The Reserve Bank of India on Tuesday banned all investments by overseas corporate bodies in Indian companies through the portfolio as well as direct foreign investment routes.

The ban extends to deposits and loans made by OCBS to Indian companies. Earlier, in November 2001, the RBI had clamped down on only the portfolio investments by OCBs.

"The decision is a follow up of the review of investment activities of OCBs in India, carried out by the RBI on the basis of recommendations of the joint parliamentary committee on the security market scam," the central bank said in a statement.

About 600 OCBs have investments in India but the size of their investments cannot be quantified as they are clubbed with non-resident Indians (NRIs) and treated as a group.

The OCBs -- bodies predominantly owned by individuals of Indian nationality or origin residing outside India -- are neither regulated nor registered with the Securities and Exchange Board of India, nor do they come under the RBI's regulatory framework. About 80 per cent of the OCBs are registered in Mauritius for tax purposes.

"It has been decided in consultation with government to derecognise with immediate effect OCBs in India as an eligible 'class of investors' under various routes/schemes available under extant foreign exchange regulations," an RBI release said.

"Henceforth, OCBs shall not be permitted to make fresh investment under the FDI scheme (including automatic route) and in other investments/deposits /loans under the various routes/schemes available to the non-residents," the RBI said.

It has also withdrawn the facility of opening and maintaining fresh NRI accounts -- the non-resident external accounts scheme, foreign currency non-resident accounts banks scheme and non-resident ordinary accounts -- for any unincorporated entity, the RBI said.

Sunil Shah, managing director, HDFC Securities, said: "This is a step in the right direction as OCBs have outlived their utility. The markets will now become a cleaner place."

The JPC investigating the 2001 stocks scam suspected that Indian promoters were using outfits registered offshore as a front. The JPC report emphasised the need to have a fresh look at the operations of OCBs after an in-depth study of inflows and outflows.

The exercise should also include identification and plugging of loopholes and possible establishment of a proper regulatory set-up with stringent penal provisions for violations, it recommended.

The committee wanted the government to consider the RBI suggestion for minimum paid-up capital stipulation for OCBs on the lines of FIIs.

Overseas corporate bodies, with 60 per cent non-resident Indian ownership and 40 per cent foreign holding, were initially allowed to invest in the secondary market to boost foreign exchange reserves. However, between 1999 and 2001, the route was misused by several market participants, with over Rs 3,800 crore (Rs 38 billion) being taken out of the country.

The Sebi investigations revealed some non-resident Indians, in collaboration with market operators, had set up overseas corporate bodies in Mauritius with capital as little as $10, conducting high-value transactions to gain tax benefits.