Finance secretary Arvind Mayaram has built a case for reviving a highly-discredited mechanism for routing investments by non-resident Indians (NRIs) into the country if the regulators can build proper safeguards.
If the government accepts the suggestion, the Modi regime will re-open a route that the Vajpayee administration had locked down.
In September 2003, the then NDA government barred NRIs from routing investments through overseas corporate bodies (OCBs) because of deepening concerns over the true ownership of these unregulated entities.
Mayaram, who headed a committee formed by the earlier UPA administration that was given the mandate to rationalise the definition of foreign direct investments (FDI) and foreign institutional investments (FII), has suggested that NRIs ought to be allowed once again to invest through corporate entities.
“With suitable safeguards and checks, this can be revived in a different form and NRI investments enhanced,” says the Mayaram report which was submitted on Friday.
The suggestion is significant since the report has been submitted just weeks before the Modi-led government submits its first budget.
Traditionally, governments have used the annual rite of budget presentation as an opportunity to unveil new programmes and policies.
Lately, the BJP government has been wrestling with the idea of improving the policy environment in order to revive foreign investments into the country.
Falling out of favour
The searchlight fell on NRI investments routed through OCBs soon after the Ketan Parekh stock market scam in early 2001.
OCBs were entities in which the NRIs were supposed to hold at least 60 per cent of the shareholding, directly or indirectly, at all times.
But the reporting mechanism was weak, requiring the investors to furnish a certificate by an overseas auditor or chartered accountant indicating compliance with the 60 per cent ownership threshold at the time of applying for such a facility. It was largely an “honours system” built on trust and self-certification and, therefore, subject to rampant misuse.
The OCBs were granted special concessions to operate in the country in the early 1990s. Within a decade more than 600 OCBs had made portfolio and FDI investments in India.
But by 2001, it became evident that the route was being misused. The first clampdown on OCBs began in November 2001 after a Sebi investigation showed that massive investments were being routed into the Indian stock markets through Mauritius-based OCBs. The Reserve Bank of India barred OCBs from investing in the stock markets under the portfolio investment scheme.
Two years later, the government de-recognised OCBs as a special class of investors under the Foreign Exchange Management Act (Fema), effectively shutting down a favoured route for NRI investment into India.
Non-resident Indians have been clamouring for opening up the OCB route once again. Two years ago, S.P. Hinduja of the Hinduja group urged then finance minister Pranab Mukherjee to lift the ban on routing investments through OCBs but it didn’t find favour.
Now that the Mayaram panel has pushed the suggestion, the Modi government might be ready to relax the rule. The report is, however, low on specifics. It will be left to regulators such as the Reserve Bank of India and market watchdog Sebi to work out how to regulate the OCBs and ensure that they can’t hide their shenanigans behind a veil.