Mindless Bullshit

By Ramesh Akkineni

from article in Business Standard

It is not normal for any emerging economy to discriminate against its overseas non-resident people. In fact, it is quite normal to woo them back and get them to invest the foreign savings in their home country.

However, this is one of the areas where India has scripted its own unique path. For over two years, overseas corporate bodies (“OCBs”) (foreign companies, partnership firms, societies and other corporate bodies that are owned directly or indirectly to the extent of at least 60 per cent or more by non-resident Indians (“NRIs”), and trusts with NRIs as beneficiaries of at least 60 per cent) have been stripped of a slew of privileges thanks to a special law called Foreign Exchange Management (Withdrawal of General Permission to OCBs) Regulations, 2003 (“Disqualification Regulations”).

In other words, the only legal element that characterises a foreign entity as being an OCB is the beneficial ownership by our own Indian people who have become foreign nationals or have taken up residence abroad.

De-recognition of OCBs and removal of their special privileges did not just lead to these entities being treated on par with other foreign entities. On the contrary, India has unleashed the Disqualification Regulations that positively discriminate against OCBs, denying them even the privileges that are permitted to other foreign entities. Consider this.

Foreign funds could get registered as foreign institutional investors (“FII”) with SEBI and the RBI, and freely invest in the Indian securities market, but OCBs cannot get that status. A foreign company could register with SEBI and the RBI as a sub-account of any FII and invest in the Indian securities market, but an OCB cannot do so.

There is even a bar on OCBs taking any exposure to Indian securities by investing in participatory notes and other such offshore derivative instruments (“ODIs”) that may be issued by FIIs. FIIs now have to certify that no back-to-back ODI has been issued to any NRI or OCB. No such bar restricts non-OCB foreign entities.

The extent of draconian discrimination against NRI-owned foreign entities is evident from a simple illustration. In sectors where foreign direct investment is permitted on an automatic basis, a foreign entity that is not an OCB can freely subscribe to fresh shares, but OCBs cannot do so.

Even in such sectors, an OCB cannot even subscribe to rights issues made by companies in which, it already holds shares, without specific permission of the RBI. The Disqualification Regulations impose a blanket ban on any investment by any OCB in any Indian security, and these regulations expressly override all other exchange control regulations.

Why this antipathy to OCBs? While investigating the 2001 securities scam, investigators are said to have found that certain OCBs were fronting forresident Indian brokers who were violating Indian exchange controls and securities laws. It was suspected that the funds invested by the OCBs were but the private banking funds of the Indian residents who were accused of manipulating the market.

If the regulators have got hold of such instances of resident Indians using their private banking funds stashed away in foreign numbered accounts, being invested in Indian securities, the violators ought to be brought to book.

There are adequate laws to nail them down. There is little point in penalising NRIs and OCBs by creating unwarranted barriers to the investment of their savings into India.

Mark Twain -- once said that a cat that sits upon a hot stove will never sit upon a hot stove again, nor upon a cold one either, because they all look hot.

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