The High Powered Committee on Mumbai as International Financial Centre has made interesting recommendations, but it is difficult to say at this point if they are feasible politically and technically. For even as Mumbai has to become an IFC, India has also to be competitive, points out S.VENKITARAMANAN.

S. VENKITARAMANAN

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 are 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, stock 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.

One of the recommendations of the Committee concerns the opening of Indian bank ownership to foreigners. I am personally in favour of this so long as the condition of reciprocity — equal rights of Indians to own banks in the host countries — is observed.

Narrow goal

I have a bone to pick with the Committee on one of its recommendations — that financial institutions in India set up large-sized asset management companies, straddling mutual funds, insurance, banking and, perhaps, stock broking. While this is based on the argument of economies of scale and is valid to a limited extent, ultimately management has to be by segment, even in such a large institution. In particular, accounting has to be segment-wise.

I am reminded of the nightmarish problems of multi-tasking faced by universal banks combining insurance and banking. These are well-known. This suggestion has little relevance to Mumbai as an IFC.

One aspect the Committee refers to only tangentially is that of the dilemma of high capital flows leading to debilitating appreciation — the trilemma discussed in these columns last week while reviewing Arvind Subramaniam’s piece (see Business Line, July 9). But the Committee leaves it to the monetary authority and the Government to handle. It is more concerned with making Mumbai an IFC. Such a single-ended destination to a goal is a costly luxury in a practical political economy. While Mumbai has to be an IFC, India has also to be competitive. Both are goals that need to be achieved.

Ultimately, the report on Mumbai as an IFC does offer interesting but controversial insights. But its recommendations require to be studied meticulously. Perhaps, another Committee, equally high-powered, is what the doctor in New Delhi has ordered.

(This article was published in the Business Line print edition dated July 16, 2007)
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