The Hindu Business Line : Tarapore panel for 3-phased road-map towards free float

Highlights
Ban PN notes (One member dissents).
Discriminatory tax treaties should go.
5-year time frame for full float of rupee.
Bring down Government stake in PSU banks to 33 per cent.
Allow industrial houses to set up banks.
Put on hold transfer of RBI stake in SBI.

Mumbai , Sept. 1

A quick wind down of Participatory Notes has been suggested by the Tarapore Committee on fuller capital account convertibility while favouring a three-phased road-map towards free float.

The report made public by the RBI is of the view "that FIIs should be prohibited from investing fresh money raised through PNs. Existing PN-holders may be provided an exit route and phased out completely within one year."

A strong dissent note by Dr Surajit S. Bhalla, appended to the report says, "the Committee's haste towards an immediate ban of P Notes and immediate reversal of the existing GoI policy, without any documentation or evidence, suggests an ideological bureaucratic predisposition."

Discriminatory tax treaties have been frowned upon by the committee.

"Such discriminatory tax treaties are not consistent with an increasing liberalisation of the capital account as distortions inevitably emerge, possibly raising the cost of capital to the host country. It would, therefore, be desirable that the Government undertakes a review of tax policies and tax treaties," it adds.

The first phase of the three-part road map begins in 2006-07 followed by the second spread over 2007-09 with the third ending in 2011.

"The roadmap should be considered as a broad time-path for measures and the pace of actual implementation would no doubt be determined by the authorities' assessment of overall macroeconomic developments as also specific problems as they unfold," says the committee.

Liberal capital outflows by residents, corporates and banks are "a strong confidence building measure," contends the committee.

The general experience is that as the capital account is liberalised for resident outflows, the net inflows do not drop. The report wants the limits on the current facility for individuals to freely remit $25,000 per calendar year to be raised in parts to $2,00,000 in 2011. Corporate investments abroad should be made easier, the report says and argues for lifting the cap on such outflows from 200 per cent of net worth to 400 per cent of net worth by 2011. In tandem, limits on overseas borrowings by banks need to be made more liberal.

The report is for linking the limits to paid-up capital and free reserves and not to unimpair Tier 1 capital as of now and "raised substantially to 50 per cent in Phase 1, 75 per cent in Phase II and 100 per cent in Phase III."

Pleading the case of mutual funds, the report calls for scrapping of stipulations on individual fund limits and the proportion in relation to net asset value (NAV). The overall ceilings should be moved up from the present level of $2 billion to $5 billion by 2011 (Phase 3).

A case has been made for non-resident corporates to invest in the Indian bourses through SEBI-registered entities including mutual funds and portfolio management schemes.

Currently, only multilateral institutions are allowed to raise rupee bonds in India and the Committee wants the facility to be extended to "other institutions and corporates" subject to an overall, upwardly mobile ceiling.

While favouring a hike in ECB ceilings, the report is concerned over the volume of trade credit, as they are not fully captured in macro data. Import linked short-term loans "should be monitored in a comprehensive manner," the report feels and adds "the per transaction limit of $20 million should be reviewed and the scheme revamped to avoid unlimited borrowing."