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.
- 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).
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.