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Portfolio investments banned for overseas corporate bodies

Our Bureau

MUMBAI, Nov. 29

THE Reserve Bank of India (RBI) on Thursday banned overseas corporate bodies (OCBs) from investing in the stock market under the portfolio investment scheme (PIS).

An OCB is a company, partnership firm, society or corporate body owned directly or indirectly to the extent of at least 60 per cent by non-resident Indians (NRIs).

Overseas trusts in which not less than 60 per cent beneficial interest is held by NRIs directly or indirectly all fall under this category.

The prohibition by the central bank comes in the wake of allegations of irregular ownership and a SEBI investigation following the post-budget stock scam which found that huge investments were made by Mauritius-based OCBs.

The investigations also revealed that Mr Ketan Parekh, a stock-broker, had probably used a number of OCBs to route money into the markets.

Market players said that a large number of these OCBs are owned by resident Indians or entities.

Most of the OCBs are incorporated in Mauritius in order to exploit the provisions of India's taxation treaty with that country.

The RBI, however, clarified in a release that OCBs can continue to invest by making direct investments through non-resident accounts. They may also continue to hold investments already made under PIS.

The Finance Ministry and the two regulators - the RBI and the SEBI - had recently decided to revise the existing norms for OCBs, as their activities have been under review after the securities scam in March 2001.

The Joint Parliamentary Committee (JPC) probing the events of March was also circumspect about the role of OCBs and the monitoring of outflows.

``The ban on OCBs investing under the PIS scheme is not likely to affect the stock markets as they can come in through NRIs,'' Mr Nilesh Shah of Kotak Securities said.

However, another broker with a domestic securities firm said on condition of anonymity: "It may not be good for the stock market in the short term.'' According to him, the recent rally in the stock market was primarily due to OCB investment.

The Government had opened up this investment route during the balance of payment crisis in the early 90s to boost foreign exchange inflows.

Following this, there was further liberalisation for the OCBs with investment ceilings for this category being raised progressively, especially for primary capital market offerings, investment in debentures and in foreign direct investment.

Earlier this month, a high-level committee on financial and capital markets headed by the RBI Governor, Dr Bimal Jalan, discussed the issue of imposing higher capital norms at the entry point for OCBs to ensure that market intermediaries do not face any problems.

Our New Delhi Bureau adds: OCBs will also not be permitted to invest in stocks through the foreign institutional investor (FII) route either, according to senior officials.

Earlier, there was a suggestion that by permitting them to invest through a sub-account of the FIIs, the SEBI could monitor the flow of funds and investments better.

The suggestion was that these investors could also be registered with regulator. However, this has been rejected by the committee headed by Dr Jalan.

The committee has, however, decided to give the OCBs enough time to unwind their investments in the country.

They can now invest through the FDI route and a few other permitted categories as outlined in FEMA.