For foreign entities planning to make investments in India, it’s advisable to gain a comprehensive understanding of the available business structures to facilitate smooth entry and exit strategies. In this regard, setting up a Liaison Office (LO) or Branch Office (BO) in India is a feasible option.
Liaison Office (“Representative Office”)
A Liaison Office, also known as a Representative Office, primarily handles liaison activities and serves as a communication bridge between the foreign Head Office and Indian parties. It isn’t permitted to engage in business activities or generate income in India, with all expenses being covered by inward remittances of foreign exchange from the Head Office outside India. The role of such offices is limited to gathering market information and providing insights about the company and its products to potential Indian customers. The initial permission for setting up such offices is typically granted for a 3-year period, extendable as needed.
Branch Office
Foreign companies involved in manufacturing or trading activities can establish Branch Offices in India with the specific approval of the Reserve Bank. These offices are permitted to undertake activities such as export/import of goods, rendering professional or consultancy services, conducting research work related to the parent company’s domain, promoting technical or financial collaborations, representing the parent company, and acting as a buying/selling agent in India. However, retail trading and manufacturing or processing activities are not permitted for Branch Offices. Profits earned by these offices are freely remittable from India, subject to applicable taxes.
Project Office
Foreign companies have the general permission to set up Project Offices in India for executing specific projects, subject to certain conditions outlined by the Reserve Bank of India. These conditions include securing a contract from an Indian company to execute a project in India, the funding of the project, and approval from relevant authorities.
Using a Local Associate
Apart from setting up a Liaison or Branch Office, another popular option for foreign entities is to collaborate with a local associate in India. This association allows the foreign entity to leverage the local associate’s understanding of Indian business practices, markets, and contacts, at a relatively lower cost. The local associate can perform various functions, including market research, acting as a distributor or sourcing agent, providing pre- and after-sales support, and more. Formalizing the relationship with a local associate can be done through a Memorandum of Understanding (MOU) or a formal agreement.
Understanding the nuances of these business structures is crucial for foreign entities planning to establish their presence in India, ensuring compliance with the regulatory framework and facilitating a seamless entry into the Indian market.
