The Hindu Business Line : Clarification needed on investment by OCBs

What the RBI wants to do by "derecognising" OCBs as a class of investor is to strip them of the special status they have enjoyed, and sometimes misused, all these years. An OCB will be treated just like any other company and merely being owned or controlled by NRIs will not get it access to areas of the market closed to other foreign investors.

A CIRCULAR issued on September 16, by the Reserve Bank of India has created waves as, on the face of it, it has a tremendous impact on non- resident Indian investment in India. The central bank, in consultation with the Government, has decided that Overseas Corporate Bodies, or OCBs,be derecognised as an eligible `class of investor' under the current

Exchange Control Regulations. The circular makes it clear that the decision is a follow up of the RBI review of investment activities of OCBs in India on the basis of the recommendations of the Joint Parliamentary Committee on Security Market Scam.

In November 2001, OCBs were banned from investing in the secondary market under the Portfolio Investment Scheme (PIS); now one gets the impression that the OCBs cannot make fresh investments under the various routes/schemes available under the Exchange Control Regulations and that they cannot open fresh bank accounts.

To understand the implications of this restriction, we have to first see what an OCB is. An OCB has been defined as a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least 60 per cent by Non-Resident Indians and includes overseas trusts in which not less than 60 per cent beneficial interest is held by NRIs directly or indirectly but irrevocably.

Let us take the case of a software company incorporated in the US by NRI professionals, who hold all the shares in the company. By definition this company is an OCB, as more than 60 per cent is owned directly by NRIs. A reading of the latest circular gives one the impression that such a company cannot open a subsidiary in India to outsource software development, as an OCB cannot make a direct investment in India. This would imply that overseas companies that are owned to the extent of 60 per cent by NRIs, are at a huge disadvantage compared to a similar company owned by non-Indians. Such a development would indeed be disastrous and I am pretty certain that that is not, and never will be, the RBI's intention, no matter how the circular reads.

These days it is rather easy to forget that investment in India was the subject of severe restrictions some years ago. At that time, NRIs and OCBs were given a special status and allowed to invest in and access markets in India. This favourable treatment was especially significant in the secondary stock market and in other areas, such as real-estate development, where direct investment by `pure" foreign companies was restricted. OCBs were also allowed the privilege of maintaining NRE and FCNR deposits with banks. Unfortunately, some OCBs chose to be naughty boys especially with regard to the Portfolio Investment Scheme and the JPC had to get involved resulting in the present circular.

It is obvious that what the RBI wants to do by "derecognising" OCBs as a class of investor is to strip them of the special status they have enjoyed, and sometimes misused, all these years.

An OCB will be treated just like any other company and merely being owned or controlled by NRIs will not get it access to areas of the market that are closed to other foreign investors. Direct investment by the likes of the software company I took as an example earlier in this article, will not be affected at all and, for them, it is business as usual.

Unfortunately the circular does not make that position very clear (or should I say, "the circular does not appear to make that position very clear?"). A sentence in the circular reads: "An unincorporated entity and OCB shall not make fresh investment under FDI Scheme (including Automatic Route)" has caused considerable panic.

The RBI should issue a clarification soon and that in the form of an AP Dir circular. Else a lot of people will be visiting cardiologists.

(The author, a former Deputy Controller, RBI, is a Chennai-based forex consultant. He can be contacted at pyes@vsnl.com)

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