For foreign companies looking to establish a presence in India, having a liaison office in the country can be of great value. Irrespective of what your business plan is, having a liaison office allows you to open up a line of communication between your head office (outside of India) and the businesses/entities in India with whom you want to deal.
A liaison office can facilitate one or more of the following:
- Sourcing division in India
- Facilitate exports/import
- Test the Indian market with a prospective business venture
- Improve the relations with the authorities and business community
LEGAL STATUS
The legal status of Liaison Offices in India is well defined but changes frequently. According to Taraspan:
“Establishment of Liaison Office/Representative Office in India is governed by Reserve Bank of India (RBI) together with Ministry of Finance, Government of India. The rules and regulations in respect to Liaison Offices are framed under Foreign Exchange Management Act, 1999 and Circulars/Notifications issued by RBI from time to time.”
The full list of documents and procedure is mentioned on the RBI website, and it is advised that you go through it thoroughly before proceeding.
There is usually a great deal of legal jargon/terms and conditions associated with the process, so it is recommended that you consult a specialist (in India) to understand the process better. Please also note that India is a highly bureaucratic country and many subprocesses (not mentioned in the main list) might arise from time to time.
ACTIVITIES ALLOWED
A liaison office is permitted to do the following:
Representation – The Liaison office is allowed to represent the parent company in India and vice-versa. It is authorised to take legal decisions as per the terms of its operations.
Promotion of Trade – The office is permitted to undertake such activities which result in marketing/popularising the trade benefits between the two countries. Note that the Liaison Office isn’t allowed to participate in trade of any kind actively; only promote it.
Promotion of Financial Collaborations – The office may undertake such activities which help in the growth of financial collaboration between the two parties. Again, it is not permitted to sign deals or conduct financial transactions explicitly.
Communications – The biggest work for the liaison office is to function as a means of communication between the parent office and the Indian subsidiaries. To keep an open line of communication is essential for businesses, and that’s what a good liaison office does most effectively.
ACTIVITIES NOT ALLOWED
A liaison office is not permitted to do the following:
- Indulge in trade directly
- Indulge in any profit-generating/financial activity
- Invest in India
- Buy or sell property such as offices and land in India.
- Actively indulge in public advertising, only in the passive promotion.
TENURE AND ANNUAL COMPLIANCE
Approval for setting up a liaison office in India is given for three years and extension is granted by track record of annual activity certificates. Record of the account must be maintained with the designated bank as per the terms and conditions of original approval.
There’s a set process for annual compliance:
- Annual Activity Certificates to be submitted to the RBI, The DGP and the Directorate of Income Tax within six months of the Balance Sheet Date
- Receipts and Payments A/C must be sent to the Directorate of Income Tax
- Annual Compliances and Filing to be done at the Registrar of Companies using Form FC 2
These are some of the most important things that you should take care of while setting up a Liaison Office in India. The procedure is complicated, and it is advisable that you ensure all the necessary conditions are met well in time.
