Procedures For Russian Companies To Establish A Liaison Office In India

Процедуры для российских компаний по созданию представительства в Индия

Russian-Indian bilateral trade is growing and India is currently negotiating a Free Trade Agreement with the Eurasian Economic Union. This, coupled with a commitment by both Russian President Vladimir Putin and Indian Prime Minister Narendra Modi to increase bilateral trade to US$30 billion by 2025 make the Russia-India market attractive as this trade corridor is supported by State to State policy. We discussed the current bilateral trade position and items imported and exported between the two countries in this article here.

Prospective Russian companies and investors looking to enter the Indian market must carefully consider their options for investment and available avenues for establishing a business presence in the country.

Of these, Liaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time, as they are inexpensive and relatively simple to set up.

In contrast to other business structures, LOs allow foreign companies to establish a light footprint in India while keeping their financial, legal, and administrative commitments low.

Here, we outline the functions and requirements for liaison offices operating in India.

Setting up a liaison office in India

Russian companies can open a liaison office in India to facilitate and promote the parent company’s business activities, and act as a communications channel between the foreign parent company and Indian companies.

Unable to engage in commercial, trading, or industrial activities, liaison offices must be sustained by private, inward remittances received from the Russian parent company.

A liaison office is permitted to engage in the following activities:

• Facilitate communication between the Russian head office and parties in India to establish market opportunities;
• Promote imports/exports between India and other countries; such as Russia and the Eurasian Economic Union.
• Establish financial and technical cooperation between Russian, EAEU, other overseas and Indian companies; and
• Represent the Russian parent company in India.

The Foreign Exchange Management Act (FEMA) governs the application and approval process for the establishment of a liaison or branch office in India.

Under the Act, Russian and other foreign enterprises must receive specific approval from the Reserve Bank of India’s (RBI) Foreign Exchange Department to operate a liaison office in the country.

There are additional qualifying aspects in certain industries as follows:

Russian and Foreign insurance companies can establish LOs in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).

Russian and Foreign banks can establish LOs only after obtaining approval from the Department of Banking Regulation (DBR), RBI.

Applications are to be submitted through Form FNC Annex-1 (Application for Establishment of Branch/Liaison Office in India).

Identifying if the target sector is restrictive

The applications from these entities will be considered by the RBI under two approval routes:

• RBI route – Where principal business of the foreign entity falls under sectors where 100 percent FDI is permissible under the automatic route.
• Government route – Where principal business of the foreign entity falls under the sectors where 100 percent FDI is not permissible under 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.

To clarify further – if the Russian entity is conducting business in the following sectors – defense, telecom, private security, and information and broadcasting – then no prior approval of the RBI is required if the government or concerned ministry has already granted clearance.

If the LO applicant is a non-governmental/non-profit organization engaged in any of the activities under Foreign Contribution (Regulation) Act 2010 (FCRA), they will have to obtain a certificate of registration under the FCRA instead of seeking permission through FEMA.

Approval process

The approval process generally takes 40 days and 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).

But, in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, the validity period is only two years, and no extension for these sectors (excluding infrastructure development companies) will be considered.

Once the validity period expires, the liaison office has to either close down or be converted into a joint venture/wholly owned subsidiary in conformity with the FDI policy.

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 verified by the most recent audited balance sheet or account statement.

If a company does not meet these requirements, but is a subsidiary of a company that does, the Russian parent may submit a Letter of Comfort on the subsidiary’s behalf, as per Annex-2.

To begin the process of setting up a liaison office, the Russian parent company must submit a certificate of incorporation, Memorandum and Articles of Association (MOA and AOA), and a copy of the parent company’s latest audited balance sheet.

The liaison office must also obtain a Permanent Account Number (PAN) from the income tax department and a Unique Identification Number (UIN) from the RBI. The application for registration should be forwarded to the RBI by a designated AD Category – I Bank.

Within 30 days of establishment, the liaison office must register with the Registrar of Companies (RoC) by filing e-form FC-1 through the Ministry of Corporate Affair’s online portal.

The following documents must also be provided:

• A notarized and apostilled copy of the liaison office charter or Memorandum and Articles of Association in English;
• Full address of the enterprise’s principal place of operation outside of India;
• Name and address of the liaison office in India;
• List of directors; and
• Name and address of the company’s official representative based in India (the person authorized to accept delivery of notices and documents served to the company).

Compliance requirements

Each year, the liaison office must file an Annual Activity Certificate (AAC), prepared by a chartered accountant, to the RBI verifying the office’s activities are within its charter (Annex-3).

An AAC along with Form 49C should also be filed with the Directorate General of Income Tax within 60 days of the close of the financial year.

If an LO wants to open more than one bank account in India, it has to obtain prior permission of the RBI through its AD Category – I bank justifying the reason for the additional account.

An LO can also be upgraded into a branch office (BO) structure once its bank account is re-designated as a BO account. The entity will not require a new PAN.

Special approvals, registering with state police authorities

Prior approval of the RBI will be required only if applicants or Russian subsidiary companies from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau want to open a liaison office in Jammu and Kashmir, the North East region, and Andaman and Nicobar Islands.

Further, only applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong, Kong, Macau, and Pakistan have to register with the state police authorities, however there is no need for Russian or EAEU nationals to do this.

A copy of the approval letter for persons from these countries shall be marked by the AD Category – I bank to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New Delhi for necessary action and record.

All other countries, including Russian and EAEU businesses are exempted from registering with the state police authorities.

Establishing a Liaison Office in India is a proven, low capital investment route for establishing connections, promoting Russian products, or facilitating import-export between the Russian parent and domestic Indian enterprises. As the commitment between the two countries to expand trade to US$30 billion by 2024, there are plenty of opportunities for Russian investors into India to explore.

Related Reading

• India-Russia Business Ties are Developing in Energy, Shipping, Agriculture, and Jewelry Fields
• Establishing a Foreign Company in India
  India is an attractive destination for foreign investors due to its large consumer-oriented market, low labor costs, and rising global competitiveness. Despite the recent dip in the growth rate, India features among the top 10 countries for global FDI.