue expenses, such as leasehold improvements, cannot be capitalized or transferred to the JV or WOS.
4. Tax obligations: The AD bank must ensure all applicable taxes are paid before permitting the transfer of assets.
5. Bank account credits: Any proceeds from the asset transfer credited to the LO’s bank account will be treated as permissible credits.

This ensures compliance with regulatory requirements while enabling a smooth transfer of assets.

POST INCORPORATION CHANGES

Can an LO change its Existing Name?

When an LO wants to change its name, it must apply to the AD bank. The AD bank may approve the name change under the following conditions:

1. The foreign entity changes its name without altering its ownership.
2. The application includes a board resolution for the name change, along with a certificate or document from the Registrar of Companies (ROC) in India confirming the change.
3. The name change of the LO must be reported to the Foreign Exchange Department, CO Cell, New Delhi.

If the name change is due to an acquisition or merger that involves a change in ownership, the new or acquired entity must apply for a new LO and close the existing one. It’s important to note that approvals granted by the RBI or AD bank are based on a detailed review of guidelines and Foreign Direct Investment (FDI) policies, so approvals given to one foreign entity cannot be transferred to another.

Can a LO donate its assets in India?

An LO can donate its assets, such as old furniture, vehicles, computers, and other office items, to NGOs or not-for-profit organizations, but this requires approval from the AD) bank. The AD bank will approve the donation only after ensuring that the transaction is legitimate.

Can an AD bank allow term deposits accounts for an LO?

An AD bank can approve a term deposit account for an LO of a foreign entity, with a maximum duration of 6 months. This approval is granted only if the AD bank is satisfied with the following conditions:

1. The term deposit is made using temporary surplus funds.
2. The LO provides an undertaking that the maturity proceeds of the deposit will be used for its business activities in India within 3 months of the deposit’s maturity.

However, this facility is not available for shipping or airline companies.

AMLEGALS REMARKS

Setting up an LO in India is a strategic option for foreign companies looking to explore business opportunities, build partnerships, and establish a presence in the Indian market without engaging in commercial activities. Governed by FEMA regulations and RBI guidelines, an LO serves as a communication channel between the parent company and Indian entities while operating strictly within the scope of market research, promotional activities, and coordination services.

While the approval process is relatively straightforward, businesses must ensure compliance with financial eligibility criteria, banking regulations, tax obligations, and annual reporting requirements. Proper adherence to regulatory norms, timely filings, and operational transparency will facilitate smooth functioning and avoid legal or financial complications.

For foreign entities looking to assess the Indian market before full-scale investment, an LO acts as a low-risk entry strategy, helping them establish credibility and long-term business potential in India.

Team AMLEGALS assisted by – Yash Rajput

For any queries or feedback, feel free to connect to mridusha.guha@amlegals.com