Indian dynamism, entrepreneurship and enthusiasm is seeking new horizons across the globe. Of course, anyone stepping into a foreign land must take care of the laws, rules and regulations of the host country. Each country is different and keeping abreast of the laws of different countries can indeed be a challenge.
Reserve Bank of India controls and regulates investment in foreign entities by persons who are residents of India. A person may be a citizen of India and resident outside India. A citizen who is not resident of India will not be governed by Reserve Bank of India regulations. An Indian resident is free to invest in foreign assets out of the income received when he/she was resident outside India. So, if a person resident in India desires to enter into overseas market, he can enter either by establishing branch office or liaison office outside India or he can form an independent Company outside India. The Company formed outside India may be in the form of wholly owned subsidiary or Joint Venture Company.
It is important to note that under section 2 of FEMA Act, the intention to stay outside or inside India for an uncertain period is important. This is different from the provisions under section 6 of Income Tax Act. To be a resident under Income Tax Act, an individual has to only stay in India for a specified number of days. So, an individual may be non-resident under Income Tax Act during a year and may be resident as per the FEMA Act, during the same year.
A person resident in India being a Firm or Company or Body Corporate registered in India is eligible to establish a branch outside India. A general permission is available for opening of Bank Account for the purpose of meeting the Branch Expenses abroad subject to following limits/conditions:
General terms and conditions for opening branch office/ representative abroad:
a. The overseas branch/office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity.
b. The overseas branch/office/representative shall not enter into any contract or agreement in contravention of the Act, Rules or Regulations made there under;
c. The overseas office (trading / non-trading) / branch / representative should not create any financial liabilities, contingent or otherwise, for the head office in India and also not invest surplus funds abroad without prior approval of the Reserve Bank. Any funds rendered surplus should be repatriated to India.
d. Exchange released by the authorized dealer should be strictly utilized for the purpose(s) for which it is released. The unused exchange may be repatriated to India under advice to the authorized dealer.
e. The details of bank accounts opened in the overseas country should be promptly reported to the AD Bank.
f. The account so opened, held or maintained shall be closed,
i. if the overseas branch/ office is not set up within six months of opening the account, or
ii. within one month of closure of the overseas branch/ office, or
iii. where no representative is posted for six months,
and the balance held in the account shall be repatriated to India;
g. The renewal of remittance facility after two years may be granted, provided proper accounts of utilization of foreign exchange released are furnished to the authorized dealer.
h. The following statements should be submitted by the applicant to the authorized dealer:
- A statement showing details of initial expenses incurred together with suitable documentary evidence, wherever possible, within three months from the date of release of exchange for that purpose.
- Annual account of trading/non-trading office abroad duly certified by statutory Auditors/Chartered Accountants.
Acquisition of Assets outside India
Branch / office / representative may buy office equipment and other assets required for normal business operations. Funds required for this may be remitted by the Indian entity from India as a current account transaction.
However, transfer or acquisition of immovable property outside India, other than by way of lease not exceeding five years, by the overseas branch/ office/ representative will be subject to RBI regulations.
Notably, the above facility cannot be used by e-commerce companies who are, for example, in the business of providing an e-commerce platform to foreign sellers and buyers and wish to establish a collection account in a foreign country without establishing a branch office or representative in that country.
Application to the AD Banker
The Indian firm/companies should submit applications to their bankers (authorized dealers) in form OBR along with the particulars of their turnover duly certified by their auditors and also a declaration to the effect that they have not approached/would not approach any other authorized dealer for the facility being applied for. The application form OBR needs to be filled in with necessary details along with supporting documents. After which the foreign exchange is released by the authorized dealer (bank).
The recurring (expenditure) remittance facilities are allowed initially for a period of two years only, after obtaining confirmation from the applicant that they have completed all legal and other formalities in India and abroad in connection with the opening of trading/non-trading office or for posting a representative abroad.
Some of the details to be provided in the application:
- Exporter’s Code Number allotted by Reserve Bank.
- Nature of the applicant’s business in India.
- Particulars of foreign currency balances/securities, if any, held by the applicant.
- Present arrangements for applicant’s representation in the country/territory concerned if any. If there is any agency arrangement, its full details including the number and date of Reserve Bank’s approval and commission paid during the past three years.
- Details of export realizations for the past two years.
- Commodity-wise/country-wise break up of exports realized in the last two years.
- Application is for appointing an agent (on fixed remuneration basis), or for opening a trading branch, or for a representative liaison office/non-trading branch.
- Place and country of posting of agent/representative office/branch.
- Territories/countries to be covered by the proposed agent/representative office/branch.
- Details of business to be conducted abroad by the agent/representative office/branch.
- Initial Establishment Expenses.
- Recurring expenses per month.
Off-site and on-site contracts
The overseas office / branch of software exporter company/firm may repatriate to India 100 per cent of the contract value of each ‘off-site’ contract.
In case of companies taking up ‘on site’ contracts, they should repatriate the profits of such ‘on site’ contracts after the completion of the said contracts.
An audited yearly statement showing receipts under ‘off-site’ and ‘on-site’ contracts undertaken by the overseas office, expenses and repatriation thereon may be sent to the AD Category – I banks.