Mumbai – An International Financial Centre
Volume 20, Number 1 Article by R Vaidyanathan March, 2008
Mumbai – An International Financial Centre : Report of the High Powered Expert Committee, Ministry of Finance, Government of India, 2007, Sage, pp 246, Price: Rs 795. :
The premier international financial centres (IFCs) of the world are London, New York and Singapore. In the second rung, there are many regional financial centres (RFCs) like Frankfurt, Tokyo and Dubai. A High Powered Expert Committee (HPEC) was appointed by the Ministry of Finance (MoF) to draft a report on making Mumbai an IFC. The Committee has done an in-depth analysis of the Indian financial sector and drawn up a road map for Mumbai to emerge as an IFC.
Whether Mumbai becomes an IFC or not, the report is worth reading for it offers a bird’s eye view of the Indian financial sector. Even though one may doubt the feasibility of some of the recommendations achieving fruition in the near future in India, given the political compulsions, one must appreciate the boldness and vision of the document. Covering not just the plan to make Mumbai an IFC, but reforms which are pertinent to the entire Indian financial sector, the HPEC Report envisages a phased development of the Mumbai International Financial Centre (MIFC). In the first phase (2007-2012), Mumbai connects India’s financial system to the world’s financial markets, when it will mimic what RFCs like Frankfurt or Tokyo do for their respective national economies. In the second phase (2012-2020), the HPEC recommends that Mumbai develop its capacity to join London, New York and Singapore as one of the premiere IFCs of the world.
Some experts ask whether India needs an IFC at all. Yes, says the study. The demand for financial services in India is already large and is expected to grow at a healthy pace. The market for high-end financial services like cross-border deals, mergers and acquisitions etc is growing exponentially. According to a study, India paid about USD 13 billion for these services in 2005. Unless Mumbai emerges as an IFC, overseas financial centres will cater to these service demands. Tata’s Corus deal was done not in India but in London; the fees went to London’s bankers.
The report observes that Mumbai has several advantages like high quality human capital, a large domestic demand for financial services and locational advantage in terms of time zones; plus, India is the current flavour in global economic discussions. The emergence in the last decade of the National Stock Exchange (NSE) and the Multi Commodity Exchange (MCX), which are of global standard, also holds out hope for India’s ability to compete globally in the financial sector. The report also lists the major weaknesses of our financial sector, including the lack of depth in the bond markets and linkages with currency derivatives, restrictive regulations and government ownership of financial institutions. It highlights lack of innovation in our financial sector which is partly due to lack of competition and also due to heavy regulation.
Some of the suggestions offered to rectify these shortcomings are realistic but some require much broader debate. Although the report argues for a single financial regulator, this does not seem to be a pre-requisite for creating a financial centre. It also talks about capital account convertibility, argues for opening up of the banking sector to foreign entities, and calls for the jettisoning of land use regulations like the Urban Land Control Regulations Act (ULCRA), which come under the state domain.
The HPEC recommends an overall move from a ‘rules-based regime’ to a ‘principles-based regime’. Financial entities are required to comply with the spirit of the law and not just the letter of the law. It also argues for withdrawal of the state from all financial institutions, which is a challenging task. Given the fact that only fifty percent of our population is covered by banking activity, the state needs to play a role for some more time in deepening and widening the financial sector to include larger segments of our population.
One of the recommendations of the HPEC is the formation of an International Financial Services Appellate Tribunal (IFSAT), covering all areas of finance. It also moots training for judges for specialised domain knowledge in finance. Irrespective of the MIFC idea, these are some of the long overdue second generation reforms which have been much talked about. Despite some steps like the Debt Recovery Tribunal and the SARFAESI Act, commercial banks have not shown significant recovery of non performing assets (NPAs) through the legal process. There is an urgent need for legal reforms on this front.
It is important to remember that the financial sector is part and parcel of the larger Indian economy. The global 21st century Indian expects certain standards of infrastructure and civic amenities. Efficient municipal services, effective police force and reduction of corruption in civic services are some of the basic things we need to focus on.
Political compulsions do not allow Mumbai to be carved out as a Union Territory. Public-private partnership (PPP) needs to be taken up in a big way to improve Mumbai’s infrastructure and amenities on a war footing.
The report is an excellent eye opener from the point of view of understanding the larger canvas and showing the huge gap between our desire and the reality of our financial sector. Even if some of the recommendations of the HPEC are implemented, it will go a long way towards improving our existing financial sector.
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