The committee set up to review FEMA has made many pragmatic suggestions that will simply Portfolio Investment Scheme for NRIs

With time and changes in the economy, many rules under the Foreign Exchange Management Act (FEMA) have become redundant.  “The operations of FEMA still betray a ‘fear’ of compensatory payments between non-residents and residents, harking back to the FERA days.” This one sentence in the Kishori J Udeshi Committee encapsulates its pragmatic approach to simplifying rules for the public benefit.  

The committee, whose mandate is to review facilities for individuals under FEMA 1999 made as many as 46 observations and recommendations in its report submitted to the Reserve Bank of India (RBI) on 8th August, 2011.
It is to Chairman Udeshi’s credit that the report was completed in the stipulated time. Its comprehensive recommendations which propose simpler rules will make life easier not only for NRIs, but also for Indians travelling abroad. Rules that are easier to comply with will benefit banks, which are authorized dealers in foreign exchange.

India’s burgeoning foreign exchange reserves of over US$ 320 billion have created an urgent need to relax most of the conditions imposed in 1999 during the initial years of FEMA. So far, the RBI has considered five of the recommendations of the Committee and is reviewing others. Hopefully, the process would be completed by the end of this year.  

One recommendation is with regard to the operations of the Portfolio Investment Scheme (PIS) for NRIs. According to the Committee, there is simply no need for continuation of the existing scheme it needs to be reviewed in its entirety (Para 4.23(1)). The RBI should go deep into this, as it is observed that different banks follow different systems and procedures to suit their own convenience rather than the convenience of their customers.

Current rules covering the Portfolio Investment Scheme for NRIs are so ambiguous that some leading private sector banks insist on NRIs opening as many as four savings accounts and four demat accounts ostensibly to separate the primary market operations from the secondary market operations both for repatriable and non-repatriable investments for facilitating regulatory reporting by the Bank. Obviously, this is not according to the guidelines of the RBI, which only require the repatriable and non-repatriable investments to be separated, without having to separate the primary and secondary market investments under each category.

These banks also insist upon maintenance of minimum balances in these four accounts and levy account maintenance charges for all the four demat accounts, which are opened for the benefit of the bank and not of its customer. This has been causing considerable strain for the NRI customers to monitor these several accounts, apart from resulting in waste of time, energy and money for them, if they decide to invest in the Indian stock market.

While the motive behind this requirement to open four accounts each for savings and demat is not known, these banks are not willing to change their procedures, even when the effected NRIs request them to confine their operations to one account each for repatriable and non-repatriable investments as per the existing guidelines of RBI.

The problem is further compounded by the fact that once an NRI opens a PIS account with one bank, he is not permitted to deal with any other designated bank under this scheme as per the rules presently in force.

The Reserve Bank of India should, therefore, give clear cut guidelines to these banks to avoid opening of multiple accounts, unless specifically requested for by the customers, as this causes considerable burden on the NRIs and makes their job of investing in the Indian stock market so much cumbersome and expensive.

The Committee has further recommended as under: “Since non-residents have been given the freedom to remit US$ 1 million annually, it makes little sense to maintain procedures under FEMA that continue to treat these two categories (repatriable and non-repatriable) separately.” ( Para 6.5.)

If these recommendations of the Committee are implemented, the question of maintaining even two accounts for each NRI does not arise and the NRIs will certainly be encouraged to invest their surplus funds in the Indian stock market without much hassle.

It is pertinent to mention here what Dr. K. C. Chakrborty, Deputy Governor of the RBI said while addressing the Bancon 2011 at Chennai a few days ago. He said that technology must help banks to reduce cost, and banks should look at a customer-centric model rather than an employee-centric one. Reserve Bank of India should ask banks to precisely follow this golden advice and not inconvenience the customers in their own enlightened self-interest.

(The author is a banking & financial consultant. He writes for Moneylife under the pen-name ‘Gurpur’)