Resource support on NGO Governance, Accounting and Regulations BRANCH & LIAISON OFFICES OF FOREIGN DONORS

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1 fmsf Resource support on NGO Governance, Accounting and Regulations Standards & NORMS An initiative of FMSF & VANI VANI Legal Series Vol. IV, Issue 3, July 2011 For private circulation only BRANCH & LIAISON OFFICES OF FOREIGN DONORS (OVERVIEW OF THE FCRA, FEMA & INCOME TAX LAW APPLICABLE TO BRANCH AND LIAISON OFFICES) Editorial : Sanjay Patra, Executive Director, FMSF, Team Harsh Jaitli, CEO, VANI Author : Manoj Fogla* * The Author is a consultant, can be contacted at mfogla@yahoo.com

2 fmsf Resource support on NGO Governance, Accounting and Regulations Standards & NORMS An initiative of FMSF & VANI VANI Legal Series Vol. IV, Issue 3, June 2011 For private circulation only BRANCH & LIAISON OFFICES OF FOREIGN DONORS (OVERVIEW OF THE FCRA, FEMA & INCOME TAX LAW APPLICABLE TO BRANCH AND LIAISON OFFICES) CONTENTS LEGAL ISSUES FOR FOREIGN NGOs WORKING IN INDIA 01 PERMISSION FROM RBI FOR OPENING LIAISON OR BRANCH OFFICE IN INDIA 02 PERMITTED ACTIVITIES OF LIAISON OFFICE 02 CAN LIAISON OFFICE DO GRANT MAKING IN INDIA 02 DOES FCRA LAW APPLY TO LIAISON OFFICES & BRANCH OFFICES OF FOREIGN NGOs 03 PROCESS FOR SETTING UP LIAISON OFFICE IN INDIA 05 DOCUMENTS TO BE FILED FOR LIAISON OFFICE 05 WHO SHOULD SIGN THE FORM FNC-1 AND POWER OF ATTORNEY FOR LIAISON OFFICE 05 AUTHORITY TO WHOM DOCUMENTS TO BE FILED FOR LIAISON OFFICE 05 TIME TAKEN FOR PROCESSING THE APPLICATION 06 DOCUMENTS TO BE FILED ANNUALLY BY LIAISON OFFICE 06 SETTING UP OF ADDITIONAL LIAISON OFFICE 06 RENEWAL OF THE LIAISON OFFICE APPROVAL 06 BELATED APPLICATION FOR APPROVAL OF LIAISON OFFICE 07 REGISTRATION WITH THE ROC, NEW DELHI FOR ALL LIAISON OFFICES 07 CAN A LIAISON OFFICE SIGN MOUS WITH INDIAN PARTNERS 07 CAN FUNDS BE TRANSFERRED TO FCRA PARTNERS 08 CAN LIAISON OFFICE HOLD WORKSHOPS AND CONFERENCES WITH INTERNATIONAL PARTICIPANTS 08 ROLE OF LIAISON OFFICE IN TRAINING, EVALUATION, WORKSHOP, CONSULTANCY, ETC. 08 DOES LIAISON OFFICE OF FOREIGN NGO NEED 12A REGISTRATION 08 INCOME TAX REPORTING REQUIREMENT FOR LIAISON OFFICES 09 DOES BRANCH OFFICE OF FOREIGN NGO NEED 12A REGISTRATION 09 CASE LAWS IN FAVOUR OF FOREIGN NGOs GETTING EXEMPTIONS 09 ANNEXURE 1 RBI CIRCULAR ON ELIGIBILITY CRITERIA & PROCEDURAL GUIDELINES OF LIAISON OFFICE & BRANCHES 11 ANNEXURE 2 RBI CIRCULAR ON DELEGATION OF POWERS TO BANKS OF LIAISON OFFICE & BRANCHES 21 ANNEXURE 3 RBI CIRCULAR ON EXTENSION OF DUE DATE FOR FILING ANNUAL REPORT TO THE BANKS 26 Editorial : Sanjay Patra, Executive Director, FMSF, Team Harsh Jaitli, CEO, VANI Author : Manoj Fogla* * The Author is a consultant, can be contacted at mfogla@yahoo.com

3 LEGAL ISSUES FOR FOREIGN NGOs WORKING IN INDIA 1.01 It is important to understand that a foreign NGO is legal entity registered outside India, and therefore it cannot be considered as an Indian NGO. After the enactment of Foreign Exchange Management Act, 1999 (hereinafter referred to as FEMA), all foreign NGOs are required to take permission from Reserve Bank of India (RBI) for operating in India. It may be noted that prior to the enactment of FEMA many foreign donor offices were granted No Objection Certificate by RBI under the erstwhile Foreign Exchange Regulation Act, 1973 (hereinafter referred to as FERA) as FERA did not prohibit or regulate the offices of foreign donors in India. Therefore, all permission for liaison office granted under FERA became invalid w.e.f. 1st June 2000 (the day of enactment of FEMA 1999) Foreign NGOs having their branch/liaison offices in India are required to take approval from the RBI under the provisions of FEMA. FEMA was enacted in the year 1999 and it became effective from 1st June, Prior to that, all the foreign exchange matters were regulated under the Foreign Exchange Regulation Act, Somehow under FERA there was no provision for a specific permission to be obtained by foreign NGOs to operate in India. Therefore, many foreign NGOs were having their branch/liaison offices without getting any formal permission from any authority. Prior to the enactment of FEMA, many foreign NGOs sought permission from RBI to set up liaison offices. All such applications made prior to 1st June, 2000, were issued a letter of no objection by RBI. Many foreign NGOs having their liaison offices/branch offices in India construed this letter of no objection as an open-ended approval, which was not correct. The reality is that RBI was not regulating foreign NGOs prior to 1st June All foreign NGOs remained virtually unregulated by any specific law or regulation. However, after enactment of FEMA, the law is very categoric and clear about the legal formalities required to be complied by a foreign NGO. They have to seek permission for setting up liaison offices and the permission is generally granted for 3 years only. The liaison offices can be upgraded to branch offices at the discretion of RBI Another issue to be noted is that the FCRA (Foreign Contribution Regulation Act, 2010) is an internal security legislation regulated by the Home Ministry unlike the FEMA which is a fiscal legislation regulated by the Finance Ministry. Both the Acts have their specific applicability and are not mutually exclusive. 01

4 PERMISSION FROM RBI FOR OPENING LIAISON OR BRANCH OFFICE IN INDIA 2.01 All international NGOs are required to seek permission from the RBI for opening liaison or branch office in India. The relevant document is Notification No. FEMA 22/2000-RB, dated 3rd May, This regulation became effective from Earlier RBI was not granting branch office permissions to foreign NGOs. However in the recent years RBI has started granting branch office approval to various foreign NGOs. There are also instances where the liaison office status has been upgraded to branch office, later on. PERMITTED ACTIVITIES OF LIAISON OFFICE 3.01 A liaison office has a very narrow scope of activities. It can act as a channel between the head office and the Indian partners in a representative capacity only. In other words, it cannot have any activity independently of its own. Schedule II of FEMA Notification No. 22/2000 RB, dated , defines the permissible activity of liaison office which are as under: (a) (b) (c) (d) Representing in India the parent company/group companies. Promoting export/import from/to India. Promoting technical/financial collaborations between parent/group companies and companies in India. Acting as a communication channel between the parent company and Indian companies From the above four clauses, it can be seen that only clauses (a) and (d) are somehow related to the purposes of an NGO. The scope of activities permitted for liaison office practically rule out the possibilities of having any independent activity in India. A liaison office has to act as a representative and co-ordinating body in India. CAN LIAISON OFFICE DO GRANT MAKING IN INDIA 4.01 Generally liaison office is not permitted to do grant making from India. However, it was observed that in some specific circumstances RBI had allowed the permission to do grant making from India to some foreign NGOs. It may be noted that such grant making shall be subject to the FCRA provisions. 02

5 DOES FCRA LAW APPLY TO LIAISON OFFICES & BRANCH OFFICES OF FOREIGN NGOs 5.01 Under FEMA there is no legal bar in having independent activities including receipt of grant directly in the branch account, provided the RBI specifically permits such activities. In other words, if specifically permitted by RBI, there is no bar in having grant making activities from the Indian branch office or liaison offices. Generally liaison offices would not receive such approvals. However, in both the cases the FCRA law will become relevant depending on the nature of grant received and disbursed If the funds are received from sources other than inward remittances from head office, then FCRA and Income Tax laws become relevant. For instance, if grants are received directly in India by a foreign NGO, then such grant shall be treated as income in India. The income which accrues in India is subject to taxes. In other words, such branch offices should apply for section 12AA registration under the Income Tax Act for any direct receipt into India or any other income generated inside India. Such registration will provide 100% tax exemption. There is precedence of various branch offices availing Income Tax registration Under the FCRA law all entities having a definite social programme in India should receive foreign contribution only after receiving prior permission or registration under FCRA. As per the FCRA 2010 the law applies to whole of India including Indian persons domiciled outside India. The specific section for the applicability of FCRA is reproduced as under : Section 1(2) It extends to the whole of India, and it shall also apply to (a) citizens of India outside India; and (b) associate branches or subsidiaries, outside India, of companies or bodies corporate, registered or incorporated in India. Section 2(1)(a) association means an association of individuals, whether incorporated or not, having an office in India and includes a society, whether registered under the Societies Registration Act, 1860, or not, and any other organisation, by whatever name called; (m) person includes (i) an individual; (ii) a Hindu undivided family; (iii) an association; (iv) a company registered under section 25 of the Companies Act, 1956; 5.04 From the above three sub clauses of Section 1 & 2 of FCRA 2010, it is clear that FCRA is applicable to all entities (having an office in India) having a definite cultural, economic, educational, religious or social programme, if 03

6 they receive foreign contribution. Therefore, a foreign branch office needs to reflect upon the following issues : - Since it is having an office in India, will it fall under the definition of the term association as defined above. In our opinion the definition is too wide and the Indian branch irrespective of its foreign form will be covered under the above definition. - Does it have a definite cultural, economic, educational, religious or social programme in India. In our opinion a branch of a foreign NGO is having a definite social programme in India. - Does the inward remittance (including grant) from head office be considered as foreign contribution. In our opinion inward remittance of funds from head office cannot be considered as foreign contribution, because the payer and payee are the same person and therefore, no transfer, donation or delivery is involved. It may be noted that under section 2(h) of FCRA, a foreign contribution is defined as transfer, donation or delivery of funds from foreign source. - Does the receipts (including grant) from other foreign sources directly into the branch office be considered as foreign contribution. In our opinion receipt of funds from other foreign sources should be considered as foreign contribution, since the payer and payee are different persons and therefore, there is a transfer of funds from foreign source to the Indian branch In the light of above analysis, FEMA is the only relevant statute for branch offices of Foreign Entities if their operations are strictly confined to the inward remittances received from the head office Income Tax Act becomes relevant only if they generate income inside India including grant from other foreign sources. Similarly FCRA shall be relevant only if they receive grant from other foreign sources directly in the Indian branch account The form for registration under FCRA also includes liaison and branch offices of foreign entities. The clause 4(a) of the Form FC-3 mentions the branch of a foreign entity, this form is required for applying for FC registration. The clause 4(a) is reproduced as under : 4. Whether the applicant Association: (a) is a branch/unit/associate of foreign based organisation or another Association already registered or granted prior permission under the Act. If so, name and address of the parent organisation should be furnished: 5.08 The above clause in Form FC-3 clearly includes a branch office of a Foreign entity. Therefore, if a branch of foreign NGOs is contemplating receiving foreign grants directly into its Indian branch account, then it should apply for FCRA prior permission or regular registration. 04

7 PROCESS FOR SETTING UP LIAISON OFFICE IN INDIA 6.01 As per the Notification No. 22/2000, dated , no person resident outside India shall establish a office without prior approval of RBI. Therefore, before setting up of a branch/liaison office, approval of RBI should be taken. Application in Form FNC-1 is required to be made. Recently the law has been amended and as per the new law the application for approval has to be made to the RBI through the respective bank. The banks have also been empowered to accept annual activity report and also grant extension to the branch and liaison offices. The relevant circulars in this regard have been annexed in Annexure 1, 2 & 3. DOCUMENTS TO BE FILED FOR LIAISON OFFICE 7.01 The following documents are required to be filed with RBI: (1) Form FNC-1. (2) English version of the Certificate of incorporation/registration or memorandum of articles of association of the Foreign NGO. Either the Indian Embassy or a notary public of that country should attest this document. (3) Latest audited balance sheet of the foreign NGO. (4) Letter of Comfort as provided in Annexure 1 (5) Report from the Overseas Bank of the foreign entity (6) Detail of activities proposed to be supported by the foreign NGO. (7) Overview of the activities, mission and vision of the foreign NGO. (8) Power of the attorney in favour of the consultant, if any. WHO SHOULD SIGN THE FORM FNC-1 AND POWER OF ATTORNEY FOR LIAISON OFFICE 8.01 Form FNC-1 should be signed by the Overseas authorized signatory of the Foreign NGO and not the Indian representative The power of attorney should be signed by the overseas authorized signatory of the Foreign NGO and not the Indian representative. AUTHORITY TO WHOM DOCUMENTS TO BE FILED FOR LIAISON OFFICE 9.01 All applications should be filed to the respective bank which will then forward it to the RBI after verification and due diligence. 05

8 TIME TAKEN FOR PROCESSING THE APPLICATION No time limit has been prescribed in Foreign Exchange Management Act (FEMA). The RBI normally takes 2-3 weeks for processing such applications. However, in the case of charitable organisations, all applications are referred to Finance Ministry, Government of India. It can be a time consuming process. It may take anywhere between 6-12 months to get the first approval for liaison / branch office, but renewal is done at RBI level only, which should not take more than 2-3 weeks. DOCUMENTS TO BE FILED ANNUALLY BY LIAISON OFFICE Annually a auditors certificate is required to be filed to the banker. The auditor should certify that : (i) all expenditure/payments were made out of inward remittances only. (ii) only permitted activities were taken up by the liaison office and all the provision of FEMA were complied with There are no statutory requirement to file audited statement/activities, but the organisation may enclose the audited statements as well as a brief activity report of its operations in India. SETTING UP OF ADDITIONAL LIAISON OFFICE An application in Form FNC-1 has to be made to the banker for setting up additional liaison office. An application for setting up an additional office does not require any enclosure, which were already submitted with the initial application. RBI has delegated such powers to the respective bankers. Kindly see Annexure 2. RENEWAL OF THE LIAISON OFFICE APPROVAL The approval provided for liaison office is valid for 3 years only. Every 3 years an application has to be made to the banker for renewal of the liaison office approval. This application can be in form of a letter and FNC-1 is not required to be filed again. The organisation, optionally, should also file a copy of the memorandum/constitution and other documents such as activity report, audited statements, etc. Kindly see Annexure 2. 06

9 BELATED APPLICATION FOR APPROVAL OF LIAISON OFFICE The delay in making application to RBI even after the commencement of operation in India is condonable at the discretion of RBI. REGISTRATION WITH THE RoC, NEW DELHI FOR ALL LIAISON OFFICES It may also be noted that after receiving an approval from RBI for setting up of liaison office, the foreign NGO is also required to register itself with the Registrar of Companies (RoC), New Delhi. The RoC, New Delhi keeps a register of branches and liaison offices of foreign entities. A foreign NGO is required to record its name in that register. However, such law applies only to those foreign NGOs which are registered as companies in their country. CAN A LIAISON OFFICE SIGN MOUs WITH INDIAN PARTNERS This is a legally debatable issue and therefore divergent views are available. There are some foreign NGOs who sign MoUs in India through their liaison offices. On the other hand, there are some other foreign NGOs who send the documents to the head quarters for the purposes of signing In our opinion, this issue should not be confused with the liaison office. The issue is whether a representative of a foreign NGO can enter into a valid legal MoU by signing the document in India. In our opinion an authorised representative can enter into a valid MoU on behalf of its parent body provided he/she is properly authorised to do so. The authorisation to sign MoUs should be given to an individual rather than the liaison office. As a liaison office is not a separate legal entity, all valid legal documents, in any case, will be signed on behalf of the parent body. Further, signing of a document is not an activity, per se. The place of signing cannot change the activities embedded in the MoU. Therefore, more importantly it has to be ensured that the liaison office does not engage in any kind of prohibited activity. The moot point is that the character of a liaison office is of representative in nature and, therefore, it has to confine to that only. Signing of MoU can be done in representative capacity without infringing the rules of FEMA, in our opinion. 07

10 CAN FUNDS BE TRANSFERRED TO FCRA PARTNERS A liaison office cannot receive funds on behalf of the partners and therefore it cannot transfer any funds to its partner NGOs having FCRA registration. Liaison office can receive funds only and to the extent of its administrative expenses. Further, all the administrative expenses should be made out of inward remittances only. However, if RBI specifically allows grant making then a liaison office may undertake grant making subject to FCRA laws. CAN LIAISON OFFICE HOLD WORKSHOPS AND CONFERENCES WITH INTERNATIONAL PARTICIPANTS In our opinion liaison office cannot hold conferences or workshop with international or even local participants, going by the rules of FEMA. However, the FCRA department in its FAQ requires that all liaison offices should obtain prior permission from the FCRA Department for receiving remittances from its Head Office abroad for conducting conferences or carrying out other activities/ programmes, etc. in India Therefore such activities will be possible only if permitted by RBI under FEMA. ROLE OF LIAISON OFFICE IN TRAINING, EVALUATION, WORKSHOP, CONSULTANCY, ETC If the training, evaluation, workshop, consultancy etc. are conducted by third parties, then the liaison office can facilitate all such activities. All payments should be made directly to such third parties by the head office. The liaison office can only play a catalytic role in representative capacity. In this regard, it is important to note that the involvement of liaison office will be determined in terms of money spent from its account. Therefore, care should be taken to avoid monetary transactions. DOES LIAISON OFFICE OF FOREIGN NGO NEED 12A REGISTRATION The liaison office is not expected to have any income or activity in India. Therefore, 12A registration is not necessary. 12A registration is required by only those organisations which are generating taxable income in India including grants from other entities whether from India or abroad. 08

11 INCOME TAX REPORTING REQUIREMENT FOR LIAISON OFFICES The Finance Act, 2011 has made a very significant amendment, by virtue of which all liaison offices of foreign NGOs working in India will have to report to the Assessing Officer within 60 days from the end of the financial year. The rules and forms in this regard will be notified later. It may be noted that liaison offices, currently, are not required to file any return/document, unless they have income in India. The proposed Section 285 is as under : Every person being a non-resident having a liaison office in India set up in accordance with the guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act, 1999, shall in respect of its activities in a financial year, prepare and deliver or cause to be delivered to the Assessing Officer having jurisdiction, within sixty days from the end of such financial year, a statement in such form and containing such particulars as may be prescribed. This provision became effective from DOES BRANCH OFFICE OF FOREIGN NGO NEED 12A REGISTRATION A branch office can have activities resulting in taxable income in India. However, it may apply for Income Tax exemptions on par with other Indian NGOs. Section 11 of the Income Tax Act does not require the NGO to be established or registered in India. Therefore, even a foreign NGO would be entitled to apply for registration under section 12A and 10(23C). Foreign NGOs can also avail exemptions on their income, if any, earned in India. Such exemptions shall be subject to having activities in India It may be noted that foreign NGOs will need exemptions under section 12A and 10(23C) only if they are collecting grant /donations from sources other than inward remittances from head quarters or they are having any income which is generated in India It may further be noted that foreign NGOs shall not be entitled for income tax exemptions if they are not having any considerable activity inside India. In other words, if the income is generated in India for the purposes of repatriation outside India, then such foreign NGOs shall not be entitled for income tax exemptions. CASE LAWS IN FAVOUR OF FOREIGN NGOs GETTING EXEMPTIONS In Educational Institute of American Hotel and Motel Association v. CIT [1996] 219 ITR 183 (AAR), the issue of a foreign organisation came before 09

12 the court of the authority for advance ruling. The issue was whether, the applicant would be entitled to exemption under section 10(22) of the Incometax Act, 1961, in respect of its various amounts of income from the following sources in India : 1. Conducting various courses and certification programmes in hospitality management and operations. 2. Providing educational and training materials. 3. Conducting seminars, workshops and other programmes. 4. Providing training, course materials and instructional resources to the inhouse faculty of various institutions. It was held that exemptions under section 10(22) will be available. It was observed that to avail exemption the conditions under section 10(22) required the following (a) the educational institution must actually exist (b) a society need not itself be imparting education and it is enough if it runs some schools or colleges (c) it should exist only for educational purposes and not for profit (d) the income would be entitled to exemption provided it is directly relatable to the educational activity. The AAR found that the assessee was satisfying all the above conditions, therefore exemptions under section 10(22) were available The issue of eligibility of exemptions for foreign charities working in India also came up before the Supreme Court of India in Oxford University Press v. CIT [2001] 247 ITR 658. In this case though the ruling was against the assessee but the legal reasons on which the case was decided apparently was in favour of granting exemptions to foreign charitable institutions. The court found that the work of the Indian branch of Oxford University was not charitable in nature. It was engaged in publications, distribution and sales of books which could not be considered as an educational activity under section 2(15). It was observed that the label university press was not sufficient to establish that it was engaged in any educational activity. The purpose of the existence of the assessee in this country as appeared from the material on record, was possibly to earn profit Supreme Court clarified that if a foreign charity engaged in charitable activities in India is able to justify its activities are of charitable nature and it does not exist for profit, then there is no reason why exemption under section 11 should not be given The Supreme Court gave a landmark judgement in American Hotel & Lodging Association Educational Institute vs. CBDT (2006) 206 CTR (Del) 601 : (2007) 289 ITR 46 (Del). In this case the assessee NGO was a branch office of an American NGO. It was not doing any charitable activity in India and all its income in India was repatriated to USA The Supreme Court was of the opinion that exemptions under section 10(23C) was not available if all the activities were outside India though 10(23C) did not specifically make it mandatory for the activities to be done in India. In other words, Supreme Court opined that NGOs registered under section 10(23C) may have some activities outside India but to claim exemptions they should primarily be working in India, only. 10

13 RBI CIRCULAR ON ELIGIBILITY CRITERIA AND PROCEDURAL GUIDELINES OF LIAISON OFFICE & BRANCHES Annexure 1 RBI/ /278 A. P. (DIR Series) Circular No. 23 December 30, 2009 To All Authorised Dealers Category - I Banks Madam / Sir, Establishment of Branch Office (BO)/Liaison Office (LO) in India by Foreign Entities - Eligibility Criteria and Procedural Guidelines 1. Attention of Authorised Dealer Category-I (AD Category-I) banks is invited to Notification No. FEMA 22/2000-RB dated May 3, 2000 viz. Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) Regulations, 2000, as amended from time to time, in terms of which a person resident outside India requires prior approval of the Reserve Bank for establishing Branch Office (BO) / Liaison Office (LO) in India. 2. Under the current regulations, the applications from foreign companies (a body corporate incorporated outside India, and includes a firm or other association of individuals) (foreign entities) for establishing BO / LOs in India are considered by the Reserve Bank under two routes: Reserve Bank Route Principal business of the foreign entity falls under sectors where 100 per cent foreign direct investment (FDI) is permissible under the automatic route. Government Route Principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and Non - Government Organisations / Non - Profit Organisations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Government of India, Ministry of Finance. 3. With the objective of achieving greater transparency, it has been decided to place the eligibility criteria and the procedural guidelines for establishment of BO and LO in India, in the public domain. Accordingly, the broad criteria regarding eligibility for opening of BO / LOs, documentation, etc., are given in Annex A and the scope of activities permitted and other procedural guidelines regarding functioning of the BO / LO in India are given in Annex B. 4. The application for establishing BO / LO in India may be forwarded by the foreign entity in Form FNC (Annex C) through a designated AD Category - I bank (i.e. an AD Category I bank identified by the applicant with whom they intend to pursue banking relations) to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai , along with the prescribed documents. The designated AD Category - I bank should exercise due diligence in respect of the applicant s background, antecedents of the promoter, nature and location of activity, sources of funds, etc. and also ensure compliance with the KYC 11

14 norms before forwarding the application together with their comments/ recommendations to the Reserve Bank. 5. Applications from foreign banks and insurance companies will continue to be directly received and examined by the Department of Banking Operations and Development (DBOD), Reserve Bank, Central Office and the Insurance Regulatory and Development Authority (IRDA), respectively, as hitherto. Approval of the Reserve Bank is not required to establish a branch/unit in Special Economic Zones for undertaking manufacturing and service activities, subject to compliance with the conditions specified in Notification No. FEMA 102/2003-RB dated October 3, 2003 read with A.P. (DIR Series) Circular No.58 dated January 16, In order to provide a uniform framework, a Unique Identification Number (UIN) would be allotted to both, the existing as well as the new BOs / LOs. The UIN will have to be quoted in all references to the Reserve Bank by the BO/LO and the designated AD Category I bank. 7. The Reserve Bank or the Government of India, as the case may be, reserves the right to reject an application for non-fulfillment of any other condition/s not specifically referred to in the Annexes, fulfillment of which, in the opinion of the Reserve Bank / the Government of India, is necessary for grant of such permission or in the public interest. The Reserve Bank or the Government of India, as the case may be, also reserves the right to verify / examine the activities of the BO / LO of the foreign entities established in India and to withdraw the permission already granted, after due notice, if the circumstances so warrant or due to changes in the policy. 8. The BOs / LOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the Annual Activity Certificate. 9. AD Category - I banks may bring the contents of this circular to the notice of their constituents/customers concerned. 10. Necessary amendments to the Foreign Exchange Management (Remittance of Assets) Regulations, 2000 notified vide Notification No.FEMA.13/2000-RB dated May 3, 2000 and the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 notified vide Notification No.FEMA.22/2000-RB dated May 3, 2000 are being issued separately. 11. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and is without prejudice to permissions / approvals, if any, required under any other law. Yours faithfully, (D. Mishra) Chief General Manager 12

15 Annex A [Annex to A. P. (DIR Series) Circular No.23 dated December 30, 2009] Eligibility Criteria for Establishment of Branch / Liaison Office in India (i) Eligibility Criteria An application from a foreign entity to establish Branch / Liaison Office in India is considered on the basis of two criteria viz: basic and additional: Basic Criteria Reserve Bank Route Principal business of the foreign entity falls under sectors where 100 per cent foreign direct investment (FDI) is permissible under the automatic route. Government Route Principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category are considered by the Reserve Bank, in consultation with the Government of India, Ministry of Finance. Additional Criteria Track Record o For Branch Office a profit making track record during the immediately preceding five financial years in the home country. o For Liaison Office a profit making track record during the immediately preceding three financial years in the home country. Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name]. o For Branch Office not less than USD 100,000 or its equivalent. o For Liaison Office not less than USD 50,000 or its equivalent. Applicants that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company as per Annex D, subject to the condition that the parent company satisfies the eligibility criteria as prescribed. (ii) Application Form and Documentation Applications in Form FNC (Annex C), duly completed in all respects and signed by the authorized signatory of the foreign entity in the home country may be submitted along with the Letter of Comfort, wherever applicable (Annex D), to the designated AD Category - I bank for onward transmission to the Reserve Bank, along with their comments and recommendations and the prescribed documents vide item (viii) of Form FNC. 13

16 Annex B [Annex to A. P. (DIR Series) Circular No.23 dated December 30, 2009] Scope of activities permitted and other procedural guidelines regarding functioning of a Branch Office / Liaison Office in India (i) Permitted activities Permitted activities for a Branch / Liaison Office in India would be as under: Branch Office Export/import of goods. Rendering professional or consultancy services. Carrying out research work, in which the parent company is engaged. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. Representing the parent company in India and acting as buying/ selling agent in India. Rendering services in Information Technology and development of software in India. Rendering technical support to the products supplied by parent/group companies. Foreign airline/shipping company. Normally, the Branch Office should be engaged in the activity in which the parent company is engaged. Liaison Office Representing the parent company / group companies in India. Promoting export / import from / to India. Promoting technical/ financial collaborations between parent / group companies and companies in India. Acting as a communication channel between the parent company and Indian companies. (ii) Applications for additional offices or undertaking additional activities. Requests for establishing additional BO / LOs may be submitted to the Reserve Bank in the same manner, as indicated in Annex A. Fresh FNC form, duly signed by the authorized signatory of the foreign entity in the home country should be submitted. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier. If the number of Offices exceeds 4 (i.e. one BO / LO in each zone viz; East, West, North and South), the applicant has to justify the need for additional office/s. The applicant may identify one of its Offices in India as the Nodal Office, which will coordinate the activities of all of its Offices in India. 14

17 Requests for undertaking activities in addition to what has been permitted initially by the Reserve Bank may be submitted through the designated AD Category -I bank to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai, justifying the need with comments of the designated AD Category - I bank. (iii) Extension of validity of the approval of Liaison Offices Requests on letter head of LO for extension of time for continuance of LOs [other than those from entities in the Insurance sector, banks, NBFCs and Construction and Development sectors (excluding infrastructure development companies)] may be submitted to the AD Category - I bank concerned under whose jurisdiction the LO / Nodal Office is located before the expiry of the validity of the approval. Applications from foreign banks and insurance companies will continue to be directly received and examined by the Department of Banking Operations and Development, Reserve Bank and Insurance Regulatory and Development Authority (IRDA) respectively, as hitherto. No extension would be considered for LOs of entities which are NBFCs and those engaged in Construction and Development sectors (excluding infrastructure development companies). Upon expiry of the validity period, these entities have to either close down or be converted into a Joint Venture (JV)/Wholly Owned Subsidiary (WOS), in conformity with the extant FDI policy. (iv) Winding up of Branch/Liaison Offices Requests for closure of the BO / LO and allowing the remittance of winding up proceeds of BO / LO may be submitted to the designated AD Category - I bank by the BO/LO or their Nodal Office, as the case may be. The application for winding up may be submitted along with the following documents: a. Copy of the Reserve Bank s permission/ approval from the sectoral regulator(s) for establishing the BO/ LO. b. Auditor s certificate : (i) indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; (ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the Office have been either fully met or adequately provided for; (iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India. c. No-objection or Tax Clearance Certificate from the Income-Tax authority for the remittance. d. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the BO / LO and there is no legal impediment to the remittance. e. A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the BO /LO in India. 15

18 Designated AD Category-I bank should ensure submission of all the above mentioned documents by the BO / LO before considering the request for closure of the BO / LO and subsequent remittance, if any, to the Head Office. Designated Authorised Dealers may allow remittance of winding up proceeds in respect of Offices of banks and insurance companies, after obtaining copies of closure permission from the sectoral regulators along with the documents mentioned above. 16

19 Annex C [Annex to A. P. (DIR Series) Circular No.23 dated December 30, 2009] FNC Application for Establishment of Branch/Liaison Office in India A. General Instructions to Applicants: The application form shall be completed and submitted to the AD Category - I bank designated by the applicant for onward transmission to the Chief General Manager-in - Charge, Reserve Bank, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai along with the documents mentioned in item (viii) of the Declaration. No. Details Particulars 1. Full name and address of the applicant. Date and Place of incorporation/ registration Telephone Number(s) Fax Number(s) ID 2. Details of capital i) Paid-up capital ii) Free Reserves/Retained earnings as per last audited Balance Sheet/ Financial Statement iii) Intangible assets, if any 3. Brief description of the activities of the applicant. 4. i) Value of goods imported from and/ or exported to India by the applicant during each of the last three years: a) Imports from India b) Exports to India ii) Particulars of existing arrangements if any, for representing the company in India. iii) Particulars of the proposed Liaison/ Branch Office: a) Details of the activities/ services proposed to be undertaken/ rendered by the office. b) Place where the office will be located. c) Phone number 17

20 d) ID e) Expected number of employees (with number of foreigners) 5. i) Name and address of the banker of the applicant in the home country ii) Telephone & Fax Number iii) ID 6. Any other information which the applicant company wishes to furnish in support of this application. 7. For Non-profit / Non-Government Organisations: (i) Details of activities carried out in the host country and other countries by the applicant organization. (ii) Expected level of funding for operations in India. (iii) Copies of the bye-laws, Articles of Association of the organisation. 18

21 DECLARATION We hereby declare that: i) The particulars given above are true and correct to the best of our knowledge and belief. ii) Our activities in India would be confined to the activities indicated in column 4(iii) (a) above. iii) If we shift the office to another place within the city, we shall intimate the designated AD Category - I bank and the Reserve Bank. In the event of shifting the Office to any other city in India, prior approval of the Reserve Bank will be obtained. iv) We will abide by the terms and conditions that may be stipulated by the Government of India / Reserve Bank / designated AD Category - I bank from time to time. v) We, hereby commit that we are agreeable to a report / opinion sought from our bankers abroad by the Government of India /Reserve Bank. vi) We understand that the approval, if granted, is from FEMA angle only. Any other approvals / clearances, statutory or otherwise, required from any other Government Authority/ Department/ Ministry will be obtained before commencement of operations in India. vii) We have no objection to the Reserve Bank placing the details of approval in public domain. viii) We enclose the following documents: 1. Copy of the Certificate of Incorporation / Registration attested by the Notary Public in the country of registration [If the original Certificate is in a language other than in English, the same may be translated into English and notarized as above and cross verified/attested by the Indian Embassy/ Consulate in the home country]. 2. Latest Audited Balance sheet of the applicant company. [If the applicants home country laws/regulations do not insist on auditing of accounts, an Account Statement certified by a Certified Public Accountant (CPA) or any Registered Accounts Practitioner by any name, clearly showing the net worth may be submitted] 3. Bankers Report from the applicant s banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank. Name: Designation: Place: Date: (Signature of Authorised Official of the Applicant Company) 19

22 Annex D [Annex to A. P. (DIR Series) Circular No. 23 dated December 30, 2009] Format of the Comfort Letter The Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Fort, Mumbai Dear Sir, Sub: Application for establishment of Branch / Liaison Office in India by our subsidiary / group company, M/s 1. You may kindly refer to the application made by our subsidiary/group company, M/s to your office for establishing Branch / Liaison Office in India. 2. In this connection, we, (the parent company) undertake to provide the necessary financial support for our subsidiary / group company s operations as a Branch / Liaison Office in India. Any liability that may arise due to the functioning of the Branch/Liaison Office in India will be met by us (the parent company), in case of inability on part of the Branch/Liaison Office to do so. 3. We are also enclosing the financial background of our company in the form of our latest Audited Balance Sheet / Account Statement certified by a Certified Public Accountant. Yours faithfully, ( ) Authorised Representative of the parent company 20

23 RBI CIRCULAR ON DELEGATION OF POWERS TO BANKS OF LIAISON OFFICE & BRANCHES Annexure 2 RBI/ /279 A. P. (DIR Series) Circular No.24 December 30, 2009 To Madam / Sir, All Authorised Dealers Category - I Banks Establishment of Branch (BO) / Liaison Offices (LO) in India by Foreign Entities Delegation of Powers 1. Attention of Authorised Dealer Category I banks is invited to Notification No. FEMA 22/2000-RB dated May 3, 2000 viz. Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 as amended from time to time, in terms of which a person resident outside India requires prior approval of the Reserve Bank for establishing Branch (BO)/ Liaison Offices (LO) in India. As announced in the Mid-term Review of the Annual Policy Statement for the Year (para 143), the draft circulars regarding delegation of powers to Authorised Dealers for extension of the validity period of LOs, closure of BO / LOs of foreign entities in India and the eligibility criteria and procedural guidelines for BO / LOs of foreign entities in India were placed on Reserve Bank s website for public comments. On the basis of the feedback received from the public, the final guidelines have been issued vide our A. P. (DIR Series) Circular No.23 dated December 30, As indicated therein, the application in form FNC by the foreign entity (other than those engaged in insurance and banking) for opening of BO / LO in India should be routed through a designated AD Category - I bank. The designated AD Category - I bank is required to forward the application/s, along with the relevant documents and their comments / recommendations, to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai The designated AD Category - I bank should exercise due diligence in respect of the applicant s background, antecedents of the promoter, nature and location of activity, sources of funds, etc. and also ensure compliance with the KYC norms before forwarding the application together with their comments/ recommendations to the Reserve Bank. 3. Applications from banks and insurance companies for opening of BO/LO will continue to be received and examined directly by the Department of Banking Operations and Development of the Reserve Bank and the Insurance Regulatory and Development Authority (IRDA) respectively, as hitherto. Approval of the Reserve Bank is not required to establish a branch/unit in Special Economic Zones for undertaking manufacturing and service activities, subject to compliance with the conditions specified in Notification No. FEMA 102/2003-RB dated October 3, 2003 read with A.P. (DIR Series) Circular no. 58 dated January 16, In order to provide a uniform framework, a Unique Identification Number (UIN) will be allotted to both the existing as well as new BO / LOs. This UIN is required to be quoted in all future references made to the Reserve Bank by the BO / LO / designated AD Category I bank. Consequent upon delegation of powers from February 01, 2010 existing BO / LO 21

24 will also have to necessarily approach the Reserve Bank through their designated AD Category -I bank for their requests/references. 5. With a view to liberalizing the existing procedure in respect of BO/ LOs, it has been decided to delegate the powers to the designated AD Category - I banks, as under : i) Submission of Annual Activity Certificate At present, BO/ LOs are required to submit Annual Activity Certificate (Annex) from their Auditors to the Central Office / Regional Office of the Reserve Bank, certifying that the BO / LO has carried out only those activities which are approved by the Reserve Bank. With effect from February 01, 2010, the Annual Activity Certificate as at the end of March 31 shall be submitted, on or before April 30, to the designated AD Category I bank and a copy to the Directorate General of Income Tax (International Taxation), Drum Shape Building, I.P. Estate, New Delhi , by the following : (a) In case of a sole BO/ LO, by the BO/LO concerned; (b) In case of multiple BO / LOs, a combined Annual Activity Certificate in respect of all the Offices in India by the Nodal Office of the BOs / LOs. The designated AD Category - I bank shall scrutinize the Annual Activity Certificate and ensure that the activities undertaken by the BO/LO are being carried out in accordance with the terms and conditions of the approval given by the Reserve Bank. In the event of any adverse findings being reported by the Auditor or noticed by the designated AD Category -I bank, the same should be reported immediately by the designated AD Category I bank to the respective Regional Office of the Reserve Bank in respect of LOs and to the Central Office of the Reserve Bank in the case of BOs, along with the copy of the Annual Activity Certificate and their comments thereon. ii) Extension of validity period of Liaison Offices The designated AD Category - I bank may, with effect from February 01, 2010, extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval / extension granted by the Reserve Bank, if the applicant has complied with the following and the application is otherwise in order. The LO has submitted the Annual Activity Certificates for the previous years (initially, for existing LO, the designated AD Category-I banks may obtain confirmation from the Regional Office concerned about timely submission of the Certificate for previous years); and The account of the LO maintained with the designated AD Category I bank is being operated in accordance with the terms and conditions stipulated in the approval. Such extension may be granted, as expeditiously as possible, say within a period of one month from the receipt of the request under intimation to the Regional Office concerned and to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai , as the case may be, quoting the reference number of the original approval letter and the UIN. It may be noted that in the case of LOs of banks and entities engaged in insurance business, the application has to be directly submitted to the Department of Banking Operations and Development, Reserve Bank of India and Insurance Regulatory and Development Authority (IRDA), respectively as stipulated by them, as hitherto. Further, no extension would be considered for LOs of entities which are NBFCs and those 22