There are various ways for a foreign company to establish its presence in India, such as a wholly owned subsidiary, liaison office (LO), branch office, and project office.
As the name suggests, an LO facilitates close coordination between the parent company situated abroad and business entities in India. Also referred to as a representative office, it acts solely as a communication channel.
For foreign companies seeking to explore the Indian market on a preliminary basis or establish a communication channel with Indian stakeholders without engaging in commercial activities, setting up an LO offers a suitable and compliant mode of presence in India.
It is mainly governed by the Foreign Exchange Management Act, 1999 (FEMA), and the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 issued by the Reserve Bank of India (FEMA 22(R)/2016-RB).
An LO is not allowed to undertake any business, trading, or industrial activity in India and is also prohibited from earning any income. It must function entirely through inward remittances received from its foreign parent company.
In this article, we have covered the following key aspects related to LO in India:
- Definition: What constitutes an LO?
- Permitted Activities: Activities that an LO is allowed to undertake.
- Eligibility Criteria: Conditions and financial thresholds for foreign entities to set up an LO in India.
- Approval Process: Step-by-step procedure to obtain approval under FEMA 22(R)/2016-RB.
- Compliance Checklist: Ongoing regulatory and reporting requirements post-establishment.
- Exit Procedure: Process for closure.
I. What is an LO?
As per Regulation 2(e) of FEMA 22(R)/2016:
‘Liaison Office’ means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.
II. Permitted Activities
An LO may undertake only the following activities:
| • Representing the parent company in India. |
| • Promoting export/import between India and the home country. |
| • Promoting technical and financial collaborations. |
| • Acting as a communication channel between the parent company and Indian businesses. |
Note: LOs are not allowed to earn any income or engage in commercial/trading/manufacturing activity.
III. Eligibility Criteria
| Criteria | Requirement |
| Profit Track Record | Profit-making track record for the immediately preceding 3 financial years in the home country. |
| Net Worth | Minimum USD 50,000. |
| Exception to Profit Track Record and Net Worth: If a foreign company is not financially sound but is a subsidiary of another company, it can still apply to set up an LO in India by submitting a Letter of Comfort from its parent company. This is allowed only if the parent company meets the required net worth and profitability criteria. | |
IV. Approval Process
An LO cannot be established in India without obtaining prior approval from the Reserve Bank of India (RBI). Therefore, obtaining prior approval from the RBI is mandatory before establishing an LO in India.
While prior approval of the RBI is generally mandatory for foreign entities to establish an LO in India, the following exceptions apply:
- Banking Companies: A banking company incorporated outside India is not required to obtain approval under FEMA for establishing an office in India, provided it has obtained the necessary approvals under the Banking Regulation Act, 1949.
- Insurance Companies: An insurance company incorporated outside India is exempt from RBI approval under FEMA if it has obtained the requisite approval from the Insurance Regulatory and Development Authority of India (IRDAI), established under the Insurance Regulatory and Development Authority Act, 1999.
- Branch Offices in Special Economic Zones (SEZs): A company incorporated outside India does not require RBI approval to set up a branch office in an SEZ for undertaking manufacturing and service activities.
Application is made in Form FNC to an AD Category-I bank. The AD Category-I Bank considers such applications as per the guidelines given by the RBI. However, before issuing the approval letter to the applicant, the AD Category-I bank shall forward a copy of the Form FNC along with the details of the approval proposed to be granted by it to the RBI, for allotment of Unique Identification Number (UIN) to each LO. After receipt of the UIN from the RBI, the AD Category-I bank shall issue the approval letter to the non-resident entity for establishing an LO in India.
In the following cases, the AD Category-I Bank shall forward the application to the RBI, which shall process the applications in consultation with the Government of India:
a. The applicant is a citizen of or is registered/incorporated in Pakistan;
b. The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau, and the application is for opening an LO in Jammu and Kashmir, North East region, and Andaman and Nicobar Islands;
c. The principal business of the applicant falls in the four sectors, namely Defence, Telecom, Private Security, and Information and Broadcasting. However, prior approval of the RBI shall not be required in cases where Government approval or license/permission by the concerned Ministry/Regulator has already been granted.
d. The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. However, if such an entity is engaged, partly or wholly, in any of the activities covered under the Foreign Contribution (Regulation) Act, 2010 (FCRA), they shall obtain a certificate of registration under the said Act and shall not seek permission under FEMA 22(R)3.
V. Timeline for opening LO
An LO must be opened within six months from the date of the approval letter. If it is not opened within this period, the approval will be cancelled. In case the delay is due to reasons beyond the control of the foreign company, the AD bank may grant an extension of up to six more months. Any extension beyond this period will require prior approval from the RBI.
VI. Validity period for LO
| Criteria | Requirement |
| Entities engaged in the construction and development sectors and which are Non-Banking Finance (NBFC) | Two yearsNo further extension, except for infrastructure development companiesAfter expiry of the validity period, either close down or convert into a joint venture/ wholly owned subsidiary |
| Banks and entities engaged in the insurance business | Three yearsApplication for extension of the validity period of the LO to be directly submitted to the Department of Banking Regulation (DBR), RBI, and the IRDA, as applicable |
| Others | Three yearsApplication for extension of the validity period to be submitted to the AD Bank, which may extend the validity period by three years from the date of expiry of the original approval/extension granted |
VII. Additional Guidelines
| Guideline | Details |
| Multiple LOs | Allowed with justification and RBI/AD bank approval. |
| Bank Accounts | Only one LO bank account is permitted unless otherwise approved by the RBI. The permitted Credits and Debits to the account shall be:Credits Funds received from Head Office through normal banking channels for meeting the expenses of the office.Refund of security deposits paid from the LO’s account or directly by the Head Office through normal banking channels.Refund of taxes, duties, etc., received from tax authorities, paid from LO’s bank account.Sale proceeds of the assets of the LO. Debits Only for meeting the local expenses of the office |
| Prior approval for a change in address | If shifting to another city, prior approval from the AD Category-I bank is required. If shifting to another place in the same city, no approval is required. The new address needs to be intimated to the designated AD Category-I bank. |
| Remittances | LO must maintain itself only through inward remittances from the parent company. |
VIII. Compliance Checklist
| Compliance Item | Timeline / Description |
| Form FC-1 (Companies Act) | File with RoC within 30 days of setup. |
| Obtain Permanent Account Number (PAN) | Mandatory, even if no income is earned. |
| Local Registration | Required if local laws require it (case-specific). |
| Annual Activity Certificate (AAC) | Submit to the AD bank and the Director General of Income Tax (International Taxation) within 6 months from the end of the financial year. |
| Form 49C under Income Tax Laws | Within 8 months from the end of the financial year |
IX. Closure Process
To close the LO, the following documents must be submitted through the AD Category-I bank to the RBI:
| Copy of approval for establishing the LO |
| Auditor’s certificate: – indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; – confirming that all liabilities in India, including arrears of gratuity and other benefits to employees, etc., of the office have been either fully met or adequately provided for; and – confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India. |
| Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the office and there is no legal impediment to the remittance. |
| A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the branch office/liaison in India. |
| The designated AD bank has to ensure that the LO had filed the AACs; |
| Any other document(s) specified by the RBI/AD bank while granting approval. |
X. Conclusion
An LO provides a low-risk model for foreign companies to explore the Indian market. However, strict regulatory compliance with FEMA, RBI Master Directions, and the Companies Act is critical. Non-compliance may lead to cancellation of approval and penalties. Seek professional advice for an efficient setup and operation.
Coming Up in the India Entry Series:
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At CorpNinja Advisors, we specialize in supporting foreign enterprises in establishing and managing their operations in India. From incorporation to post-establishment compliance, we provide end-to-end legal and regulatory assistance.
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Disclaimer: This article is for general information purposes only and does not constitute any advice. Please get in touch with your consultant before taking any step(s). We shall not be responsible for any loss incurred due to the step(s) taken basis the information shared in this article.