Outposts at SEZs lets foreign firms test local waters

The Reserve Bank of India (RBI) has opened the floodgates for foreign companies to test Indian waters by setting small, initial outposts in the special economic zones (SEZs).

Thus foreign companies can undertake manufacturing activities, with all the benefits of a low manufacturing cost, without the hassles of several approvals.

The RBI, in its latest notification, has granted general permission to foreign companies to set up branch offices/ units in special economic zones to undertake manufacturing and service activities.

The permission is subject to fulfilling certain conditions and is applicable to those sectors where 100 per cent foreign direct investments is permitted.

The foreign companies also have to comply with part XI of Companies Act and function on a "stand-alone" basis, the notification said.

"Stand alone basis" means such branch offices would be isolated and restricted to the special economic zone alone and no business activity/transaction will be allowed outside the special economic zones in India, which includes branches/subsidiaries of its parent office in India.

Ketan Dalal, partner with RSM & Co said, "the notification is wider in terms of activities for foreign companies".

Industry observers say, this general permission by RBI has simplified procedures for foreign companies setting up branches which earlier were more cumbersome.

They point out that this will help multinationals to understand dynamics of working in India before shifting to the mainland.

In the event of winding-up of business and for remittance of such proceeds, the branch or unit should approach an authorised dealer with documents prescribed under the Fema Act, it said.

The auditor's certificate should indicate the manner in which the remittable amount has been arrived, supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets, it said.

It should confirm that all liabilities in India including arrears of gratuity and other benefits to employees etc. Of the branch/ office have been either fully met or adequately provided for and that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India.