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Opening Branch Offices
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:-
  1. Spreading its business to diverse locations and thus increasing the customer base
  2. Bringing its product closer to the customers by increasing their accessibility to it
  3. 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 company

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 specifying:-

  • The business to be carried out at that particular branch office
  • 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 company

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 conditions:-

  • 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 services
  • 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 worldwide
  • Proposed interests and activities in India
  • Reasons 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.

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