Financial terrorism

With the Uttar Pradesh Vidhan Sabha polls round the corner everybody and his uncle knows that ‘OBC’ means ‘Other Backward Castes’. But do you know what ‘OCB’ stands for in the world of high finance?

The official answer from the ministry of finance mandarins is ‘Overseas Corporate Body’. It might just as well be ’Obscenely Costly Blunder’ or ‘Outflow Costs Billions’. Take your pick, all three are correct.

‘‘I will not,’’ President Bush said soon after the September 11 attacks, ‘‘fire a million dollar missile to hit a ten-dollar tent!’’ The president of the world’s richest nation is a stingy man; India’s mandarins smile benignly as close to a billion dollars - the equivalent of a thousand missiles - go down the drain. (Without a single tent to show for it!) I am not exaggerating. A study of 13 OCBs showed their collective activities cost this country Rs 3,850 crore between April 1999 and March 2001. Now, imagine if you can, what not 13 but 700 OCBs can manage between them.

One of the 13 firms, Delgrada Limited, had a paid up capital of precisely US $ 1. Let me repeat that — one American dollar. This firm was registered in April 2001. The records show Delgrada did not bring even a single measly dollar’s worth of investment to India. (Not even the hundred cents with which it was so generously endowed.)

Yet in the same period it somehow took Rs 476.12 crore out of India! Who said the golden age of entrepreneurship has ended?

The story began in the 1980s; then as now the Government of India was trying to encourage Non-Resident Indians (NRIs) to invest in their motherland. Apart from pursuing individual NRIs, it was decided that OCBs could also share the benefits. An OCB was legally defined as a corporate institution in which NRIs held at least 60 per cent. Such an institution could be a company, a partnership, a society, or a trust.

At about the same time, 1983, India and Mauritius signed a ‘Double Taxation Treaty’, meaning that two pounds of flesh would not be hacked off when only one was due. The Mauritian authorities encouraged OCBs to set up off-shore banks, which were eligible for complete tax exemption.

In those early days, the functioning of the OCBs was under the Reserve Bank’s scrutiny. (Basically, the Government of India wanted to ensure that some foreign direct investment was flowing in by all this effort). And then, in 1999, there was a small bonfire of controls in the name of economic liberalisation. The FERA regime came to an end. So too did the Reserve Bank’s efforts to monitor the OCBs. Simultaneously, Mauritius saw a boom in the number of OCBs operating from there. Many of these OCBs were used to play the markets in India. The advantages were evident — they did not have to pay any taxes on the profits they made in India, and they were permitted to repatriate money in foreign exchange.

The OCBs were scarcely the only bodies to recognise, and take advantage of, Mauritius’s status as a tax-haven. Foreign Institutional Investors (FIIs) were also quick to set up shop in the islands. However, please note that FIIs and OCBs differ in one important aspect. FIIs, unlike OCBs, are required to register with the Securities & Exchange Board of India. This means that they are, theoretically, under constant scrutiny. (That cautious qualifier is necessary given the Board’s, shall we say, patchy record as a watchdog!)

Let me see: OCBs are not monitored and they pay no taxes. Short of putting out a welcome-mat with ’Crooks welcome here’ stencilled on it, I really do not see what else India could have done to encourage men with more brains than scruples.

I am happy to note that not every department was sleeping on the job. The Income Tax authorities in Mumbai issued notices to certain entities. The core issue was domicility; the taxmen argued many OCBs could not claim Mauritian domicility given that they operated entirely from India.

This created a stir in high places. Interested parties spread the rumour that the FIIs and OCBs would withdraw in a huff. The Union Ministry of Finance, having procured a green signal from Yashwant Sinha himself, issued a ‘clarification’. This document, Circular 789, restored the status quo.

Some argue Circular 789 clashes with the 1983 treaty with Mauritius. Be that as it may, the gist of the document is that Indian officials must accept as final a certificate of domicility from Mauritius.

The Finance Minister’s daughter-in-law was managing one of the entities that had received a notice from the Income Tax authorities.

This led to accusations that the Union finance minister’s decision had been influenced by this relationship. The matter is now before a Delhi court.

All this, however, is history. But there is one fact that is, or should be, clear to all concerned: the concept of OCBs has outlived whatever utility it ever possessed. So far from being an asset, it is a giant drain on an economy that was none too healthy anyway.

A couple of steps are indicated. First, plug this loophole before even more dollars are lost. Second, conduct a full-blown inquiry into the identity of the operators who ran these OCBs. We have suffered a lot of damage; surely there is no need to endure more.

A few months ago, the Union Finance Minister complained his bureaucrats had kept him in the dark, so the Unit Trust of India crisis came as a bolt from the blue. Accepting this at face value, it is possible the Finance Minister does not know, even now, certain important facts. As, for instance, who were Bull King Ketan Parekh’s associates? Or who were Bear Sultan Shanker Sharma’s partners?

I am convinced that the answers to these questions should be most illuminating. And advice on the matter would be advantageous to the country as a whole.

In a few hours we shall celebrate Vijayadashami. As Mahishasura bites the dust and Ravana flames down, it is necessary to remember that not every terrorist brandishes weapons openly. There is a kind
of financial terrorism as well - just as damaging as the more physical variety.

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