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Branch Offices- The services conundrum

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Shantanu Jindel

In its Master Circular No.11/2010-11, dated July 1, 2010 (“Circular”), the Reserve Bank of India (“RBI”) has consolidated regulations on establishment of liaison/branch/project offices in India by foreign entities. This Circular was issued with a sunset clause of one year and will stand withdrawn on July 1, 2011 and be replaced by an updated another master circular on the subject.

This Circular, with regards to establishment of branch office, states, “Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India…”  It goes on to define the activities that may be carried on at these Branch Offices. The list of permissible activities contains ‘rendering professional or consultancy services’.  The Circular further provides that normally, the Branch Office should be engaged in the activity in which the parent company is engaged.

The difference in the wording gives rise to the following ambiguities:

a)         Firstly, on the one hand the Circular does not provide for a foreign entity engaged in rendering services to open a Branch Office in India but the list of permissible activities includes rendering professional or consultancy services. Additionally, the fact that a branch office is to engage in the same activity as the parent company further complicates the issue.

b)         Secondly, while the Circular allows manufacturing and trading companies to apply for the establishment of branch office, it denies them permission to carry on retail trading or manufacturing and processing, directly or indirectly at the branch office. Not only does this severely restrict the scope of activities at the branch office but it also does not augur well with the fact that branch office, under normal circumstances is only supposed do activities similar to those of its parent company.

It may be noted that establishment of branch/liaison/project offices in India is regulated in terms of Section 6(6) of Foreign Exchange Management Act, 1999 and Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) Regulations, 2000 read with Notification No. FEMA 22/ 2000-RB dated May 3, 2000, as amended. Nowhere in these regulations or in the notification is there a requirement that for foreign entity to be eligible to establish a branch office in India, it needs to be engaged in manufacturing or trading activities. It is only when we remove such a requirement from the Circular, that a comprehensive picture is formed.

The above mentioned ambiguities are likely to remain till clarifications are issued by the RBI in this regard. The general rule is that the regulations supersede the consolidating circular to the extent of contradiction. If the same true in the present case then all types of companies should be free to apply to RBI for opening a branch office in India and be a part on the growing Indian economy.


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