That which is difficult to regulate is easiest banned, and that is what the Reserve Bank of India has done in banning investment through overseas corporate bodies (OCBs) nearly three years after the Scam of 2000. The action has come immediately after a change in guard at the helm of RBI, but the intervening years have given plenty of time for scamsters to cover their tracks. In fact, the RBI has allowed the OCB horse to bolt with over Rs 3,500 crore in speculative profits earned during the Ketan Parekh-led bull run. Post-scam investigations reveal that OCBs, which started out as investment vehicles for non-resident Indians, were often controlled by resident Indians. Of the 600 OCBs registered with the RBI, a few hundred were entirely controlled by resident Indians such as Dinesh Dalmia, Mr Parekh, promoters of Home Trade and their crony industrialists, brokers and traders. And they were used to manipulate stock prices without fear of detection. A list of OCBs submitted to the Joint Parliamentary Committee reveals that scores of them had post office boxes as addresses, a capital of just $10 and some obviously dummy directors to camouflage true beneficial ownership. In the past three years, neither the RBI, which registered the OCBs, nor the Enforcement Directorate, which looks into violation of foreign exchange laws, has attempted to trace the beneficial ownership of OCBs. The only worthwhile action has come from SEBI, which banned OCBs from investing in the capital market and effectively prevented further mischief by them during the present bull run.
The RBIs ban, however, is not limited to portfolio management; it also bars foreign direct investment as well as loans, deposits and other investments available under exchange control rules. Although it seems a step in the right direction, there are several unanswered questions. Complaints of software and BPO companies that the RBI action would hurt their investment plans needs further examination. It is to be hoped that the RBI has, in fact, studied and correctly identified the problems connected with OCBs, and has not thrown out the OCB baby with the bathwater of failed supervision. A blanket ban should not be a way of dodging the responsibility of putting in place an effective regulatory set-up with stringent penalties for violation of rules. Or, avoiding the responsibility of continuous monitoring and supervision. A better bet would have been to create a structure where the RBI interacts with other regulators and central banks around the world to put in place cooperation agreements so that the blatant misuse of foreign investment routes by unscrupulous entities can be detected and punished.