A company expands its business by opening
up its branch offices in various parts of the domestic country as well
as in other countries. A branch office refers to an establishment which
carries on substantially the same business and activity as is carried
out by its Head Office. Such offices help the company in:-
its business to diverse locations and thus increasing the customer base
- Bringing its product closer to the customers by increasing their
accessibility to it
- Making the distribution and marketing of its
goods and services easier and more effective.
In other words, branch offices
help in expanding the size of the market for a company's product by attracting
more customers; widening the scope of its trading and manufacturing activities
as well as bringing more opportunities and opening unexplored avenues
for it. Thus, these offices help to fuel the growth of the company and
enhance its profitability on a sustained basis.
Procedure for opening branch offices by a domestic
It is provided under the Companies
Act,1956, according to which:-
In order to open new branch offices in
India, a domestic company must pass a resolution in its Board meeting
- The business to be carried out at that particular branch
- The appointment of somebody to look after the day-to-day
business of the branch and operate the bank account of that branch
- The provision for authorising somebody to make arrangement for accommodation,establishment
and other requirements which are necessary to run that branch office
The person so authorised in the Board
meeting may also be delegated certain powers, on behalf of the company, which
are as follows:-
- The power to make calls on shareholders in respect of
money unpaid on their shares;
- The power to issue debentures;
- The power to borrow money otherwise than on debentures;
- The power to invest the funds of the company;
- The power to make loans.
However, the business to be transacted
at the new proposed branch is covered by the Memorandum of Association
of the company. The Memorandum of Association is the charter of the company
which defines the objective of its formation, the scope of its operations as well as informs its stake holders about the permitted range of the enterprise.
It is ultra vires for a company to act beyond the scope of its memorandum
and any departure cannot be validated even if assented to by all the members
of the company. It is the principal document of a company without which
it cannot be registered. It regulates the procedures relating to the expansion
of business of the company through opening new branches.
But if a company wants to commence new
business at the proposed branch office, which is not incidental to its
existing business, then it has to pass a special resolution. Thereafter,
it has to file a declaration in e-Form
No.20A with the concerned Registrar of Companies (ROC) within thirty
days of passing the resolution and also the special resolution in e-Form
No.23, after paying requisite fee as prescribed under the Act.
Procedure for opening branch offices by a foreign
The opening up of branch offices is one
of the options by which a foreign company can set up its business operations
in India. It needs to obtain a prior permission from Reserve
Bank of India (RBI) for setting up such offices in India. As per the
guidelines issued by RBI, these branch offices are subjected to the following
- The branch office cannot expand its activities or undertake
any new trading, commercial or industrial activity other than those
which are expressly approved by the RBI
- The entire expense of the branch office in India will
be met either out of the funds received by it from abroad through normal
banking channels or through income generated by it in India
- The branch office cannot accept any deposits in India;
- The commission earned by the branch office from parties
abroad for any agency business will be repatriated to India through
normal banking channels.
Also, the foreign companies engaged in
manufacturing and trading activities abroad are allowed to set up branch
offices in India for the following purposes:
- Undertaking export or import of goods
- Rendering professional or consultancy
- Carrying out research work, in which
the parent company is engaged (provided that the results of the research
work are made available to the Indian Companies)
- Promoting technical or financial collaborations
between Indian companies and the parent or overseas group company
- Representing the parent company in
India and acting as buying/selling agents in India
- Rendering services in information
technology and development of software in India
- Rendering technical support to the
products supplied by the parent/ overseas group companies
- Foreign airlines or shipping companies
are also permitted to open their branch offices in India.
But, branch offices can undertake only
trading activities and are not permitted to carry out manufacturing activities
on its own, though it is permitted to sub contract these to Indian manufacturers.
Such offices are a part of the foreign company and are not treated as
a separate legal entity.
For opening a branch office, the foreign
company needs to submit its formal application to the Chief General Manager, Exchange
Control Department (Foreign Investment Division), RBI Central Office,
Mumbai in the form FNC-1.
These applications are considered on a case-to-case basis. The RBI generally
gives permission in a time span of about 2 to 4 weeks. The application
must include the following details:-
- Operating history of the company
- Proposed interests and activities in India
for wanting to open a branch office and
- Any foreign exchange implications
for such matters.
The branch offices may remit outside
India profit of the branch, net of applicable Indian taxes and subject
to RBI guidelines. They need not retain any profits as reserves in India.
But in certain cases, where income is deemed to have originated in India
and such income includes royalties, fees for technical services, interest
and capital gains including capital gains from share of capital in India,
branch offices may repatriate profits to their Head Office without obtaining
prior approval from RBI.