RBI Permission for Investment by Erstwhile Overseas Corporate Body

Narendra Kumar

13 Sep, 2022

Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body located outside India but owned directly or indirectly by Non-Resident Indians at least sixty percent and it also includes overseas trust in which not less than sixty percent beneficial interest is held by Non-resident Indians directly or indirectly but irrevocable.

De-recognition of Overseas Corporate Body (OCB) Investment

After the stock scam of 1992, Securities and Exchange Board of India (SEBI) undergone for investigations and discovered that NRIs has set up OCBs in Mauritius for the purpose of carrying out high-value transactions to gain tax benefits.

The Reserve Bank of India (RBI) also carried on a review of investment activities of OCBs in India on the recommendations of the Joint Parliamentary Committee (JPC) after Security Market Scam.

In view of the fact, the OCBs were owned by individuals (i.e. either by Indians or NRIs) and not being regulated by any of the regulatory authority, RBI de-recognized investment in OCB in 2003.

Overseas Corporate Bodies (OCBs) in India were derecognized as an eligible ‘class of investor’ under various routes/schemes available under extant Foreign Exchange Management Regulations.

In consultation with the Government it has been decided below:

• Continuation of the ban imposed on OCBs under Portfolio Investment Scheme (PIS) in November 2001.
• OCBs shall not be allowed to make fresh investments in India as a ‘class of investor’ under various routes/schemes available under extant Foreign Exchange Management Regulations and facility of opening fresh NRE and FCNR (B) and NR(O) accounts shall also be withdrawn.
• The unincorporated entity also shall not be allowed to make fresh investments under the Foreign Direct Investment Scheme including the Automatic Route.

OCB investment held before de-recognition

OCBs who as on September 16, 2003, were availing of facilities under various Foreign Exchange Management Regulations to invest in India under various schemes/routes. Illustratively, an OCB could have –

• Investment in shares or convertible debentures of an Indian company under FEMA in accordance with guidelines on repatriation and non-repatriation basis, or
• invested in shares or convertible debentures of an Indian company under the Portfolio Investment Scheme on repatriation and non-repatriation basis, or
• invested in securities other than shares and convertible debentures of an Indian company on repatriation and non-repatriation basis, or
• held Savings or Current or Recurring or Fixed Deposit account under NRO Account Scheme, NRE Scheme, FCNR(B) Account Scheme with an authorized dealer/authorized bank, or
• held in deposits with a company incorporated in India (including a non-banking finance company registered with RBI), or a proprietorship concern, or a partnership firm on non-repatriation basis, or
• invested in Non-Convertible Debentures (NCDs) on repatriation and non-repatriation basis of a company incorporated in India, or
• Lent in foreign currency to a person resident in India.

Effect of De-recognition of OCB Investment

The effect of the existing OCB investment:

• An existing NRE Account (Saving or current) held or maintained in the name of an OCB shall be closed and balances repatriated immediately.
• An existing NRO Account (Saving) held or maintained in the name of an OCB shall be closed and balances transferred to non-interest bearing NRO (Current) Account. However, disposal of balances in such NRO (current) account shall require specific approval of the Reserve Bank except in the following cases:
• all local payments in rupees;
• transfer of funds outside India of current income in India of the account holder net of applicable taxes;
• An existing NRE Account (Recurring or Fixed Deposit) or FCNR (B) Account held in the name of an OCB, may be continued till original maturity and on maturity, the proceeds shall be repatriated immediately.
• An existing NRO Account (Recurring or Fixed) held or maintained in the name of an OCB may be continued till original maturity and on maturity, the proceeds shall be credited to NRO (Current) Account;
• Any loan or other facility granted against the security of a Recurring/Fixed Deposit Account held in the name of an OCB, shall not be renewed and shall be closed by amendment of the proceeds on the maturity of the deposit;
• An OCB may continue to hold the shares purchased under the Portfolio Investment Scheme till such time they are sold on a recognized stock exchange.
• Existing Government dated securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds in India or National Plan/Savings Certificates can hold on repatriation and non-repatriation basis till they are sold/redeemed.
• Existing shareholders including OCBs renounce the shares offered on rights basis prior to de-reorganization in favor of a person resident outside India who is eligible to invest an Indian company under the FDI policy.
• Existing borrowing or loan cannot be renewed on becoming due and no interest thereon shall accrue after it falls due for repayment.
• OCB can enter into a forward contract with an AD in India to hedge:

(i) the amount of dividend due to it on an existing investment in the form of shares of an Indian company, (ii) the balances held in an existing FCNR (B) account or NRE (Term Deposit) account, (iii) the amount of existing investment made under PIS (iv) the amount of investments made under Foreign Direct Investment Scheme.

Restriction in new OCB Investment:

• No fresh Investment allowed by the OCB’s in any security. However non-resident incorporated entity is treated like any other foreign incorporated company. An eligible non-resident incorporated may invest in accordance with FDI policy.
• No fresh purchase equity or preference shares or convertible debentures offered on the right basis by an Indian company are permissible, and no Indian company shall offer equity or preference shares or debenture (convertible) on right basis to an OCB.
• No person resident in India shall borrow from, or lend to, an OCB either in foreign exchange or in Rupees
• An Indian company is not allowed to borrow in rupees on repatriation and non-repatriation basis from OCBs by way of investment in Non-convertible Debentures
• An Indian company, a proprietorship concern or a firm in India shall not accept deposits from OCBs on non-repatriation basis.

Re-recognition of OCB’s as NRI investment vehicle:

The far-reaching changes in the regulatory regime for foreign direct investment (FDI), as per changes made by the recent press note issued by Department of Industrial Policy & Promotion (DIPP), has also silently brought about a significant change. In the press note, overseas corporate bodies (OCBs), which were de-recognized in 2003, has been de-recognized.

In a throwback to pre-2003 years, overseas corporate bodies (OCBs) as a vehicle for non-resident Indian (NRI) investment to India has made a comeback.

New rule for overseas NRI bodies:

While the new dispensation will add to the ease of making investments in India, regulators will have to keep a close watch to avoid history repeating itself.

• As earlier, the 60% NRI control was required now amended to hold 50 % Capital or control the management.
• A company is considered as ‘Owned’ by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and/or Indian companies, which are ultimately owned and controlled by resident Indian citizens.
• No need to be a corporate body, it can be a company or trust or partnership firm.

Special allowance for NRI’s Investment:

Special allowances available to NRIs, which may not be available to other non-residents, are as follows:

• The investment made by NRIs under Schedule 4 of FEMA (Transfer or Issue of Securities by Persons Resident outside India) Regulations, 2000 (FDI Regulations) shall be deemed to be a domestic investment at par with the investment made by residents.
• FDI cap shall not apply if NRIs make an investment through Schedule 4 of FDI Regulations
• NRIs under Schedules 3 of FDI Regulations, can invest/trade through a registered broker in the capital of Indian Companies on recognized Indian Stock Exchanges. But, the same is not the case for other non-residents except for registered FIIs and FPIs
• NRI can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis subject to fulfillment of conditions specified therein.

Conclusion:

• Several NRIs may either already have OCBs in foreign jurisdictions or they may find it easy to form such bodies in lightly regulated jurisdictions, particularly those that have comprehensive Double Taxation Avoidance Treaties (DTAT) with India.
• NRIs may find it much better to invest through bodies registered outside India than to form bodies in India.