FEMA Regulations on Branch, Liaison & Project Offices (LO/BO/PO) in India: Form FNC, AAC & RBI Compliance

For foreign multinational corporations, global institutional investors, and overseas enterprises seeking an operational foothold in India's expanding commercial market, selecting the optimal legal vehicle is the single most critical structural decision. While many global entities incorporate an Indian Wholly Owned Subsidiary (WOS) or Limited Liability Partnership (LLP), establishing an unincorporated presence—specifically a Liaison Office (LO), Branch Office (BO), or Project Office (PO)—often serves as an agile, strategic entry mechanism.

However, operating an unincorporated office in India requires continuous synchronization across three distinct regulatory frameworks: the Foreign Exchange Management Act, 1999 (FEMA) administered by the Reserve Bank of India (RBI), the Companies Act, 2013 enforced by the Ministry of Corporate Affairs (MCA), and the Income-tax Act, 1961 overseen by the Central Board of Direct Taxes (CBDT).

Failure to maintain strict boundary compliance—such as a Liaison Office engaging in commercial negotiation or missing the mandatory Annual Activity Certificate (AAC) deadline—triggers compounding proceedings under FEMA, permanent establishment (PE) tax assessments, and heavy MCA monetary penalties.

Regulatory Framework: FEMA Notification No. 22(R)/2016-RB

The establishment, maintenance, and closure of unincorporated foreign offices are governed by the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 (Notification No. FEMA 22(R)/2016-RB), read alongside RBI Master Direction No. 10/2015-16.

Under these regulations, foreign non-resident entities are categorized into three distinct operational vehicles:

The Three Office Formats: Scope of Permissible Activities

Choosing between an LO, BO, and PO depends strictly on whether the foreign entity intends to generate commercial revenue in India:

#### 1. Liaison Office (Representative Office)

A Liaison Office acts exclusively as an information and communication bridge between the overseas head office and Indian business counterparts:

• Permissible Activities: Promoting export/import relationships, facilitating technical or financial collaborations between parent and Indian entities, conducting market research, and acting as a communication channel.

• Strict Prohibitions: A Liaison Office CANNOT undertake any commercial, trading, or industrial activity, directly or indirectly. It cannot enter into contracts on behalf of the head office, invoice Indian clients, or charge fees for its services.

• Funding Structure: The entire operating expenditure of an LO must be financed strictly through inward foreign exchange remittances received from the head office through normal banking channels.

#### 2. Branch Office (Commercial Presence)

A Branch Office functions as a full-fledged commercial extension of the foreign company in India:

• Permissible Activities: Export and import of goods, rendering professional or technical consultancy services, carrying out research in sectors in which the parent company is engaged, promoting technical/financial collaborations, representing the foreign parent company and acting as buying/selling agent, rendering software development and IT support services, and operating foreign airline or shipping services.

• Prohibitions: A BO cannot undertake direct retail trading activities in India, nor can it engage in direct manufacturing or processing activities (except within Special Economic Zones - SEZs).

#### 3. Project Office (Execution of Awarded Infrastructure Contracts)

A Project Office is an ephemeral vehicle established exclusively to execute a specific industrial, infrastructure, or EPC project awarded by an Indian government or private agency:

• General Permission Route: Unlike LOs and BOs, foreign entities awarded an Indian project enjoy general permission from the RBI to set up a PO, provided the project is funded directly by inward foreign remittance, funded by a bilateral/multilateral international financing agency (World Bank, ADB, JICA), or cleared by an appropriate government authority.

Eligibility Criteria: Net Worth & Financial Soundness Tests

To prevent shell companies from accessing the Indian market, the RBI enforces strict financial eligibility hurdles under Regulation 4:

#### 1. Financial Soundness & Track Record

• Branch Office: A continuous track record of 5 consecutive financially sound years in the home country, with a certified Net Worth of not less than USD 100,000 (or its equivalent in foreign currency).

• Liaison Office: A continuous track record of 3 consecutive financially sound years, with a certified Net Worth of not less than USD 50,000 (or equivalent).

#### 2. The Letter of Comfort (LOC) Alternative

Where a newly incorporated subsidiary of a foreign multinational conglomerate cannot independently satisfy the track record or net worth thresholds, it can qualify by submitting a formal Letter of Comfort (LOC) executed by its parent company, provided the parent satisfies the eligibility criteria.

The Application & Setup Workflow: Form FNC to ROC Registration

Establishing an LO or BO follows an institutional two-tier regulatory process: