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.
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:
- Its name shall be same as its parent company.
- In India, the governing body for acquiring branch office license is Reserve Bank of India.
- 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.
- It should work towards increasing its customer base by spreading its business to diverse locations.
- Net worth of its parent company should not be less than USD 100,000.
- 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:
- It represents the parent foreign entity and acts as its purchasing and selling agent in India.
- A branch office is involved in the software development along with providing information technology services in the country.
- 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.
- A branch office can be used for exporting and importing of goods.
- It is also engaged to provide professional or consultancy services.
- It is established to carry out research word in a field of activity in which its parent company is already activating.
- 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:
- Any activities related to retail trading.
- It cannot conduct manufacturing or processing activities in India, either directly or indirectly.
- 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.
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:
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:
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:
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.