Banks, corporates and institutional investors are equipped to deal with procedural hassles, but individuals, both resident and non-resident, are defeated. The 2006 Committee on Fuller Capital Account Convertibility (FCAC) stated that “the knots in the forex management system would need to be untied before the liberalisation can become meaningful” (page 114 of the Report).
The members of the FCAC Committee have expressed indebtedness to Ms K. J. Udeshi, former Deputy Governor and current Chairman of the Banking Codes and Standards Board of India (BCSBI), for emphasising, in interaction with the FCAC Committee, that removal of procedural and operational knots is more important than liberalisation. It is in the fitness of things that the RBI has, in May 2011, set up a Committee for Review of Procedures Relating to Foreign Exchange Facilities for Individuals-Resident/Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs).
CONTROL MINDSET
The Committee is to identify areas for streamlining and simplifying procedures so as to remove the operational impediments and assess the level of efficiency in the functioning of authorised persons.
As Ms Udeshi stressed, the present anomalies and contradictions emanate from a “control mindset”. Much of the procedural framework was set up when there was a total ban on remittances by residents on the capital account and the procedural regime for NRIs /PIOs was also stringent. Non-resident individuals can now remit from their Non-Resident Ordinary (NRO) Accounts up to $1 million per annum while residents can remit on capital account $200,000 per annum and, in addition, there are liberal limits for current account transactions. Unfortunately, the procedural hurdles remain.
Till 1994, non-residents holding NRO accounts were not allowed forex remittances from their accounts. Holders of Non-Resident External Accounts, which were based on remittances from abroad, had full rights of remittances. Accordingly all non-residents were put into two boxes, “repatriable” and “non-repatriable”.
It is amazing that even today non-resident accounts are classified in this manner. It could be claimed that this is not the doing of the RBI or the banks but the Securities and Exchange Board of India (SEBI) and the government. No matter which authority prescribes such procedures, it is the individual who suffers.
INEXPLICABLE PROCEDURES
Many procedural hurdles can easily be dispensed with without any change in policy. A few select procedures are set out below:
First, despite denials by banks, a number of them still require an individual using foreign exchange to sign a demeaning declaration on what he is not doing, rather than what he is doing. Individuals are required to sign a declaration to say that they are not chors (thieves).
To the extent that even one bank uses this reprehensible declaration it speaks poorly of the entire Indian financial system.
Second, while non-residents are permitted to have an account jointly with a resident as a second name, a resident is not permitted to have an account jointly with a non-resident as a second name. This is observed in the breach as RBI officials, government officials, bankers and others violate this procedure! It is inexplicable why the authorities do not appreciate the convenience that depositors seek, but are obsessed with the concerns of yesteryear.
Third, there are absurd stipulations that residents buying a rupee asset from a non-resident are required to undertake a 30 per cent deduction of the proceeds and remit it to the government account and the non-resident has to claim a refund.
This regulation just cannot be implemented in today's screen-based trading system. The government, the RBI, the banks and those undertaking the transaction are aware that the stipulation cannot be implemented, but the authorities cling to it — it is for the tax authorities to remove this ridiculous stipulation.
Fourth, individuals utilising their Resident Foreign Currency Accounts (RFC) are required to fill the A2 Form for purchasing foreign exchange and sign the demeaning declaration. At the same time, a resident is allowed to maintain a RFC account abroad where the writ of the RBI does not run! It is reported that the banks undertake these procedures because of strictures by RBI inspectors!
It is unbelievable, but true, that non-residents are required to have one NRO Account for their assets before they left India and for inherited assets, and a separate NRO Account to purchase shares after they become non-residents; what is more, the individual has to maintain two separate demat accounts. The RBI and SEBI prescribing these procedures are looking for a black cat in a dark room which is not there.
Lastly, the decentralisation of the RBI offices and the delegation of powers to banks has moved the system from a single regulator to a proliferation of regulators, each acting like a satrap.
Despite liberalisation, individuals continue to suffer. Ms Udeshi, much before this Committee was set up, said dismantling exchange control procedures is more demanding than imposing controls. The Udeshi Committee is the last hope for individuals.
(The author is an economist. blfeedback@thehindu.co.in )