Presented by:- Amit Luthra Managing Partner Luthra & Luthra , Chartered Accountants

1. Foreign Entities – Setting up of office in India Presented by:- AmitLuthra Managing Partner Luthra & Luthra, Chartered Accountants 23rd July 2011

2. India: The rest of the story Luthra & Luthra, Chartered Accountants • UNCTAD survey projected India as the second most important FDI destination (after China) during 2010-2012. • Sectors attracting higher inflows services • telecommunication, • construction activities and • computer software and hardware. Leading sources of FDI • Mauritius, • Singapore, • US and • UK. • This presentation is about understanding the way Foreign Companies can set up their offices in India so as to mine the existent business potential.

3. FDI in India Luthra & Luthra, Chartered Accountants

4. Regulatory Provisions: FEMA,1999/RBI Regulations Section 6(6) of Foreign Exchange Management Act,1999 read with Notification No.22/2000 dated May3, 2000 as amended from time to time Master Circular No. 03/2011-12 dated 01 July,2011 Companies Act,1956 Section 591-602 of the Companies Act,1956 related to Companies Incorporated outside India Luthra & Luthra, Chartered Accountants

5. Regulatory Aspects-Detailed Analysis1. As Foreign Company/entity a. Liaison Office (L.O.) Luthra & Luthra, Chartered Accountants • Body incorporated outside India are allowed to set up a L.O. • Mere communication channel between Head office and parties in India • Commercial/ income generating activities are strictly not permitted • Expenses to be met by foreign parent company. • Required to be registered with the Registrar of Companies (ROC). • An extension of parent company in India, is also known as Representative Office. • Required to get its annual accounts audited and submit annual activity report to the RBI .

6. Scope of Activities:- • Permissible • Promoting export from and import to India • Representing the parent company/ group companies in India • Promoting technical/ financial collaborations between foreign parent and Indian companies • Acting as a communication channel between the parent company and Indian companies • Prohibited • Cannot • undertake any activity of trading, commercial or industrial nature • enter into business contracts in its own name • render any consultancy or any other service with or without any consideration • charge any commission/ fee or earn any income for services rendered • have any signing or commitment powers • borrow, lend money or acquire, transfer or dispose off any movable property without prior permission of the RBI • acquire immovable property in India Luthra & Luthra, Chartered Accountants

7. b. Branch Office Luthra & Luthra, Chartered Accountants • Body incorporated outside India and engaged in manufacturing or trading activities are allowed to set up with specific approval of RBI. • It is an extension/permanent establishment of the parent company in India. • Required to be registered with the (ROC). • Foreign companies have general permission to establish branch/unit in SEZ (Special Economic Zones) to undertake manufacturing or service activities, subject to certain rules. • Foreign Banks do not require FEMA approval, they have obtained necessary RBI approval under the Banking Regulation Act, 1949. • Profits earned by branches can be freely remitted, subject to payment of applicable taxes. • Funding is possible from parent company and from Indian operations. • Required to submit annual activity report to the RBI. Branch Office on Stand Alone Basis in SEZ:- • Such Branch Offices are restricted to Special Economic Zone (SEZ) alone and no business activity/ transaction is allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India

8. Scope of Activities:- • Permitted • Representing the parent company in India and acting as buying/ selling agents in India • Export/ import of goods • Rendering professional or consultancy services • Carrying out research work in areas in which the parent company is engaged • Promoting technical or financial collaborations between Indian companies and parent or overseas group company • Rendering services in Information Technology and development of software in India • Rendering technical support to the products supplied by the parent/ group companies, foreign airline/shipping company • Prohibited • Not allowed to • carry out any manufacturing or retail trading activity of any nature • undertake domestic trading (i.e. domestic procurement and sale of goods) • Entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran and China are not allowed to acquire immoveable property in India even for a Branch Office. These entities are allowed to take such property on lease for a period not exceeding 5 years Luthra & Luthra, Chartered Accountants

9. c. Project Office (PO):- Luthra & Luthra, Chartered Accountants • A foreign entity may open PO to execute a contract awarded by the Indian Government or any Indian Company. • RBI has granted general permission to foreign Companies for setting up PO • Project office is treated as an extension/permanent establishment of parent company. • Required to be registered with the Registrar of Companies. • Profits earned can be freely remitted from India (Subject to payment of taxes). • Funding is possible from project operations and receipts from parent company. Can also be funded by Multilateral financial agency/Cleared by an appropriate authority like DRDO,IRDA etc • Required to submit annual activity report to the Reserve Bank of India by 30th April of every year

10. Scope of activities • Permitted • Execute projected related activities • Provide support services to parent company to whom the project has been granted • Perform activities incidental to execution of project in India • Prohibited • To undertake or carry on any activity other than relating and incidental to execution of the project Luthra & Luthra, Chartered Accountants

11. 2. Indian Incorporated Entitiesi) Joint Venture , ii) Wholly owned subsidiaries iii) Acquiring an existing company and iv) LLP Luthra & Luthra, Chartered Accountants Joint Venture • Foreign entities can set up JV with Indian party where FDI is permitted under FDI Policy • Unlike LO/BO/PO,JV has more flexibility with regard to the nature of operations and both can leverage their area of expertise. Wholly owned subsidiaries • Foreign companies can set up WOS in sectors where FDI is permitted • Unlike LO/BO/PO/JV, WOS has significantly higher flexibility with regard to nature of operations. (Subject to Sectoral limits, if any, under FDI Policy) Acquiring an existing Company • Acquiring an existing Indian company (wholly or partly)- a popular way of entering into India. • Legal, financial and technical due diligence suggested to avoid any unforeseen liability to either party is of critical importance.

12. Limited Liability Partnership Luthra & Luthra, Chartered Accountants • A recently introduced legal entity. • Partners have limited liability. • It is expected that LLPs may soon become a popular vehicle for FDI. • Other ordinary partnerships have unlimited liability - therefore not considered as a vehicle for foreign investment. • Investment in LLPs,- prior approval of the RBI/Government

13. Foreign Charitable organization’s –Office in India Luthra & Luthra, Chartered Accountants • A foreign non-profit organization setting up an office in India needs:- i) to be registered as a trust/society/company (Section 25), ii) permission from the Reserve Bank of India and also iii) a No Objection Certificate from the Ministry of External Affairs. Example:-A place of work in a restricted area (like a tribal or a border area requires a special permit– usually issues either by the Ministry of Home Affairs or by the relevant local authority (i.e., district magistrate).

14. Operational AspectsImportant compliances- FEMA Opening of LO/BO • File application in form FNC 1 for RBI Permission • Application will be considered under two routes • Automatic route where 100% FDI is allowed • In consultation with MOF where 100% is not allowed Additional Criteria considered by RBI: • Track record: For Branch Office — a profit making track record during the immediately preceding five financial years in the home country. For Liaison Office — a profit making foreign Company track record during the immediately preceding three financial years in the home country. Luthra & Luthra, Chartered Accountants

15. Operational AspectsImportant compliances- FEMA • Net worth For Branch Office — not less than USD 100,000 For Liaison Office — not less than USD 50,000 (Net Worth = Paid up Capital+ Free Reserve – Intangible Assets ) • Documents to be filed: English version of the Certificate of Incorporation and Memorandum & Articles of Association attested by Indian Embassy / Notary Public in the Country of Registration. Latest Audited Balance Sheet of the applicant entity. LO of Insurance/ Banking Companies • Insurance Companies- Approval of IRDA • Banking Companies- Approval of Department of Banking Operations and Development (DBOD), Reserve Bank of India. Luthra & Luthra, Chartered Accountants

16. Operational AspectsImportant compliances- FEMA Branch Office in Special Economic Zones (SEZs) General permission to foreign companies for establishing branch SEZ to undertake manufacturing and service activities, subject to:- • their functioning in 100 % FDI sectors; • Complying with Companies Act,1956 (Section 592 to 602); • Function on a stand-alone basis. RBI Notification No.FEMA/102/2003-RB dated 03-10-2003 and circular No.58 dated 16-01-2004 as amended from time to time. Branches of Foreign Banks • Foreign banks do not require separate approval under FEMA, for opening branch office in India. However, approval from RBI is required under Banking Regulation Act, 1949. Luthra & Luthra, Chartered Accountants

17. Operational AspectsImportant compliances- FEMA Project office • RBI has granted general permission to establish Project Offices, provided foreign Companies have secured a contract from an Indian company to execute a project in India, and • the project is funded directly by inward remittance from abroad; or • is funded by a International Financing Agency; or • the project has been cleared by an appropriate authority; or • Entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank. However, if the all the above criteria are not met, the foreign entity has to approach the RBI, Central Office, for approval. Luthra & Luthra, Chartered Accountants

18. Operational AspectsImportant compliances- FEMA Validity • LO/BO- Initial approval for 3 years and further extended by Authorised Dealer Bank and RBI respectively • PO- Till the period of project Validity extension exceptions No extension to the LO’s of following entities: • NBFC • Construction and development sectors (excluding infrastructure development companies) Upon expiry of the validity period, these entities have to either close down or be converted into a JV /WOS by forming a Company, in conformity with the extant FDI policy Luthra & Luthra, Chartered Accountants

19. Operational AspectsImportant compliances- FEMA Remittance of profit-BO • Can repatriate profit (net of taxes), on production of the following documents to AD : • Audited B/S and P&L account for the relevant year • Chartered Accountant’s certificate certifying • manner of arriving at the remittable profit • entire remittable profit has been earned from permitted activities (Profit should not include any profit on revaluation of the assets of the branch) Luthra & Luthra, Chartered Accountants

20. Operational AspectsImportant compliances- FEMA CLOSURE OF LO/BO Authorised Dealer Bank Category - I bank with the following documents: • Copy of the RBI permission/ approval from the sectoral regulator's such as IRDA,SEBI etc • Auditor’s certificate- i) indicating the manner of remittable amount has been arrived at/statement of assets and liabilities, indicating the manner of disposal of assets; ii) confirming that all liabilities (gratuity and other benefits to employees, etc.), have been met/ provided for; and iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India. • No-objection / Tax Clearance Certificate. • Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance. • Report from the ROC regarding compliance with the provisions of the Companies Act. • Any other document/s, specified by the Reserve Bank while granting approval. Luthra & Luthra, Chartered Accountants

21. Regularization of LO/ BO of foreign entities established during pre FEMA period RBI-A.P.(DIR) Circular No.2 dated 15th July 2011 The RBI, vide above circular has now decided that all foreign entities, including NGOs/ N.P.O.s/ Government bodies and news agencies, operating in India through B.O.s/ L.O.s, who are continuing to function in India without obtaining any approval from RBI after the Foreign Exchange Management Act (FEMA), 1999 came into force from 1 June 2000, should approach RBI within 90 days from the date of issue of this circular for regularization of establishment of such offices in India, in terms of extant FEMA provisions

22. Operational AspectsImportant Compliance- The Companies Act,1956 Section 592- Foreign Companies within 30 days of the establishment shall file e-form 44 for registration with- • A certified copy of the charter/MOA of the Company. • Address of principal office • List of directors/secretary • Name of the Indian authorize representative • Full address of the office in India Section 593- Foreign company shall file e-Form-49 : • In case an alteration is made in MOA of a foreign company/Registered office/directors or secretary of a foreign company, on or before the 31st January, of the year following the year in which the alteration was made. • In case of alteration is made in name or address of the authorised person/principle place of business, within one month from the date on which the alteration was made. Luthra & Luthra, Chartered Accountants

23. Operational AspectsImportant Compliance- The Companies Act,1956 Section 594- • Every foreign company shall, in every calendar year- • Make out a balance sheet and Profit & Loss account and file in e-form-52 with ROC within nine months of the close of the financial year of the foreign company (Rule 18A of Companies General Rules & Forms, 1956) along with the list of all place of business in India. Section 597(3) • In case of cessation of place of business in India, file e-form 52 with in 30 days Section 598- • In case of default- Every officer shall be punishable with fine up to INR 10,000/- and up to INR 1,000/- for every additional day Luthra & Luthra, Chartered Accountants

24. Tax Implications & Transfer Pricing Rules Luthra & Luthra, Chartered Accountants A. Direct Taxes Liaison Office:- • Not liable to pay income tax as they are barred from making any profit. Transfer Pricing Rules:- • Transactions between liaison office and parent/associated entities- not subject to Transfer Pricing (TP) Regulations Branch Office:- • Liable to pay income tax in India on the profits attributable to it at the rates applicable to foreign companies. Transfer Pricing Rules • The transactions between Branch and parent/associated entities are subject to Transfer Pricing (TP) Regulations.

25. Tax Implications & Transfer Pricing Rules Luthra & Luthra, Chartered Accountants Project Office:- • Liable to pay income tax in India on its profits at the rates applicable to foreign companies. Transfer Pricing Rules • Transactions between project office and associated entities are subject to Transfer Pricing (TP) Regulations. JV/WOS:- • Liable to pay income tax in India on its profits at the specified rates Transfer Pricing Rules • The transactions between Indian Subsidiary/JV and parent/associated entities are subject to Transfer Pricing (TP) Regulations. B. Indirect Taxes:- All the above entities except L.O are subject to applicable indirect taxes.

26. What kind of office to Open:- Suggestion Luthra & Luthra, Chartered Accountants Liaison office • Suggested for a foreign company that does not have existing business in India but wishes to understand and explore the Indian market. • For collection of market information, interaction with Indian customers and providing information about parent company and its products to prospective Indian customers. • To promote technical and financial collaborations between parent/group companies and Indian companies where services are to be provided from off-shore. Branch office • Where the foreign entity has understood the Indian market and wishes to provide services from India on a regular basis. • It can undertake most of the activities, as mentioned above and enjoys greater operational freedom in comparison to Liaison and Project offices. Project office • When a foreign entity has been awarded a contract in India. Entity incorporated in India e.g. JV, LLP, wholly or partly owned company • Wide range of business activities envisaged; • Having long term perspective of mining Business potential in India

27. Luthra & Luthra, Chartered Accountants “I've never believed protectionism of that kind will lead us anywhere. I think you can have certain specific rules for engaging with India.. for example, not allowing mineral resources to be taken out of the country.. but there is not a shred of doubt in my mind that when you open an economy you should do it in totality. Foreign investment adds a sense of competition; we should see this as a wake-up call to modernize and upgrade. Companies that do not will undoubtedly die.” – Ratan Tata

28. COMPARATIVE ANALYSISOperational requirements Luthra & Luthra, Chartered Accountants

29. COMPARATIVE ANALYSIS Operational requirements Luthra & Luthra, Chartered Accountants

30. COMPARATIVE ANALYSIS Luthra & Luthra, Chartered Accountants

31. COMPARATIVE ANALYSIS Luthra & Luthra, Chartered Accountants

32. COMPARATIVE ANALYSIS Luthra & Luthra, Chartered Accountants

33. COMPARATIVE ANALYSIS Tax requirements Luthra & Luthra, Chartered Accountants

34. COMPARATIVE ANALYSIS Legal/ Regulatory requirements Luthra & Luthra, Chartered Accountants

35. Luthra & Luthra, Chartered Accountants “There is nothing so dangerous as the pursuit of a rational investment policy in an irrational world” - John Maynard Keynes

36. Thank You Luthra & Luthra, Chartered Accountants

37. Queries, if any, are welcome Luthra & Luthra, Chartered Accountants