• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

P. Devarajan

OVER the last many months, the Reserve Bank of India is reported to have sent out letters to some 500 Overseas Corporate Bodies (OCBs) located outside the country and in more than 300 cases, the letters came back as the addresses were fake.

A working group of officials from various departments was set up by the RBI sometime in 2001 and seemingly put in its report a few months back arguing for tough action.

Over the last 6-7 years, dollar outflows have exceeded inflows mainly owing to the arbitrage facilities made available through various dollar deposit schemes set up by the RBI.

Either OCBs did not leave any footprints or the Indian regulators could not spot them as it meant trying to pin down fast moving financial objects with dissolving shadows.

Looked at anyway, the RBI did not - and probably does not - have much information on this investor species and along with the Government, has now decided to keep them out of the Indian financial system.

OCBs are entities owned 60 per cent or more by NRIs, who generally front for Indian corporates and politicians with funds abroad.

On September 16, OCBs as "a class of investor" entity were put out of the savings and investment schemes run by the financial system with the RBI's nod.

On September 18, the RBI clarified that incorporated bodies registered in any foreign country were welcome to invest funds in assets through the foreign direct investment (FDI) route or in the equity market through any foreign financial institution (FII) registered with the Securities and Exchange Board of India (SEBI).

But in no event could these new registered bodies place funds in the various deposit schemes offered by the banks.

Till the new circulars were issued, non-resident individuals and OCBs were treated on par by the savings and investment schemes, making it that much hard to quantify the dollar inflows and outflows on OCBs' accounts.

This favour to OCBs now stands withdrawn with the bank deposit schemes like NRE, FCNR(B) and NR(O) meant exclusively for non-resident individuals.

Bankers wonder over the delayed action of the RBI when most were aware of the shady character of OCBs.

After all, OCBs were banned under the Portfolio Investment Schemes (PIS) in November 2001.

"Did it suit the RBI then to play ball with OCBs when forex reserves were not as strong as today? They could have banned OCBs from deposit schemes then," says a Government banker.

With the new RBI circulars, nothing stops unregistered OCBs to register themselves in host countries and place funds in the equity market where the returns are better than in many other bourses.

Again, the individuals comprising an OCB could drop out, with each sending dollars into the deposit schemes of the Indian banks.

As one banker put it, the RBI will find it hard even to chase registered overseas corporate entities as host countries rarely co-operate when inquiries are launched.

The feeling on Mint Street is that the ban may not work since NRIs are always two steps ahead of the Indian Government and the RBI.

Perhaps the best option is to chip off arbitrage opportunities and not be overly concerned with the class and quality of overseas investors.

Why should the RBI still allow on foreign deposit schemes an interest rate cap of 100 basis points over Libor?

Article E-Mail :: Comment :: Syndication

Stories in this Section
No RIB redemption hiccups for rupee

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line