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OCBs to be denied GDR fungibility

Subhomoy Bhattacharjee in New Delhi

The government has decided not to allow overseas corporate bodies a role in the emerging market of fungibility trading.

This decision means OCBs will not be able to enter the promising market of the two-way conversion of American Depository Receipts and Global Depository Receipts into their underlying domestic shares to be sold in stock markets, and the other way round.

The issue has become important because the size of the fungibility market is gradually expanding, with more and more companies keen to tap the route to realise a better value abroad.

But according to the high-level committee on capital markets, headed by Reserve Bank of India governor Bimal Jalan and including representatives from the ministry of finance, the Securities and Exchange Board of India and the Insurance Regulatory Development Authority, allowing such a role to OCBs will re-open their access to secondary markets, which is not desirable.

The OCBs had come under a cloud after the stock scam of 2001. As a result of this, they were banned from investing in stock markets through the portfolio investment scheme.

The scheme, launched in the mid-nineties, was the chief instrument through which the OCBs were able to invest in the market. But now they can only operate as sub-accounts of foreign institutional investors.

The committee felt that in the process of converting domestic shares into ADRs\GDRs, the OCBs would be able to get an access to bourses on their own, which should not be allowed till the joint parliamentary committee investigating the scam finalised its views on their role.

The Centre has recently liberalised the guidelines for the two-way trade in ADRs\GDRs and domestic shares. The measures are meant to align the domestic capital markets with those abroad.

There has been a consistent demand from OCBs to allow them to enter the market. In the stock market scam of 2001, these bodies had been accused of siphoning off capital and, therefore, foreign exchange out of the country, rather than bringing in capital.

In its deposition to the JPC, the RBI had pointed out how some of the private banks had been made a conduit for taking profits out of the country by the OCBs.

The portfolio investment scheme was intended to encourage OCBs to enter the domestic capital market, with far less initial capital investment requirement than was needed by FIIs. The reason for a favourable treatment of OCBs was because they were supposed to be non-resident Indian-promoted entities, with at least 60 per cent investment by them.

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