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Panel suggests scaling up convertibility

india Updated: Sep 02, 2006 02:03 IST

In what could make buying properties and making investments abroad by individuals much easier, an RBI panel has recommended a slew of measures relaxing the norms for transfer of money from India.

The committee on full account convertibility of the rupee headed by SS Tarapore has recommended that the money allowed to be transferred for the purpose be increased in phases from $25,000 annually permissible now. The committee's plan of action is to raise the limit to $50,000 in this fiscal itself, then to $100,000 in 2007-08, and to $200,000 by 2010.

The committee was tasked to look into the possibility of capital account convertibility  ---- which essentially means that local financial assets can be freely converted into foreign financial assets  and vice versa -- and recommended measures needed to achieve that goal.

The committee also recommended that non-resident Indians (NRIs) be permitted to invest without limits in Indian stock markets, including mutual funds and portfolio management schemes. The money, however, should be routed through bank accounts in India. Now, an NRI is allowed to own only up to five per cent of the paid up capital of a company; also no Indian company is allowed to sell more than 10 per cent of such capital to NRIs as a whole.

Simultaneously, the committee has recommended that Indian mutual funds be allowed to invest up to $5 billion a year in overseas stock markets by 2010. The current limit is $2 billion. The increase is to be attained in a phased manner, the limit going up to $3 billion this year itself, to $4 billion in 2007-08 and to $ 5 billion thereafter.

To prevent slush funds coming into the Indian capital market, the committee has called for a complete ban on fresh inflows of participatory notes (P-notes). P-Notes are issued by foreign institutional investors (FIIs) to their clients against deposits.

The funds are then routed to the Indian stock market on the FII account in stocks specified by the clients. As a result, the Indian regulators never get to know the identity of the original investors. Currently a substantial part of portfolio investments is routed through P-notes.

The committee has further recommended that the existing P-notes be phased out over the next one year. Also, overseas corporate entities should be allowed to invest in the Indian stock market only if the funds come through identifiable bank accounts in India.

It has also called for a major relaxation of the foreign direct investment regime and recommended that all other regulations/restrictions be phased out in two years. If some of the regulations must continue, they must be notified afresh.

To enable Indian corporate bodies to tap overseas debt market on a larger scale, the committee has recommended that the overall ceiling for external commercial borrowings should be gradually raised.

In a key recommendation that will aid banking sector reforms, it has suggested that the government cut its stake in SBI and all other public sector banks to 33 per cent. Now, the law restricts minimum government holding in these banks to 51 per cent.