Apart from measures for capital account convertibility, the Tarapore Committee II has suggested simplification and liberalisation of facilities in the current account, including the removal of the sub-ceilings on the quantum of remittances permissible for various purposes such as gifts to relatives and donations.
The Reserve Bank of India has promptly set up an internal Task Force on the regulatory changes required to act on the recommendations.
Lack of knowledge
There have been many an instanceof the RBI's regional offices or authorised dealers declining to approve permissible facilities to residents due to lack of experience or knowledge of the regulations.
Recently, an octogenarian, who had emigrated to the US to live with her son, was informed by a large public sector bank that funds lying in her fixed deposit accounts with the bank could not be remitted to her as that was not permitted.
Eventually, the remittance was made, thanks to the intervention by the officer in charge of the bank's regional office. But it is quite likely that lack of knowledge or the infrastructure needed to deal with such cases may well result in similar situations in various banks.
Regulations for NRIs
It is, therefore, imperative that the RBI stipulates periodical special internal inspection in all banks to ascertain if they follow correctly the regulations dealing with client requests and transactions. The RBI may prescribe guidelines for the inspections, such as coverage, periodicity, and reporting the findings to the audit committees of the banks. Where necessary, the internal inspections could be supplemented with inspection by the RBI itself. Denial of permissible remittances should be considered as seriously as unauthorised remittances are.
In this context, it is interesting to note how the regulations in respect of non-resident Indians (NRIs) have changed dramatically over a period. In the 1970s and the 1980s, NRIs were allowed to invest only in fixed-rate instruments such as government securities and government savings schemes and not in shares in the secondary market or other instruments, which may yield substantial returns in the form of dividend and capital appreciation. The regulation was to help conserve foreign exchange by restricting the quantum of repatriation when the investments were liquidated.
The NRIs are now allowed to invest only in such instruments which have the potential of yielding a high rate of return and capital appreciation and not in fixed-income instruments such as government securities and government savings schemes! The reason for barring such investment opportunities is not clear, more so, as the rates of interest on such instruments are now more or less market-cleared!
There is also scope for simplification of the regulations governing investments by the NRIs in the shares of Indian companies in the secondary market. Banks are required to open two accounts in the name of the NRI-investor for such investments. Bank charges for maintenance of these accounts are exorbitant on the grounds that they are required to report all purchases and sales to the RBI. The recently set-up Banking Codes and Standards Board of India should look into the rationale of charges in these cases.
Furthermore, though not required by tax authorities, banks deduct tax from even tax-free long-term capital gains of NRI investors, supposedly on the basis that the RBI regulations require such deduction before the sale proceeds of shares are credited to the NRI investor's account. (Banks also levy exorbitant charges for issuing TDS certificates.)
The deduction is made although when an overseas remittance from the NRI account is requested the NRI is required to declare to the authorised dealer, in the prescribed format, that applicable taxes have been paid in respect of the funds to be transferred.
As a result of the tax deduction, NRIs are put to the trouble of claiming substantial refund of tax, which often gets delayed, for years even. Certainly, NRIs do not deserve this sort of treatment.
The new RBI Task Force should look into this aspect and simplify the regulations wherever there is scope, since simple regulations facilitate implementation by authorised dealers of the authority delegated to them.
(The author is former Executive Director, RBI.)