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A Liaison office (“LO”) allows foreign companies to build a light footprint in India keeping their financial, legal, and administrative commitments low. A Liaison Office also known as Representative Office can undertake only liaison activities. The role of such offices is therefore, limited to collecting information about possible market opportunities, source of supply, providing information about the parent company and its products to the prospective Indian customers or vice versa to its vendor.
General features of liaison office
- Indian liaison office shall have named same as of its parent company.
- Governing body for a liaison office license is Reserve Bank of India (RBI).
- It is suitable for foreign companies looking to setup a temporary office in India to liaison its existing business with Indian clients.
- LO does not have any ownership; it is just extension of the exiting company in the foreign country.
- Such offices have to meet it expenses entirely through inward remittances of foreign exchange from the head office outside India.
- License granted to liaison office is valid for three years and needs to be renewed every 3 years.
Activities allowed to liaison office in India
- Representing the parent company / group companies in India.
- Promoting export / import from / to India.
- Undertaking activities promoting technical / financial collaborations between parent / group companies and companies in India.
- Collecting information about possible market opportunities, source of supply, providing information about the parent company and its products to the prospective Indian customers or vice versa to its vendor.
- To act as a communication channel between the parent company and Indian companies.
Restrictions on activities of a liaison office
- LO is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly and therefore cannot earn any income in India.
- LO can neither borrow, nor lend money.
- It cannot acquire, hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India, without prior approval of RBI.
Regulators
- Foreign Exchange Management Act (FEMA) governs the application and approval process for the setting up of a liaison or branch office in India.
- Under the Act, foreign enterprises obtain permissions from RBI’s Foreign Exchange Department to establish a liaison office in the India.
- Foreign insurance companies can set up liaison offices in India after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).
- Foreign banks can establish LOs in India only if they get approval from the Department of Banking Regulation (DBR), RBI.
- The applications from such entities are to be submitted through Form FNC Annex-1(Application for establishment of branch / LO in India).
Investment route
The applications from these entities will be considered by the RBI through two routes:
- RBI route – Where principal business of the foreign entity falls under sectors where 100 percent FDI is permissibleunder the automatic route.
- Government route – Where principal business of the foreign entity falls under the sectors where 100 percent FDI is not permissibleunder the automatic route. Applications from entities falling under this category and those from non-government organizations are considered by the RBI in consultation with the Ministry of Finance, Government of India.
Permission to operate a liaison office is granted for a three-year period, which can be extended at a later date (maximum three year extension).
Conditions for setting up liaison office
An enterprise must also meet the following conditions before qualifying for the establishment of a liaison office:
- Must have a three-year record of profitable operations in the home country; and,
- Must have a minimum net worth* of US$50,000 or its equivalent verified by the most recent audited balance sheet or account statement.
* 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.
If a company does not meet these requirements, but is a subsidiary of a company that does, the parent company may submit a Letter of Comfort (LOC) on the subsidiary’s behalf.
FAQs
A liaison office (“LO”) permits foreign companies to build a light footprint in India, keeping their financial, legal and administrative commitments low. A liaison office, also well-known as a representative office, can tackle only liaison activities. Therefore, the part of such offices is limited to collecting information about possible market opportunities, source of supply, and providing information about the parent company and its products to the prospective Indian customers or vice-versa to its vendor.
The general features of a liaison office are:
- Indian liaison office shall have named same as of its parent company
- Governing body for a liaison office permit is the Reserve Bank of India
- It is suitable for foreign companies to set up a temporary office in India to liaison their existing business with Indian clients.
- LO does not have any proprietorship; it is just an extension of the exiting company in the foreign country.
- Such offices have to meet their expenses entirely through inward remittances of foreign exchange from the head office outside India
- The license granted to the liaison office is valid for three years and needs to be renewed every three years.
The restricted activities that a liason office cannot perform are:
- LO is not allowed to undertake any commercial/ trading/ industrial activity, directly or indirectly and therefore cannot earn any income in India
- LO can neither borrow nor lend cash.
- It cannot obtain, hold, (otherwise than by way of lease for a period not exceeding five years) transfer or dispose of any immovable property in India without preparatory acceptance of RBI.
An enterprise must encounter the following conditions before qualifying for the initiation of a liaison office:
- Must have a three-year record of profitable operations in the home country; and,
- Must have a minimum net worth* of US $50,000 or equivalent verified by the most up-to-date audited balance sheet or account statement.
The activities that are allowed to a liaison office in India are as follows:
- Representing the parent company/ group companies in India.
- Promoting export/ import from/ to India.
- Undertaking activities are promoting technical/ financial alliances between parent/ group companies and companies in India.
- Collecting data about possible market opportunities, source of supply, providing data about the parent company and its by-products to the prospective Indian customers or vice-versa to its vendor.
- To function as a communication channel between the parent company and Indian companies.
Foreign insurance companies can begin liaison offices in India only after acquiring acceptance from the insurance regulatory and development authority (IRDA). Similarly, foreign banks can begin liaison offices in India only after getting approval from the department of banking operations and development (DBOD), RBI.
The general conditions applicable to liaison offices of foreign entities in India are as under:
- Without prior consent of the Reserve Bank, no individual is a native of/ registered in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau can begin in India a liaison office or any other place of employment.
- Proprietary concerns set up abroad are not permitted to establish liaison offices in India.
- Liaison offices are allowed to open non- interest-bearing INR current accounts in India.
- Powers relating to the shifting of assets of the liaison office have been delegated to AD category-1 banks subject to compliance with specific stipulations as mentioned in A.P.DIR (Series Circular) no.142 dated June 12, 2014.
- All the new entities setting up LO shall also:
- Submit a report containing the information as per annexes ( given in AP DIR.Cir.35 dated September 25, 2012) within five active days of the LO becoming functional to the DGP of the state concerned in which LO has started its office; if there are more than one offices of such a foreign organization, in such cases to each of the DGP concerned of the state where it has started an office in India;
- A copy of the report as mentioned above annexes shall also be filed with the DGP concerned on an annual basis, along with a copy of the yearly activity certificate/yearly information required to be submitted by LO discussed as the case may be.
- A copy of the report thus filed as above shall also be filed with AD by LO concerned.
- Liaison Offices have to file an annual activity certification from the auditors, as at the end of March 31, along with the inspected balance sheet on or prior to September 30 of that year, expressing that the liaison office has taken up only those activities permitted by RBI. In case the annual accounts of the LO are completed concerning a date other than March 31, the AAC along with the examined balance sheet may be put forward within six months from the target date of the balance sheet.
The validity of LO (NBFC / construction and development sector) is two years. For other LO s, the validity is for three years. No extension in there for LO (NBFC / construction and development sector). For other LO s, the extension is for three years, subject to conditions.
