Foreign Companies - Procedures for Opening Branches in India

By Sanjay Singh Somwanshi

Companies Incorporated Outside India:

Right from days of East India Company foreign companies were incorporating companies in India. After the liberalization policy Indian companies also started incorporating subsidiaries outside India. Recently many foreign companies have shown interest to open branch office or liaison office to monitor their business in India. In case they opt to incorporate a subsidiary company in India they have to follow the procedures given under the Companies Act, and also the provisions of the act will apply in to after the company is incorporated. If a company incorporated outside India wish to have a place of establishment in India without incorporating separate company for various reasons then it has to follow the procedures laid down in Part XI-sections 591 to 602.

The Act, which has been enacted to oversee the functioning of companies in India, draws heavily from the United Kingdoms Companies Acts and although similar, is more comprehensive. The Registrar of Companies (ROC) and the Company Law Board (CLB), both working under the Department of Company Affairs, ensure compliance with the Act. Sections 592 to 602 of the Companies Act of India closely follows sections 406 to 423 of the English Act barring sections 408, 416 to 418 of the act.

Foreign Companies:

A foreign company is a company which is incorporated in a country outside India under the law of that other country and has a place of business in India. Sections 591 to 602 of the Act deal with such companies.

Foreign Companies are of two classes namely:

Companies incorporated outside India, which have established a place of business in India after April 1, 1956; and

Companies incorporated outside India, which have established a place of business in India before that date and continue to have an established place of business in India.

Part XI of the Companies Act, 1956 containing Section 591 to 608 deals with the Companies incorporated outside India i.e. a "Foreign Company." The provisions of this part of the Companies Act, 1956 prescribes that its Sections 592 to 602 shall be applicable to Companies who are incorporated outside India which after the commencement of the Companies Act, 1956 establishes a place of business within India and Companies incorporated outside India having established place of business within India prior to the commencement of the Companies Act, 1956 and continue to have the said establishment. It says that a Company incorporated outside India and having an established place of business in India in which 50% or more paid up share capital is held by Indians then provisions of those sections shall apply to such Companies also.

Sections 592 to 602 applicable to such Foreign companies provide that they have to file with the Registrar of Companies:

Various documents giving particulars,

Returns regarding any alterations in the company,

Balance-sheet and Profit & Loss Accounts of the company,

Charges on any of the Companies' properties in India.

It also provides that the following provisions shall apply to Indian business of a Foreign Company:

Registration of charges,

Right to obtain copies of and inspect the trust deed,

Books of account to be kept by the Company,

Annual returns to be made by the Company,

Inspection of books of accounts,

Power of Central Government to direct special audit,

Audit of cost accountants,

Power of Registrar to call for inspection and investigation

(Contained in Sections 124 to 145, 125, 127, 118, 209, 159, 209-A,, 233-A, 233B, and 234 to 246 of the Companies Act)

Section 603 of the said part XI puts certain restriction on a foreign company offering documents for subscriptions in India.

Though under the Companies Act, 1956, no formalities are required to be carried out for a Foreign Company establishing place of business in India except the filing of the documents provided for in Part XI; under the provisions of Section 29 of the Foreign Exchange Regulation Act, 1973 general or special permission of the Reserve Bank of India for continuing any place of business or establishing any place of business for carrying on activities of trade and Commercial nature by a foreign company is required.

General:

The limit of the foreign equity in an Indian Company is now increased up to 51% from the earlier 40%. In certain cases 100% foreign equity participation is also now allowed. The Government of India has entered into agreements with major foreign countries including USA for avoiding double taxation.

Section 592 merely deals with the requirements of filing various documents and information with the Registrar of Companies. The Registrar, for the purpose of this section, is the Registrar of Companies, Delhi and also the Registrar of Companies of the State in which the place of business is situated. The filing has to be done within 30 days of the establishment of the place of business. Foreign companies are required to file one set of documents with the Registrar of Companies, Delhi and the other set of documents with the Registrar of Companies of the State in which the company has established its place of business. Filing fee of Rs. 5000 has to be paid only at ROC Delhi and no filing fee be paid for filing copy with the other ROC.

If the company establishes any branch or branches of its business in India, no further information need be given, except that with the annual accounts the company should deliver three copies of a list of all its places of business in India and with reference to which the accounts are made out.

Every foreign company must conspicuously exhibit on the outside of its every office or place of business in India its name ending with the words Limited or Private Limited, as the case may be, if it is limited company, and the country of its incorporation in English as well as in the local language.

Where a foreign company carries on its business in India through an agent, the agent is required to comply with the provisions of this section (592).

A company shall be said to have a place of business in India if it has a specified or identifiable place at which it carries on business such as an office, store house, go down or other premises having some concrete connection between locality and its business.

594. ACCOUNTS OF FOREIGN COMPANY.

The provisions concerning the accounts of a foreign company are detailed in section 594. It lays down the general obligation - once in every calendar year to make out a balance sheet and profit and loss account in respect of its Indian business, under the presumption that it were an Indian company, giving details also of its subsidiaries and to deliver three copies of the documents to the Registrar. When not in English, a certified translation should also be annexed. A list of all places of business established by the foreign company in India with reference to which the balance sheet is made out should also be sent regularly.

In other words, the foreign company shall maintain books of accounts of its Indian business and file, every year, three copies of its world accounts (within nine months from the close of the financial year), Indian business accounts (within nine months from the close of the financial year) and a list of places of business established in India.

In respect of its Indian business, the foreign company is required to maintain at its principal place of business in India, proper books of accounts with respect to all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place, all sales and purchases of goods by the company, and all assets and liabilities of the company

Where the foreign company sets up a liaison office in India, it shall prepare a "statement of receipts and payments" and a "statement of assets and liabilities" instead of a balance sheet and profit and loss account. These shall be in the prescribed form and shall be duly audited, the auditor giving his report as to the truth and fairness of the receipt and payments during the financial year

The Government has granted several exemptions and made modifications in regard to the above, in the light of its general policy as to foreign companies. Exemptions are also given to liaison offices. Special clarifications are issued in regard to foreign shipping, airline and insurance companies and also trade and industrial activities of foreign companies

The documents are to be filed with the Registrar within a period of nine months of the close of the financial year of the foreign company or within such period as extended by the Registrar not exceeding three months.

Provisions Relating To Foreign Companies:

(1) Foreign companies which, after the commencement of this Act, establish a place of business within India shall, within thirty days of the establishment of the place of business, deliver to the Registrar for registration -

(a) a certified copy of the charter, statutes, or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company; and, if the instrument is not in the English language, a certified translation thereof;

(b) the full address of the registered or principal office of the company;

(c) a list of the directors and secretary of the company, containing the particulars mentioned in sub-section (2);

(d) the name and address or the names and addresses of some one or more persons resident in India, authorized to accept on behalf of the company service of process and any notices or other documents required to be served on the company; and

(e) the full address of the office of the company in India which is to be deemed its principal place of business in India.

(2) The list referred to in clause

(c) of sub-section

(1) shall contain the following particulars, that is to say :-

(a) with respect to each director, -

(i) in the case of an individual, his present name and surname in full, any former name or names and surname or surnames in full, his usual residential address, his nationality, and if that nationality is not the nationality of origin, his nationality of origin, and his business occupation, if any, or if he has no business occupation but holds any other directorship or directorships, particulars of that directorship or of some one of those directorships; and

(ii) in the case of a body corporate, its corporate name and registered or principal office; and the full name, address, nationality, and nationality of origin, if different from that nationality, of each of its directors;

(b) with respect to the secretary, or where there are joint secretaries, with respect to each of them -

(i) in the case of an individual, his present name and surname, any former name or names and surname or surnames, and his usual residential address; and

(ii) in the case of a body corporate, its corporate name and registered or principal office :

Provided that, where all the partners in a firm are joint secretaries of the company, the name and principal office of the firm may be stated instead of the particulars mentioned in clause (b) of this sub-section.

(3) Clauses (2) and (3) of the Explanation to sub-section (1) of section 303 shall apply for the purpose of the construction of references in sub-section (2) to present and former names and surnames as they apply for the purposes of the construction of such references in sub-section (1) of section 303.

(4) Foreign companies, other than those mentioned in sub-section (1), shall, if they have not delivered to the Registrar before the commencement of this Act the documents and particulars specified in sub-section (1) of section 277 of the Indian Companies Act, 1913 (7 of 1913), continue to be subject to the obligation to deliver those documents and particulars in accordance with that Act.

When any change occurs in the above particulars, the Registrar must be intimated accordingly. According to section 596 any process, notice, or other document required to be served on a foreign company shall be deemed to be sufficiently served, if addressed to any person whose name has been delivered to the Registrar under the foregoing provisions of this Part and left at, or sent by post to, the address which has been so delivered:

Provided that -

(a) where any such company makes default in delivering to the Registrar the name and address of a person resident in India who is authorized to accept on behalf of the company service of process, notice or other documents; or

(b) if at any time all the persons whose names and addresses have been so delivered are dead or have ceased so to reside, or refuse to accept service on behalf of the company, or for any reason, cannot be served;

a document may be served on the company by leaving it at, or sending it by post to, any place of business established by the company in India.

The Indian accounts have to be drawn up in Indian rupees as per the requirements of Schedule VI.

Under Regulation 22 of the Companies Regulations, 1956 the registrar having jurisdiction over Delhi must maintain a Register of Foreign Companies in Form III. In that the names of foreign companies must be entered in the order in which the documents referred to in section 592 of the Companies Act are delivered to the Registrar.

The company has to address all communication to The Registrar of Companies, NCT of Delhi and Haryana.

Courts jurisdiction:

The jurisdiction will be decided with reference to the filing of documents and information pursuant to Section 592. Clause (d) of sub-section (1) requires the foreign companies to furnish particulars about the names and addresses of some persons on whom notices can be served insofar as the foreign company is concerned.

In the case of amalgamation of branch of a foreign company in India with the transferee company jurisdiction of High Court for sanctioning under section 391/394 read with section 591 and 597(1) it is the jurisdiction of registered office or place of business which would decide the jurisdiction of any High Court to entertain the petition for approval of amalgamation scheme under section 391/394 and not Delhi. [Bank of Muscat S.A.O.G, In re. (2004) 60 CLA 325 (Kar.)]

Establishment of Place of Business in India- FEMA Requirements:

The Foreign Exchange Management Act, 1999(FEMA) has framed Regulations relating to establishing any place of business in India. The Foreign Exchange Management (Establishment in India of Branch or Office or other place of business) Regulations, 2000 (Regulations) provides for establishment by a non-resident any place of business, which would be a Liaison office or Project office or site office or branch office.

In terms of the Regulation the following two points are noteworthy:

No person resident outside India shall, without prior approval of the Reserve Bank establish in India any place of business-be it branch or a liaison office or a project office or any other business by whatever name called.

Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China cannot establish any place of business- be it branch or a liaison office or a project office or any other business by whatever name called, unless they procure RBI permission in this regard.

Place of Business-what they are?:

The Regulations define various place of business as under-

Liaison Office means a place of business to act as a channel of

communication between the Principal place of business or Head Office by

whatever name called and entities in India but which does not undertake

any commercial /trading/ industrial activity, directly or indirectly, and

maintains itself out of inward remittances received from abroad through

normal banking channel.

Project Office means a place of business to represent the interests of the

foreign company executing a project in India but excludes a Liaison

Office.

Site Office means a sub-office of the Project Office established at the

site of a project but does not include a Liaison Office.

Thus, while a Liaison office is only a channel for facilitating communication between the principal entity abroad and that in India, existing without any commercial activity the Project office is one for executing specific projects in India. A Site office is an extension of project office in the very site where the work is done.

"Branch office", in relation to a company means -

(a) any establishment described as a branch by the company; or

(b) any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or

(c) any establishment engaged in any production, processing or manufacture,

but does not include any establishment specified in any order made by the Central Government under section 8.

Forms and Procedure:

A person resident outside India desiring to establish a branch or liaison or project office in India shall apply to the Reserve Bank in form FNC 1. In respect of Project office, the person resident outside India should have secured from an Indian company a contract to execute a project in India and the project is funded directly 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 Institute or a bank in India for the project.

Permitted activities:

Paragraph 6 of the Regulations sets out the activities to be undertaken by a branch or other office in India. Schedule I of the regulations details the activities that can be carried out by Branch and Schedule II list out the activities that can be carried out by liaison office. Except when permitted by RBI, the branch or liaison office shall carry out no other activity, other than those specifically permitted by these schedules.

As per Schedule I of the Regulations the following are the permitted activities for a branch in India of a person resident outside India:

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.

In terms of Schedule II a liaison office in India of a person resident outside India is permitted to carry out the following activities:

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.

Remittance of Profit or Surplus:

A person resident outside India permitted by the Reserve Bank under Regulation 5, to establish a branch or Project Office in India may remit outside India the profit of the branch or surplus of the Project on its completion, net of applicable Indian taxes, on production of the following documents, and establishing the net profit or surplus, as the case may be, to the satisfaction of the authorized dealer through whom the remittance is effected.

For remittance of profit of a branch, -

a) certified copy of the audited balance-sheet and profit and loss account for the

relevant year;

b) a Chartered Accountants certificate certifying, -

i) the manner of arriving at the remittable profit,

ii) that the entire remittable profit has been earned by undertaking the

permitted activities, and

iii) that the profit does not include any profit on revaluation of the assets

of the branch.

For remittance of surplus on completion of the Project, -

certified copy of the final audited Project accounts;

a Chartered Accountants certificate showing the manner of arriving at the remittable surplus;

income tax assessment order or either documentary evidence showing payment of income tax and other applicable taxes, or a Chartered

Accountants certificate stating that sufficient funds have been set aside for meeting all Indian tax liabilities; and

auditors certificate stating that no statutory liabilities in respect of the Project are outstanding.