CS Executive · Setting Up of Business, Industrial and Labour Laws

Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company: formula sheet

Full chapter guide

Key formulas

Routes of entry: Liaison office | Branch office | Project office | Wholly owned subsidiary; The first three are extensions of the foreign company. The WOS is a separate Indian company.
Foreign company: Company or body corporate incorporated outside India, whether or not it has a place of business in India; This is the meaning given in the Explanation to section 234.
Filing on setting up a place of business: Deliver documents to the Registrar within 30 days of establishing a place of business in India (s. 380(1)); Includes certified charter or memorandum and articles, address of registered office, list of directors and secretary, and name and address of a person resident in India authorised to accept service.
Alteration in documents: Return of alteration within 30 days of the alteration (s. 380(3)); Applies to changes in the documents already delivered.
Display of name: Name and country of incorporation outside every office, in English and local language characters; in English on letters, bill-heads and notices (s. 382); If members' liability is limited, that fact must also be stated.
Books of account: Kept on accrual basis and double entry system; retained for not less than 8 financial years (s. 128(1), (5)); Fine for default on the officers named in s. 128(6): not less than ₹50,000, up to ₹5,00,000.
Legal status test: Office of foreign company = same legal person as parent; WOS = separate legal person; This drives liability, taxation and compliance differences.
Permitted activities of an LO: Represent parent; promote export/import; promote technical or financial collaboration; act as communication channel; All are non-revenue activities. Anything that earns income is outside the permitted scope.
Eligibility: net worth: Net worth ≥ USD 50,000 (or equivalent) as per latest audited balance sheet; Applies to a standard non-financial applicant. Banks and other special categories have separate conditions.
Eligibility: track record: Profit-making track record in the home country during the immediately preceding 3 financial years; A loss in any of the three years is a problem. Both the net worth and profit tests must be met.
Funding rule: LO expenses = inward remittances from head office through normal banking channels; No income in India. No local fees, commission or sale proceeds can fund the LO.
Approval route: Application to AD Category-I bank; RBI or Government approval in specified cases; The AD bank deals with most cases. Specified countries or sectors need prior RBI or Government approval.
Validity of approval: 3 years, extendable by AD bank on request; Apply for extension before expiry. Check the current Master Direction for the exact process.
Annual Activity Certificate (AAC): CA certificate filed every year by 30 September; It certifies that only permitted activities were done and expenses came from inward remittances. It is filed with the AD bank and the authorities named in the Master Direction.
Legal status of a branch office: Branch office = part of the foreign company (not a separate legal entity); Parent is liable for the branch's acts. A wholly owned subsidiary, by contrast, is a separate Indian company.
Eligibility: profit track record: Parent: profit-making track record during the immediately preceding five financial years in its home country; Remember this as the first eligibility condition for a branch office.
Eligibility: net worth: Parent: net worth of not less than US$ 100,000 (or equivalent); Net worth is taken from the latest audited balance sheet or account statement certified by a Certified Public Accountant or its equivalent.
Permitted activities of a branch office: Export/import of goods; professional or consultancy services; research work in which the parent is engaged; promoting technical or financial collaborations between Indian and foreign companies; representing the parent in India and acting as buying or selling agent; rendering services in IT and software development; technical support for products supplied by the parent; foreign airline or shipping company operations; Use this list as your checklist. Activities outside it are not allowed.
Prohibited activities: No manufacturing or processing activity on its own; no retail trading; Manufacturing is allowed only through a separate entity, for example a subsidiary, or through a special permission such as in a SEZ.
Approval route: Application in Form FNC to an Authorised Dealer bank; RBI approval for cases outside the AD route; After approval, the branch must register with the Registrar of Companies under the Companies Act, as a foreign company, and obtain a PAN.
Financial statements of a foreign company (Chapter XXII, s. 381): Foreign company with a place of business in India files its financial statements with the Registrar; This is the Companies Act rule for the Indian branch of a foreign company. It is not section 128(2).
Branches of a company registered under the Act (s. 128(2)): Branch keeps proper books of its transactions + sends proper summarised returns periodically to the company's registered office (or the other place under s. 128(1)); Applies to a company registered under the Act that has a branch in India or outside India. This is deemed compliance with s. 128(1).
Time limit for initial filing: Documents to Registrar within 30 days of establishing the place of business in India (Section 380(1)); The clock starts from the establishment of the place of business, not from incorporation abroad.
Documents under Section 380(1): (a) certified copy of charter, statutes or memorandum and articles, with certified English translation if needed; (b) full address of registered or principal office; (c) list of directors and secretary; (d) name and address of one or more persons resident in India authorised to accept service of process and notices; (e) full address of principal place of business in India; (f) particulars of opening and closing of a place of business on earlier occasions; (g) declaration that no director or authorised representative has been convicted or debarred from company formation and management in India or abroad; (h) any other prescribed information; Remember it as eight items, (a) to (h).
Alteration in documents: Return of alteration in prescribed form within 30 days of the alteration (Section 380(3)); A fresh 30-day period runs from each alteration.
Books of account of a foreign company: Section 128 applies to the extent of keeping at its principal place of business in India the books on monies received and spent, sales and purchases, and assets and liabilities, relating to its business in India (Section 384(3)); The scope is limited to Indian business.
Other provisions applied by Section 384: Section 71 (debentures) mutatis mutandis; Sections 92 (annual return) and 135 (CSR) subject to exceptions, modifications and adaptations made by rules; Chapter VI (charges) mutatis mutandis; Chapter XIV (inspection, inquiry, investigation) mutatis mutandis to Indian business; Section 384(2) applies both Section 92 and Section 135 to a foreign company. The reference to Section 135 was inserted with effect from 9 February 2018.
Section 128 retention and penalty: Books with vouchers kept for not less than 8 financial years; default fine of ₹50,000 to ₹5,00,000 on the persons named (Section 128(5), (6)); Imprisonment and the 'or both' option were removed in 2020.
Section 137 filing and penalty: Financial statements to Registrar within 30 days of the AGM; company penalty ₹10,000 plus ₹100 per day of continuing failure, up to ₹2,00,000; The officer penalty is ₹10,000 plus ₹100 per day after the first, up to ₹50,000.
Core duty (S.128(1)): Books at registered office + true and fair view + accrual basis + double entry; Applies for every financial year and includes branch transactions.
Other place in India: Board decision → notice to Registrar within 7 days with full address; The place must be in India. Book the 7 days from the date of the decision.
Electronic mode: Books and papers may be kept in electronic mode in the prescribed manner; Stated in the second proviso to S.128(1).
Branch relaxation (S.128(2)): Branch books at branch + periodic summarised returns to registered office; Applies to branches in India or outside India.
Director inspection (S.128(3)): Any director may inspect during business hours; For a subsidiary's books, only a person authorised by Board resolution of the company may inspect.
Foreign-held financial information: Copies kept and produced for inspection by any director, on prescribed conditions; Applies to financial information maintained outside India.
Retention (S.128(5)): Not less than 8 financial years immediately preceding, with vouchers; If company is younger than 8 years, keep all preceding years. Central Government may direct a longer period if an investigation is ordered under Chapter XIV.
Penalty (S.128(6)): Fine ₹50,000 minimum to ₹5,00,000 maximum; Imprisonment and the 'or with both' words were omitted w.e.f. 21 December 2020. Falls on MD, whole-time director in charge of finance, CFO or other person charged by the Board.
WOS shareholding: Foreign parent holds 100% of equity (directly or through nominees); Possible only where the sector allows 100% foreign investment. Nominee holders are needed for a private company's minimum two members.
FDI route test: Sector check → Automatic route (no prior approval) OR Government route (prior approval) OR Prohibited; Check the sectoral cap first. Foreign holding above the cap is not allowed.
Pricing rule for fresh issue: Issue price ≥ fair value (unlisted company) determined by a valuer under any internationally accepted pricing methodology; For an issue to a non-resident, the price cannot be below fair value. Listed companies follow SEBI pricing rules.
Reporting after receipt of funds: Advance remittance → report to RBI (Form FC-GPR for share issue) → file after allotment; Shares must be allotted within the period prescribed under FEMA rules (generally 60 days from receipt of the advance). Otherwise the amount must be refunded unless RBI permits otherwise.
Annual reporting: FLA return filed with RBI every year; Applies to Indian companies that have received FDI.
Companies Act, 2013, section 203(1): Prescribed companies must have whole-time KMP: MD or CEO or manager (or a whole-time director in their absence), company secretary and CFO; Section 203(4): a vacancy in a whole-time KMP office must be filled by the Board within six months. Section 203(5): penalty of ₹5,00,000 on the company and ₹50,000 on each director and KMP in default.

Quick revision

Three forms of entry: liaison office, branch office, wholly owned subsidiary.
A liaison office acts as a communication channel for the parent and does not carry on commercial activity.
A branch office can carry out permitted activities as per the conditions in the study material.
A WOS is a separate Indian company, with the foreign parent holding all the shares.
Section 384(3): section 128 applies to a foreign company for its business in India, at its principal place of business in India.
Books of foreign company cover money received and spent, sales and purchases, and assets and liabilities in India.
Section 128(1): books on accrual basis and double entry system.
Section 128(5): books kept in good order for not less than eight financial years, with vouchers.
Section 128(1) first proviso: if books are kept elsewhere in India, notice to the Registrar within seven days.
Section 128(6): fine of not less than ₹50,000 and up to ₹5,00,000 on the MD, whole-time director in charge of finance, CFO or other person charged by the Board.
Section 128(3): any director may inspect books during business hours.
Section 384 also applies sections 71 and 92 and Chapter VI and Chapter XIV in the manner stated in it.

Common mistakes

Treating a branch office or liaison office as a separate legal entity. Fix: State clearly that these offices are part of the foreign company, and the parent is liable for their acts. Only a WOS is a separate legal person.
Saying a liaison office can carry on commercial activity and earn income. Fix: Remember a liaison office acts as a channel of communication for the parent and does not earn income in India. Branch offices carry on permitted commercial activities.
Treating an LO like a branch office and allowing it to trade or earn commission Fix: Remember that an LO is non-revenue only. A branch office can carry out the specified activities that earn income. An LO cannot.
Saying an LO can meet expenses from income earned in India Fix: State that the LO has no income. Every expense is met by inward remittance from the head office through normal banking channels.
Saying a branch office is a separate legal entity from the foreign company. Fix: Write that a branch is an extension of the parent. Only a subsidiary has a separate legal identity.
Allowing a branch office to do manufacturing or retail trading. Fix: Learn the permitted list and remember the two key bars: no manufacturing and no retail trading.
Saying the documents are due within 30 days of incorporation of the foreign company. Fix: Section 380(1) runs from the establishment of the place of business in India. Write that phrase in your answer.
Forgetting to mention the person resident in India authorised to accept service. Fix: Learn the list as (a) to (h) and always include the authorised person, who is the legal contact for notices.
Saying books can be kept at any place, including outside India, by Board decision. Fix: Write 'other place in India' and add the seven-day notice to the Registrar.
Stating that imprisonment is still a punishment under S.128(6). Fix: Write that the penalty is fine only, ₹50,000 to ₹5 lakh. Imprisonment and 'or with both' were omitted by Act 29 of 2020.

Exam tips

Practise the difference between branch office and liaison office and between branch office and WOS. Questions often ask for these comparisons.
In every answer say whether the form is a separate legal entity. This single point earns marks across most comparisons.
Quote section numbers exactly: 380 for documents, 382 for display of name, 128 for books of account, 234 for merger with a foreign company.
Keep the 30-day period in mind, for both initial filing and alterations.
In advice questions, end with a clear recommendation and give the reason in one line.
Write the four permitted activities in the same order every time. Examiners look for all four.
When a question gives facts, apply the income test first. It settles most scope questions in one line.
Quote both eligibility tests with the numbers: USD 50,000 net worth and three years of profits.