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

Setting Up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company

A foreign company can enter India through a liaison office, a branch office or a wholly owned subsidiary. A liaison office only represents the parent and earns no income. A branch office can carry on permitted commercial activities. A wholly owned subsidiary is a separate Indian company under FDI rules. Learn the scope, approval and compliance for each.

What this chapter covers

This chapter covers the three common ways a foreign company can set up in India: a liaison office, a branch office and a wholly owned subsidiary (WOS). You study what each form may do, what it may not do, who approves it and what continuing compliance follows.

The chapter also connects to the Companies Act, 2013. Chapter XXII deals with companies incorporated outside India. Section 384 makes some provisions apply to a foreign company. For example, section 128 applies to the extent of requiring it to keep at its principal place of business in India the books of account relating to money received and spent, sales and purchases, and assets and liabilities, in the course of its business in India.

The chapter links to the rest of Paper 3 Part I, which deals with setting up of business. Choosing a form of entry is a business-structure decision, like choosing between a company, an LLP or a partnership. A WOS is an ordinary Indian company, so your knowledge of incorporation and company law carries over. Questions are written, so you must be able to compare the forms and apply them to a given set of facts.

Questions on this chapter are usually comparison, scope or short case-based questions, and they reward clear structure. If you can state what each form may do, who approves it and what limits apply, you can answer them in an ICSI style: the provision, the analysis, then a conclusion. The chapter is also compact, so the effort is small compared to the marks it can fetch. It also helps in your later work as a company secretary, since foreign entry structures are a regular advisory matter.

Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company: topics in the order to study them

  1. 1Forms of Entry for Foreign Companies in IndiaStart here to see the whole map: liaison office, branch office, project office and WOS, and how they differ.
  2. 2Liaison Office: Scope, Activities and ApprovalIt is the narrowest form, with no commercial activity, so it is the easiest baseline to learn.
  3. 3Branch Office: Permitted Activities and ConditionsStudy it next to compare it with the liaison office. The difference lies in permitted commercial activity and conditions.
  4. 4Place of Business of Foreign Company under Companies ActThis moves from FEMA-style permissions to company law. It explains when a foreign company is treated as having a place of business in India.
  5. 5Books of Account and Financial Records of Indian PresenceIt builds on the place of business. Section 128 as applied by section 384 sets what must be kept in India.
  6. 6Wholly Owned Subsidiary: Setup and FDI ComplianceStudy it last. It is an Indian company, so it draws on incorporation rules plus FDI conditions, and you can compare it with the other forms.

How to prepare Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company

Treat this chapter as a comparison exercise. Build one comparison sheet and then add the legal detail around it.

  1. Read the six topics once in the study order and list the three forms side by side: purpose, activities allowed, income allowed, approval and status.
  2. Learn the liaison office and branch office rules from the ICSI material. Write the permitted activities in your own words and note who gives approval.
  3. Read section 384 and section 128 of the Companies Act, 2013 together. Note that section 128 applies to a foreign company only for its business in India, at its principal place of business in India.
  4. Learn section 128 basics: books on accrual basis, double entry, kept at registered office, eight years retention, and fine of ₹50,000 to ₹5,00,000 on the responsible officers.
  5. For the WOS, revisit incorporation steps and then add the FDI conditions, such as sectoral caps and reporting, from the study material.
  6. Practise three short answers: a comparison of liaison and branch office, a case on which form suits a client, and a note on books of account of a foreign company in India.
  7. Revise with the comparison sheet a day before the exam and check you can recall each section number.

Common mistakes in Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company

  • Saying a liaison office can earn income or trade.

    Fix: Remember the liaison office only represents the parent and promotes links. Commercial activity belongs to other forms, as the study material permits.

  • Treating a WOS like a branch office.

    Fix: State that a WOS is a separate legal entity incorporated in India, while a branch is part of the foreign company itself.

  • Applying all of section 128 to a foreign company without limit.

    Fix: Write that it applies only to the extent of requiring books on money received and spent, sales and purchases, and assets and liabilities, in relation to business in India, kept at the principal place of business in India.

  • Quoting wrong retention period or penalty under section 128.

    Fix: Write eight financial years and a fine of ₹50,000 to ₹5,00,000. Do not mention imprisonment.

  • Writing a list of features with no conclusion.

    Fix: Open with the provision, apply it to the facts, and end with a clear recommendation or finding.

  • Ignoring who is liable under section 128(6).

    Fix: Name the MD, whole-time director in charge of finance, CFO or other person charged by the Board.

Last-day revision: Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company

  • 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.

Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company practice questions

Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Setting up of Branch Office, Liaison Office and Wholly Owned Subsidiary by Foreign Company: frequently asked questions

What is the difference between a liaison office and a branch office?

A liaison office is a channel of communication for the parent and does not carry on commercial activity. A branch office can carry on the activities permitted to it. Both are part of the foreign company, unlike a WOS.

Is a wholly owned subsidiary a separate legal entity?

Yes. It is a company incorporated in India, with the foreign parent holding all its shares. It must follow Indian company law and the FDI conditions that apply.

How does the Companies Act, 2013 apply to books of account of a foreign company?

Section 384(3) applies section 128 to a foreign company to the extent of requiring it to keep books at its principal place of business in India. These cover money received and spent, sales and purchases, and assets and liabilities relating to its Indian business.

How long must books of account be kept under section 128?

Books must be kept for not less than eight financial years immediately preceding a financial year, with the relevant vouchers. If the company has existed for less than eight years, they are kept for all preceding years. On investigation under Chapter XIV, the Central Government may direct a longer period.