Liaison office :

LO is permitted to act as a channel of communication/carry out a liaison/representation role between the head office/group companies and parties in India. It is not permitted to undertake any commercial/trading/industrial activity, directly or indirectly. LO is obliged to maintain itself and meet its expenditure through inward remittances from the Head Office. LO is generally approved only for a specified period which is subject to renewal and in certain sectors, the LO is obliged to upgrade into a company (wholly owned subsidiary/joint venture) post the initial approval period.

Establishing an LO requires the prior approval of RBI which is location specific and subject to guidelines issued in this regard. The RBI also monitors its activities on an ongoing basis primarily by seeking an annual compliance / activity certificate for the LOs operation from its Auditors in India.

Recently, the Reserve Bank of India (RBI) placed in the public domain (through a draft circular) the eligibility criteria and procedural guidelines for establishment of liaison offices by foreign entities in India. As per the draft guidelines the foreign entity needs to have a successful profit making track record during immediately preceding 3 years in the home country. Further, a net worth of not less than USD 50,000 is also required.

Through this draft Circular, the RBI had also proposed certain procedural changes to the application procedure and to delegate certain powers to Authorised Dealers regarding extension of validity period of liaison offices of foreign entities and closure of their liaison offices in India.

The proposed amendments do not apply to applications from banks (which need approval under the banking regulations from the RBI) and insurance companies (which are permitted to set-up an LO under general permission subject to necessary approval from Insurance Regulatory and Development Authority of India). Post approval of RBI and set-up in India, various registrations and compliance obligations entail on the LO.