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Incorporation of Non Corporate Entity by Foreign Entities

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Incorporation of Non Corporate Entity by Foreign Entities, Formation of Non Corporate Entity, Incorporation of Non Corporate Entity includes Formation of Liaison Office/Representation Office, Incorporation of Branch Office Formation of Project Office. Foreign entity may not be keen to invest a huge amount of capital in India during its initial stage. It might simply be interested in evaluating business opportunities and explore markets in India. In such a case, it may form a non-corporate entity in India. Now you can scroll down below n check more details regarding Incorporation of Non Corporate Entity by Foreign Companies.

Incorporation of Non Corporate Entity by Foreign Entities

Incorporation of Non Corporate Entity by Foreign Entities

Here, we shall discuss some common entry routes for the foreign investor:

1. Liaison Office/Representation Office

A body corporate incorporated outside India, including a firm or association of persons, may open a Liaison Office (LO) in India. As the name suggests, it can only take up liaison activities in India and thus, act as a channel for communication between its head office abroad and Indian parties. This form of business is best suited if the proposed foreign investor intends to mark its presence in India and spread awareness about its products and services among Indian customers. However, a major drawback of establishing an LO is that the foreign entity cannot carry any business activities through LO.

Purpose of an LO

  • 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

Steps for incorporation

Approving Authority: Reserve Bank of India (RBI)

Permission from RBI:

Application in Form FNC is required to be submitted, along with other required documents, to the Foreign Exchange Department, through authorised dealer.

There are two routes under which application in Form FNC is considered by RBI:

  1. Reserve Bank Route: This route is followed where the principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route
  2. Government Route: The application is considered under this route where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route

Additional criteria:

There are few additional criteria which are considered by RBI on case to case basis. These are mentioned below:-

  • A profit making track record of the foreign company during the immediately preceding three financial years in the home country.
  • Net Worth* of foreign company not less than US$ 50,000 or its equivalent.

*Means 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.

Initially, the permission is granted by RBI for a period of 3 (three) years, which can later be extended by the authorised dealer

Foreign Insurance Companies and Foreign Banks:

Foreign Insurance companies can establish liaison offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).

Foreign Insurance companies can establish liaison offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).

Post establishment compliances (immediately after establishment)

  • After establishment, LO is required to intimate to Registrar of Companies (RoC) in Form FC-1, within 30 days of establishment
  • Foreign entity setting up LO is required to submit a report containing information in prescribed format, within 5 (five) working days of the LO becoming functional to the Director General of Police (DGP) of the state concerned in which LO has established its office.

Relevant Parts of this article

2. Branch Office

If the foreign investor company is engaged in the business of manufacturing and trading, and it wishes to undertake certain business activities in India as well, then it can set up a branch office (BO) with specific approval of RBI.

Purpose of BO

  • Export/Import of goods (only on wholesale basis).
  • Rendering professional or consultancy services.
  • Carrying out research work, in areas 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.

Things to be kept in mind before incorporation

  • A BO set up in India is not allowed to carry any kind of retail trading in India.
  • A BO is also not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
  • Profits earned by the BO are freely remittable from India, subject to payment of applicable taxes.

Steps for incorporation

Approving Authority: Reserve Bank of India (RBI)

Permission from RBI:

The manner and procedure for making application to RBI seeking permission to set up a branch office in India is similar to that of setting up a LO. Application is to be made in Form FNC.

Additional Criteria:

As in case of a LO, there are few additional criteria for BO also, which are considered by RBI on case to case basis. These are mentioned below:-

  • A profit making track record of the foreign company during the immediately preceding five financial years in the home country
  • Net Worth* of foreign company not less than US$ 100,000 or its equivalent.

*Means 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.

Branches of Foreign Banks:

Foreign banks are required to obtain necessary approval under the provisions of the Banking Regulation Act, 1949, from Department of Banking Operations & Development, Reserve Bank, to open a branch office in India.

Branch Office in Special Economic Zones (SEZs):

Foreign companies can establish its branch in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is granted by RBI and is subject to the following conditions:

  • such branches/units are functioning in those sectors where 100 per cent FDI is permitted;
  • such units comply with the provisions of the Companies Act as applicable to the companies incorporated outside India;
  • such units function on a stand-alone basis.

Post establishment compliances (immediately after establishment)

The post establishment compliances of a branch office are similar to that as in case of a liaison office.

3. Project Office

A project office (PO) is essentially a branch office, but for a limited period of time and limited purpose. If a foreign company has secured a project from an Indian company, then in order to carry out such project conveniently and efficiently, it may open a PO in India. However, it must be borne in mind that a PO cannot carry out any other activity other than those which are incidental to or related to the project.

Steps for incorporation

No prior approval is required from RBI to set up a project office. Reserve Bank has granted general permission to foreign companies to set up a PO, subject to following conditions:

  • Foreign entity has secured a project from an Indian company; and
  • the project is funded directly by inward remittance from abroad; or
  • the project is funded by a bilateral or multilateral International Financing Agency; or
  • the project has been cleared by an appropriate authority; or
  • a company or entity in India awarding the contract has been granted term loan by a public financial institution or a bank in India for the project.

Here, the condition as mentioned in point no. (i) is mandatory and out of rest of the three conditions, any one or more conditions can be fulfilled. However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval.

Setting Up Of Project Offices by Foreign Non-Government Organisations/NonProfit Organisations/Foreign Government Bodies/ Departments

If any of the above foreign entities, by whatever name called, intends to set up a PO in India, then such entities are required to apply to the Reserve Bank for prior permission to establish an office in India, whether project office or otherwise. sssThis is because it falls under the Government Route.

Post establishment compliances (immediately after establishment)

The post establishment compliances of a project office are similar to that as in case of a liaison office or branch office. Additionally, the foreign company establishing a project office in India is to furnish report through the concerned AD branch, to the Reserve Bank of India, containing required information, within two months of its establishment.

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About Raju Choudhary

Article by Raju Choudhary Raju has written 537 articles. If you like This post, you can follow CAknowledge on Twitter. Subscribe to CAknowledge feed via RSS or EMAIL to receive instant updates.

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