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November 28, 2020

RBI directs banks not to grant permissions to any foreign law firm for opening of liaison office in India

by CA Shivam Jaiswal in RBI

RBI directs banks not to grant permissions to any foreign law firm for opening of liaison office in India

A Liaison Office means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel. Liaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time, and unsure of how the country’s liberalizing FDI caps will affect their business.

In contrast to other business structures, LOs allow foreign companies to establish a light footprint in India while keeping their financial, legal, and administrative commitments low. Foreign companies can open a liaison office in India to facilitate and promote the parent company’s business activities, and act as a communications channel between the foreign parent company and Indian companies.

However, the Reserve Bank of India (RBI) has directed the banks not to grant fresh permissions/ renewal of permission to any foreign law firm for opening of liaison office in India. The Apex Bank’s notification reiterates its five-year-old stand after the Supreme Court had clarified in 2015 that foreign law firm’s liaison offices are not permissible in India.

What was stated by the RBI?

  • RBI said that foreign law firms/companies or foreign lawyers or any other person resident outside India, are not permitted to establish any branch office, project office, liaison office or another place of business in India for the purpose of practising the legal profession.
  • AD Category – I banks were directed not to grant any approval to any branch office, project office, liaison office or other places of business in India under FEMA for the purpose of practising the legal profession in India
  • Further, they shall bring to the notice of the Reserve Bank in case any such violation of the provisions of the Advocates Act comes to their notice.

What do you mean by AD Category 1 Banks?

Authorised Dealer Category -I Banks (AD Category–I Banks) and Authorised Dealers Category – II entities (ADs Category–II) are authorised by the Reserve Bank to deal in foreign exchange for specified purposes. Such banks aim to ease the foreign exchange facilities for NRI.

Meaning of the term Liaison Office as per FEMA

As per the Foreign Exchange Management Act (FEMA), the Liaison Office means a place of business to act as a channel of communication between the head office by whatever name called and entities in India but which does not undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

Reference to a Supreme Court Decision by RBI

  • The Supreme Court, in a judgment delivered in 2015 [BCI vs. AK Balaji] had held that foreign law firms cannot set up offices in India or practice in Indian Courts.
  • However, it was clarified that they could advice Indian clients on a “fly in and fly out” basis, not amounting to regular practice.
  • “Visit of any foreign lawyer on fly in and fly out basis may amount to practice of law if it is on regular basis.
  • A casual visit for giving advice may not be covered by the expression ‘practice’. Whether a particular visit is casual or frequent so as to amount to practice is a question of fact to be determined from situation to situation.
  • It was observed that Bar Council of India or Union of India were at liberty to make appropriate rules in this regard.

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