Information on the ambitious plan to make Mumbai an International Financial Centre
To give India a competitive edge and improve its economic infrastructure, Mumbai should be turned into a global financial hub with reforms and pragmatic legislations, says an expert panel headed by a noted economist. “India is at a turning point in its financial sector,” says the committee headed by former chief economist of the International Monetary Fund (IMF) Raghuram G. Rajan, which discussed its draft report on reforms with the Planning Commission top brass Tuesday.
The committee members feel that the Indian government should do the needful to enable Mumbai, the epicentre of the fast-growing Indian economy, to be fully equipped to meet the global challenges.
“In the process of gaining the productivity, innovativeness to serve the masses, the financial sector will get the unique edge and scale to be competitive internationally,” the committee’s draft report says, giving its rationale for Mumbai’s elevation.
The Planning Commission had set-up the expert committee on financial reforms in August 2007. Its draft report was discussed here Tuesday and the final report is expected to be presented to Prime Minister Manmohan Singh by September.
The report says Mumbai is home to two of the country’s largest stock markets -the Bombay Stock Exchange and the National Stock Exchange - as also the central bank and the markets regulator the Securities and Exchange Board of India.
Experts say Mumbai’s location is eminently suitable for daylong trading across time zones, with a time difference of three-and-a-half hours with Tokyo, four-and-a-half hours with London and nine-and-a half hours with to New York.
As a hub of financial flows, Mumbai scores on high equity trading volumes and good presence of global banking and financial services firms, but requires upgradation of existing infrastructure, the expert panel says.
The committee members feel that the Indian government should do the needful to enable Mumbai, the epicentre of the fast-growing Indian economy, to be fully equipped to meet the global challenges.
“In the process of gaining the productivity, innovativeness to serve the masses, the financial sector will get the unique edge and scale to be competitive internationally,” the committee’s draft report says, giving its rationale for Mumbai’s elevation.
The Planning Commission had set-up the expert committee on financial reforms in August 2007. Its draft report was discussed here Tuesday and the final report is expected to be presented to Prime Minister Manmohan Singh by September.
The report says Mumbai is home to two of the country’s largest stock markets -the Bombay Stock Exchange and the National Stock Exchange - as also the central bank and the markets regulator the Securities and Exchange Board of India.
Experts say Mumbai’s location is eminently suitable for daylong trading across time zones, with a time difference of three-and-a-half hours with Tokyo, four-and-a-half hours with London and nine-and-a half hours with to New York.
As a hub of financial flows, Mumbai scores on high equity trading volumes and good presence of global banking and financial services firms, but requires upgradation of existing infrastructure, the expert panel says.
With India attracting the attention of the developed world as a desirable investment destination coupled with the increasingly aggressive international acquisition forays by Corporate India and the burgeoning forex reserves in excess of $200 billion, the evolution of Mumbai as an International Financial Centre (IFC) is the subject of much discussion in India. It is, therefore, worthwhile trying to decipher what exactly are the factors that contribute to making a city an international financial centre. A recent study by Z/Yen Research Consultancy that was sponsored by the Corporation of London throws some light on the subject. The study came out with a Global Financial Centres Index™ (GFC Index) which rates 46 financial centres of the world. The index has been constructed based on a factor assessment model that takes into account instrumental factors drawn from external sources that measure relevant parameters like infrastructure competitiveness, opacity of regulation, etc., as also financial centre assessments based on a survey among 491 respondents working in these financial centres. The important aspects that go into preferring one financial centre over another have been highlighted by the study as people, business environment, market access, infrastructure and general competitiveness. The study rates London as the premier global financial centre followed by New York, Hong Kong and Singapore with Mumbai at the 39th place well behind cities like Sydney at 7, Tokyo at 9, Shanghai at 24 and Dubai at 25 but ahead of Seoul at 43. Asia is being increasingly seen as the growth engine of the world on the back of the robust economic growth that China and India have been registering over the last few years. China and India together contribute to more than 20% of global gross domestic product in purchasing-power-parity terms, ahead of the US economy's 19.7% share. After the financial crisis of 1997, Asian countries have improved their financial systems and have built unprecedented levels of forex reserves that account for around half the global reserves. Hence it is natural for Asian financial centres to aspire for a larger share of the international financial services revenue pie that includes global revenues relating to asset management, insurance and risk management, securities and commodities trading, derivatives trading, financial structuring, fund raising, mergers and acquisitions, as also the related taxation, legal and other middle and back office services. However, getting this business requires much more than just a large potential business in the hinterland exemplified by the world's largest IPO of $22 billion by The Industrial and Commercial Bank of China late last year. There is also another view that that the physical location of a financial centre is much less relevant today because of the ability to seamlessly put through transactions electronically.
Mr Percy Mistry, Chairman of the High Powered Committee on Mumbai as International Financial Centre (IFC), recently stated strongly that what India needs is an additional slew of bold financial sector reforms. The report of the Committee he chaired — but resigned from before it submitted its report — was designed to lay down the guidelines for making Mumbai an International Financial Centre. The Committee has made interesting recommendations, but whether they a re feasible politically and technically, time alone can tell.
This must be the first instance of a Committee appointed on behalf of a Government to establish a Financial Centre of international reach. The rise of Tokyo, London, New York, Frankfurt, Singapore as International/Regional Financial Centres was more a matter of history and economic growth reflecting large financial surpluses rather than state action.
The only instance in recent times of an IFC arising out of governmental action is that of Dubai, but that evolution owes a lot to Dubai being a Centre of petro-dollars, capitalising on which the Dubai Government set about generating an enabling environment for attracting financial enterprises, which created an IFC. The case of the Mistry Committee’s effort, set in the context of a poor country with capital shortage rather than surplus, is entirely different.
It is, of course, true that Mumbai offers a lot of facilities, including a high-calibre financial institutional set-up that can provide the intellectual support to an IFC. The motivation of the Committee seems to be, in part, to capture the increasing demands for International Financial Services that originate from the country’s corporates. Of course, the Committee also refers to foreign corporates accessing Mumbai as an IFC. The IFC at Mumbai would cater to demands for funds, both equity and debt, arising from Indian corporates and from foreign entities. Whether and how foreign firms will be drawn to Mumbai in preference to New York, Singapore or London depends on how competitive, competent and user-friendly the facilities in Mumbai are, besides the quantum of investible resources it offers. The High-Powered Expert Committee defines the conditions that should exist to enable such an IFC to emerge and flourish in Mumbai.
The Committee has drawn up a virtual wish-list of economic reforms, which it feels, is necessary to make the Mumbai IFC come about. A review of the wish-list leads one to wonder whether the Committee has not been too ambitious. The tail — Mumbai as IFC — is wagging the dog, reforms in the economy.
The Committee lays down various conditions, such as reform of the regulatory system, withdrawal of the State from all financial institutions, change of tax systems, a roadmap of fiscal prudence, the opening up of Indian banking to foreign banks, and modernisation of the stock exchanges, besides, of course, an open capital account. It is not, however, clear how the Committee’s recommendation of a single financial service regulator, a la the UK model, for banking insurance, sto ck markets and commodities, will make the Mumbai IFC a more attractive destination for investors or borrowers.
London was an IFC before the FSA came. New York flourished and flourishes as an IFC in spite of there not being a single regulator in the US. Indeed, there is a panoply of regulators, the US Federal Reserve, the SEC and the insurance commissioners of various States, besides the regulator of commodities exchanges, which are separate bodies, each functioning independently. Single regulator
The High Powered Committee thinks that a single regulator would solve problems which obstruct the path to the emergence of Mumbai as an IFC. This is stretching logic too far. Separate regulators do have an advantage as their domain knowledge is better. The regulation of capital markets, for instance, demands different expertise than that of banks and insurance. A simplistic solution, such as a single Financial Services Authority, will be, in Indian conditions, a remedy worse than the disease. One of the important conditions laid down by the High Powered Committee is the withdrawal of the state from the ownership of financial institutions. It suggests that the state’s shareholding be brought down below 49 per cent. While there may be some logic justifying this from the background of India’s constitutional requirements making majority state ownership an impediment to effective autonomy, the Committee’s stance seems more ideologically based. The logic behind the Committee’s insistence is weak.
Singapore is a classic case of a successful IFC, but Singapore’s state-owned and run investment vehicle, Temasek, is a most efficiently run financial institution managing over $100 billion. That has not affected Singapore’s standing as an IFC. Ultimately, the investors flock to a country that has stable laws and a pleasant, investor-friendly atmosphere. They do not care too much if the state owns or runs an undertaking, as long as it is efficient. Further, the Chinese Government, to which Hong Kong belongs, is also the owner of a trillion-dollar investment nest-egg, part of which is in a state-run and owned vehicle.
This must be the first instance of a Committee appointed on behalf of a Government to establish a Financial Centre of international reach. The rise of Tokyo, London, New York, Frankfurt, Singapore as International/Regional Financial Centres was more a matter of history and economic growth reflecting large financial surpluses rather than state action.
The only instance in recent times of an IFC arising out of governmental action is that of Dubai, but that evolution owes a lot to Dubai being a Centre of petro-dollars, capitalising on which the Dubai Government set about generating an enabling environment for attracting financial enterprises, which created an IFC. The case of the Mistry Committee’s effort, set in the context of a poor country with capital shortage rather than surplus, is entirely different.
It is, of course, true that Mumbai offers a lot of facilities, including a high-calibre financial institutional set-up that can provide the intellectual support to an IFC. The motivation of the Committee seems to be, in part, to capture the increasing demands for International Financial Services that originate from the country’s corporates. Of course, the Committee also refers to foreign corporates accessing Mumbai as an IFC. The IFC at Mumbai would cater to demands for funds, both equity and debt, arising from Indian corporates and from foreign entities. Whether and how foreign firms will be drawn to Mumbai in preference to New York, Singapore or London depends on how competitive, competent and user-friendly the facilities in Mumbai are, besides the quantum of investible resources it offers. The High-Powered Expert Committee defines the conditions that should exist to enable such an IFC to emerge and flourish in Mumbai.
The Committee has drawn up a virtual wish-list of economic reforms, which it feels, is necessary to make the Mumbai IFC come about. A review of the wish-list leads one to wonder whether the Committee has not been too ambitious. The tail — Mumbai as IFC — is wagging the dog, reforms in the economy.
The Committee lays down various conditions, such as reform of the regulatory system, withdrawal of the State from all financial institutions, change of tax systems, a roadmap of fiscal prudence, the opening up of Indian banking to foreign banks, and modernisation of the stock exchanges, besides, of course, an open capital account. It is not, however, clear how the Committee’s recommendation of a single financial service regulator, a la the UK model, for banking insurance, sto ck markets and commodities, will make the Mumbai IFC a more attractive destination for investors or borrowers.
London was an IFC before the FSA came. New York flourished and flourishes as an IFC in spite of there not being a single regulator in the US. Indeed, there is a panoply of regulators, the US Federal Reserve, the SEC and the insurance commissioners of various States, besides the regulator of commodities exchanges, which are separate bodies, each functioning independently. Single regulator
The High Powered Committee thinks that a single regulator would solve problems which obstruct the path to the emergence of Mumbai as an IFC. This is stretching logic too far. Separate regulators do have an advantage as their domain knowledge is better. The regulation of capital markets, for instance, demands different expertise than that of banks and insurance. A simplistic solution, such as a single Financial Services Authority, will be, in Indian conditions, a remedy worse than the disease. One of the important conditions laid down by the High Powered Committee is the withdrawal of the state from the ownership of financial institutions. It suggests that the state’s shareholding be brought down below 49 per cent. While there may be some logic justifying this from the background of India’s constitutional requirements making majority state ownership an impediment to effective autonomy, the Committee’s stance seems more ideologically based. The logic behind the Committee’s insistence is weak.
Singapore is a classic case of a successful IFC, but Singapore’s state-owned and run investment vehicle, Temasek, is a most efficiently run financial institution managing over $100 billion. That has not affected Singapore’s standing as an IFC. Ultimately, the investors flock to a country that has stable laws and a pleasant, investor-friendly atmosphere. They do not care too much if the state owns or runs an undertaking, as long as it is efficient. Further, the Chinese Government, to which Hong Kong belongs, is also the owner of a trillion-dollar investment nest-egg, part of which is in a state-run and owned vehicle.
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