18 January 2002

CURBS ON NRI COMPANIES LIKELY TO PREVENT ANOTHER STOCK SCAM

From Jal Khambata

NEW DELHI: The Government is having a re-think on a relaxed regime for the Overseas Corporate Bodies (OCBs) of the non-resident Indians (NRIs) for investments in shares of the Indian companies following a stunning report by the Reserve Bank of India that more money is going out of India instead of coming in.

The RBI report describes the fraud that is being played on the Indian stock market by the OCBs whose investments may be a cover to those running parallel economy in India with black money as many do not even have a worthwhile capital to venture out to invest in the Indian companies. Think of unscrupulous NRIs who exploited the loopholes to float companies abroad with just Rs 500 to destabilise the Indian stock market.

The Finance Ministry is examining the RBI report and the sources say the severe restrictions may be clamped on OCBs in the upcoming Union Budget on February 28.

Many such OCBs have paid-up capital of US $100 or less and at least 15 OCBs were set up with the paid-up capital of just US $10 or even less before they started pumping money into India to buy shares with anybody's guess as to the source of their money. Many of these OCBs mushroomed in Mauritius which is seen by the Indians as a tax heaven in view of the Indo-Mauritius treaty on double taxation.

The RBI had undertaken a sample study of the inflows and outflows of the OCBs through five banks, two if which are foreign bank, two private and one public, following the last year's stock scam involving Mumbai broker Ketan Parekh and others throwing up the controversy about the OCB investments. In one of its documents, the RBI had admitted that it was not monitoring these bodies to keep a tab on their portfolio investments.

Among the OCBs linked with Ketan Parekh fraud and floated in Mauritius in 1999 with an exotic name of Delgrade is owned by Zee promoter Subhash Chandra in 1999 and an investigation by the Securities and Exchange Board of India (SEBI) had revealed how this OCB's 100 per cent investment of Rs 478 crores was in one single scrip of Zee Telefilms. Though Zee Telefilms executives claim they had cleared complete outstanding of Rs 220 crores towards Ketan Parek, the SEBI report shows that they still owe the brokers' firms another Rs 454 crores.

An important feature of the portfolio investments by NRIs and OCBs is that all transactions have to be conducted through the designated bank which is supposed to monitor the remittances and investments as per the FEMA rules and as such it continues to intrigue the Finance Ministry bosses as to how the RBI can wash off its hands claiming that it did not monitor the OCBs' operations.

The scheme is in operation since 1982 on the recommendation of the Malhotra Committee to encourage the NRIs to bring more and more foreign exchange in India but the RBI report submitted to Finance Minister Yashwant Sinha by its Governor Bimal Jalan early this week shows how the Portfolio Investment Scheme has been misused to deprecate the foreign exchange.

The RBI report recommends a strict regime to bring the OCBs at par with the Foreign Investment Institutions (FIIs) and affix a minimum paid-up capital for the OCBs as an eligibility criteria for operating under the Portfolio Investment Scheme.

Instead of India becoming richer due to the NRIs bringing in more foreign exchange, a compilation of figures by the RBI shows that the net investment of NRIs and their OCBs from 1993 to July 28, 2001 was negative to the tune of US $217.55 million while the net investments by the FIIs during the same period was US $14,024.42 million.

In the light of this trend as also to prevent undue proliferation of OCBs "without any genuine investment-related purpose," the RBI wants a very strict regime to be clamped in future so as to prevent any more financial frauds being played by any Indian or foreign player.

One of the RBI recommendations is to allow only those OCBs to operate in the capital market whose paid-up capital is minimum US $1,00,000. Out of 190 OCBs presently operating under the Portfolio Investment Scheme, only 17 have the paid-up capital of US $1,00,000 or more.

The RBI note to the Finance Minister says stipulation of the minimum paid-up capital of US $1,00,000 "would not be unreasonable since the purpose of stipulating minimum capital requirement of OCBs is only to prevent multiplicity and undue proliferation." It further points out: "Considering the cost of employing even one investment manager abroad, this is a small sum and should be easily available to any genuine OCB."

Explaining why the capital criteria should be at par with the FIIS, the RBI note points out that the foreign companies intending to make a direct investment of less than 51 per cent in the NBFC sector are required to bring in a minimum capital of US $5,00,000 as the high capital requirement is necessary to be entitle to avail credit facilities from banking and non-banking sectors while the OCBs cannot have any credit facility and their investments are strictly restricted to sale and purchase of shares for which delivery has to be given or taken and also they are not permitted even short sales.

The second additional requirement recommended "to keep away the non-genuine OCBs from the Portfolio Investment Scheme and prevent adverse impact on inflow of portfolio investment, is to clamp the same registration procedure on the OCBs that is presently applicable to FIIs.

The RBI findings of a sample study, annexed with the recommendations which have also been submitted to the Joint Parliamentary Committee examining the stock scam early this week besides presentation to the Finance Minister, covers the inflows and outflows by 209 OCBs through five banks, namely ICICI Bank, IndustInD Bank, Union Bank, HSBC and Deutsche Bank.

The OCBs are required to operate through one designated branch of a bank and hence the statistics of the total inflows and outflows of each OCB from the date of its opening of the account showed that they had brought in total US $1034 million while they had taken out of India as much as US $1264 million. Pointing out that this was only a sample study and as such does not cover all OCBs, the report says the paid-up capital figures of only 190 OCBs were available but they reveal interesting fact that as many as 48 OCBs had paid-up capital of US $100 or less and 15 OCBs had paid-up capital of U $10 or less.

It may be mentioned here that the gamut of the facilities of direct and portfolio investments was extended to the OCBs in 1982 and all that is required is that such entities submit a certificate regarding the non-resident ownership from any overseas auditor or chartered accountant, alongwith application for investment in shares to the RBI either through the designated banks authorised to deal in foreign exchange or through the Indian companies offering new issues.

The scheme originally meant for only 100 per cent NRI corporate bodies was modified in 1983 to permit even those OCBs having "indirect" ownership of NRIs up to at least 60 per cent. In 1998, the scheme was further liberalised to allow OCB's portfolio investments' limit from five to ten per cent of the paid equity capital of an Indian company. The limit for the individual NRI investments was also raised from one per cent to five per cent.

Since then, the scheme underwent further liberalisation and the latest provision is that the aggregate paid-up value of shares in a single company, purchased by all NRIs and OCBs taken together, should not exceed 10 per cent of the paid-up capital of the company. This aggregate ceiling of 10 per cent, however, can be raised up to 24 per cent by any Indian company through a special resolution passed at the general body meeting. END