Overview Opening of Branch Office by Foreign Company

As described by Section 2(9) of the Companies Act, 1956, a branch office means an establishment carrying out either the same or substantially the same activities as that of head office of the company and it may be a trading, processing or manufacturing unit. However, it is important for a branch office to carry out only those activities which are approved by the governing body of the concerned country. In India, the Reserve Bank of India is the governing body.

The main idea behind setting up a branch office in India by a foreign entity is to carry out its branch activities for the business and thus it allows the foreign entity to test and explore the Indian market without making huge investments. India, has carved its place as an attractive destination for investors from all around the world and the foreign entities that are looking to establish their business in India have two options to choose from i.e. they can either start a full-fledged private limited company with up to 100% foreign direct investment (FDI) in most of the sectors or they can rather establish a branch office first and get a thorough understanding of the Indian market.

Opening Of Branch Office in India by Foreign Entity

While both the options has its own merits and demerits to list down, option of opening a branch office is more feasible and economical and thus is an useful option for the foreign entrepreneurs that are looking to enter and explore the rich and lucrative Indian market. A branch office, set up by a foreign entity is allowed to enjoy certain benefits and rights such as remittance of profits outside India after paying the applicable taxes and acquiring of immovable property in India in order to perform permitted activities.

RBI Guidelines for Opening Branch Office by Foreign Company

As per the guidelines of RBI, general features of a branch office are as below:

  1. Its name shall be same as its parent company.
  2. In India, the governing body for acquiring branch office license is Reserve Bank of India.
  3. Any and all of the expenses concerning the branch office are met by its head office, provided it does not have the revenue from Indian operations.
  4. It should work towards increasing its customer base by spreading its business to diverse locations.
  5. Net worth of its parent company should not be less than USD 100,000.
  6. A branch office cannot have any ownership in India and is simply an extension of its parent foreign organization.

A branch office is opened with a definite aim and thus serves specific purposes and is also considered as an extension of the main or parent foreign entity, however as per the Companies Act 1956, a branch office can only conduct certain activities as approved by the Reserve Bank of India. Role of a branch office in India is restricted and it can only undertake following activities in the country, such as:

  1. It represents the parent foreign entity and acts as its purchasing and selling agent in India.
  2. A branch office is involved in the software development along with providing information technology services in the country.
  3. Its main role is to provide technical support to the products and services supplied or provided by its parent company i.e. the foreign entity.
  4. A branch office can be used for exporting and importing of goods.
  5. It is also engaged to provide professional or consultancy services.
  6. It is established to carry out research word in a field of activity in which its parent company is already activating.
  7. It can carry out activities such as buying or selling agents; business activities related to banking and airline and shipping activities.

RBI has also listed down the activities which a branch office established by a foreign entity is not allowed to perform or conduct, such as:

  1. Any activities related to retail trading.
  2. It cannot conduct manufacturing or processing activities in India, either directly or indirectly.
  3. Any profit earned by the branch office is subject to payment of applicable taxes.

In order to set up a branch office in India, foreign entity can take either of the below mentioned routes, i.e.

  • Automatic Route: In case the activities of the parent company falls under 100% FDI sectors, then the foreign entity does not need to obtain approval from the Indian government and a direct application to the RBI is to be submitted. In this case, the parent company has to submit the application form FNC-1. A Unique Identification Number (UIN) is issued to the successful applicants and once the office is set up, a PAN Card number must be acquired along with opening of a bank account. Apart from PAN Card, certain other business licenses are applicable to the branch office such as:
    • Tax deduction number
    • VAT and GST registration, in case the branch office is permitted to perform trading activities.
    • Service tax registration
  • Approval Route: If the activities of the foreign parent company do not fall under 100% FDI sectors, then the parent company has to obtain permission from the government. In this case, the applications are considered by the RBI in consultation with the Ministry of Finance, Government of India. Applications from entities such as non-government organizations or non-profit organizations or government bodies are also considered under this category.

For opening a branch office in India, its parent company has to comply or meet the below listed eligibility requirements as listed by the RBI:

  • The branch office has to comply with both the Companies Act 1956 (2013) and also with the provisions of the Foreign Exchange Management Act 1999.
  • The parent company has to submit the financial records for the last five years of the activity.
  • The net worth of the parent company should not be less than USD 100,000.

In order to open a branch office, its parent company has to submit a detailed list of documents in the specific order, as mentioned below:

  • Three copies of form FNC.
  • An authority letter or a resolution from the parent company both for setting up the branch office and in favour of its local representative.
  • A letter from the parent company from its head or principal officer with intent to support the operation in India.
  • Certificate of Incorporation / Registration or Memorandum and Articles of Association / Notary Public in the Country of Registration. The documents, in case are in a language other than English then their English version has to be submitted. The documents should also be attested by the Indian Embassy.
  • Financial statement of previous 3 years from the date of application. The statements need to be audited.
  • KYC of the parent company in the specified format as per the RBI’s guidelines.
  • Details such as name, address, contact number and email ID of the authorized person or local representative.
  • Bankers certificate
  • Details of its bankers and shareholders such as identity and address proof. The documents should be certified by Consulate and Banker in its home country.
  • Details of the activity carried by the main office in its home country with a brief description of its product and services.
  • Resolution of opening up bank account with the designated banker.
  • Details related to the branch office such as address of the proposed office, no of employees etc.
  • Detailed description of expected funding level for its operations in India.
  • A letter of commitment from its head office to the effect that it will be open to report/opinion sought from its banker by the Government of India/Reserve Bank of India.
  • Detailed structure of the organization with respect to its shareholding pattern

Once the documents are submitted and the branch office is set up, it is also required to register itself with the Registrar of Companies (ROC), which can be done on the online portal of Ministry of Corporate Affairs and within 30 days of the registration. Once the registration is done, a CIN number i.e. Corporate Identity Number is allotted to the branch office by the Registrar of Companies.

Following documents are to be submitted with the Registrar of Companies:

  • Form FC1
  • English version of the Certificate of Incorporation / Registration/ Memorandum of Association / Articles of Association. The mentioned documents should be notarized.
  • Approval letter obtained from RBI.
  • Details of key members of the parent company i.e. directors and stakeholders on company’s official letterhead.
  • Address proof in India
  • Declaration required under Section 380
  • Notarized copy of the Board Resolution for the appointment of the Authorized representative in India.
  • In addition to the above documents, RBI issued a circular in the year 2012 stating that a branch office has to submit a report to the Director General of Police (DGP) of the particular state within 3 to 5 five days of the office becoming functional. In case there is more than one DGP office in the state, the report has to be submitted in each office.

Once the branch office is established, the office license is given for 3 years, which can later be renewed on its expiry and if need arises, the parent company can choose to close the same by submitted relevant documents with the designated bank or the Authorized Dealer.

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