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Mauritius agrees to plug OCB loopholes

New Delhi, Nov. 13: The government today informed the Joint Parliamentary Committee (JPC) probing the stock market scam that Mauritius is changing its rules and will stop treating Indian companies and individuals who register themselves as Overseas Corporate Bodies (OCBs) on its soil, as Mauritian companies.

Revealing this to the committee, finance minister Jaswant Singh also accepted that the government is the central regulator for all regulatory bodies when queried by JPC members on the multiplicity of market regulators and their responsibility in checking the stock scam. This, MPs say, will go down well with Parliament as it has always been demanding that the government own up responsibility for the systemic failure of the regulatory apparatus in checking the multi-crore scam.

The move by Mauritius comes after the JPC draft report highlighted suspicions that Indian market operators were siphoning off tax-free stock sale profits to the island by taking advantage of a treaty that allows OCBs and funds registered in Mauritius to access Indian markets and take away earnings without paying any taxes.

A change in the rules by Mauritius would automatically bring many OCBs that had been siphoning tax-free stock market earnings within the ambit of heavy corporate and dividend taxes. It will also force the Central Board of Direct Taxes to launch investigations to determine which OCBs are acting as fronts for Indian stock market players.

The Securities and Exchange Board of India (Sebi) has already said in an interim report to JPC that “it is suspected that Ketan Parekh entities shift money to and out of India by getting into structured deals with OCBs and foreign institutional investors’ sub accounts”.

The government also accepted that its recently promulgated UTI ordinance could be superseded if any systemic suggestions were made by the JPC on reforming the mutual fund. MPs who formed part of the JPC said the government even agreed to stall privatisation of UTI-II if such was the considered wisdom of the JPC. While splitting the UTI into two separate entities, the government had also chalked out a plan for eventual privatisation of the second and more profitable entity.

However, MPs said the most significant revelation in today’s statement by the finance minister was that Mauritius has bowed to Indian sensitivities about India-owned OCBs playing on the stock market here out of the island.

In its third report to the JPC, the market watchdog had specifically mentioned the role of overseas corporate bodies in the scam and the misuse of the participatory notes mechanism by foreign institutional investors.

This had led to MPs claiming that much of the trouble could have been avoided if the Centre had taken up the question of misuse of the double taxation avoidance agreement with Mauritius earnestly. Many of them blamed former finance minister Yashwant Sinha for his obstinacy on this count and wanted him to own partial responsibility for the scam.

Although Sebi does not have regulatory jurisdiction over inflow and outflow of foreign exchange in the country and since OCBs are neither registered nor regulated by it, the market regulator had written to its Mauritian counterpart to find out the actual beneficiaries behind these OCBs, but had been stymied at that time as the Mauritians refused to play ball.

A draft report has already indicated deficiencies in the working of the stock markets leading to the scam. The JPC has also summoned former finance minister and the present external affairs minister Yashwant Sinha, but no date has been fixed for the hearing yet.

The current round of JPC meetings are aimed at piecing together the final report, which is likely to be submitted during the Winter session of Parliament.

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