Impact of Press Note 3 (PN-3) on Branch Office Establishment in India

The establishment of a Branch Office in India is 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), wherein the approval for establishment is granted automatically for cases eligible under the FDI Policy. However, the press note -3 (PN-3) has imposed restrictions on the FDI from neighbouring nations such as Pakistan, Myanmar, Afghanistan, China, Nepal, Bangladesh, Hongkong (SAR of China), Macau (SAR of China) and Bhutan. This article explains the impact of PN-3 on establishing a branch office, liaison office, or project Office in India.

BRIEF SUMMARY
The Press Note 3 of 2020, also known as PN-3 (2020 Series), issued by the Department for Promotion of Industry and Internal Trade (DPIIT), is a very important document to regulate the foreign direct investment (FDI) into India from the neighbouring countries. While the PN-3. As the focus of press note number 3 of 2020 (PN-3) is to regulate the FDI in Indian companies or LLPs, it does not affect the establishment of the Branch, Liaison or Project Office in India. However, existing regulations issued by the RBI already have restrictive provisions.

Prior Approval of RBI for BO, LO and PO.

As said earlier, the Press Note-3 does not directly impact the establishment of the branch office (BO), liaison office (LO), or project office (PO) in India; rather, it applies to companies and LLPs. However, applications originating from the neighbouring countries of India are processed only after obtaining prior approval from the RBI. Your attention is drawn to regulation number 5 of 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, wherein a certain situation is prescribed when the Prior Approval of RBI is mandatory for establishment of the Branch Office or Liasion office in India. The cases requiring mandatory pre-approval are as follows.
  1. Businesses fall under four strategic sectors of national importance: defence, telecom, private security, information and broadcasting.
  2. The applicant is a Non-Government Organisation, Non-Profit Organisation, or Body/ Agency/ Department of a foreign government.
  3. The application for the opening of the liaison, branch or project office in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;
  4. The applicant is registered or incorporated in any of the following countries.

Pakistan

Iran

Bangladesh

China

Sri Lanka

Hongkong

Afghanistan

Macau

Registration with the State Police Authority

The branch, liaison, or project office of companies incorporated or registered in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong, or Macau is required to register with the local state police authority having jurisdiction over the address where such BO, LP, and PO is registered. 

The PN-3 does not have a direct impact on the establishment of the branch, liaison or project office in India however, given the regulations, the applications from certain countries mentioned above would be subject to increased scrutiny from the AD Bank, the AD Bank will then forward the application to the RBI for their approval and post-approval of the RBI, the branch office would then proceed for registration of foreign company with the ROC and the respective local police authorities. The multi-level scrutiny will delay the establishment of the BO, LO, and PO in India.

Conclusion

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