Sunday, 8 December 2013

The need for an International Finance Centre at Mumbai

1.         Introduction

India being a developing nation has a huge appetite for capital funds. Sectors such as infrastructure which pave way for development require heavy finances. It is projected that investment in the infrastructure sector during the 12thFive year plan would be to the tune of Rs. 40,99,240 crores or USD 1,025 billion, 50 per cent of which would have to come from the private sector[1]. It is necessary that India develops a financial market so as to fulfil these investment needs. Other than such financial requirements, to also harness economic development, India would require an International Finance Centre (IFC). An IFC would channelize finances not only for the domestic, but also to international projects as well. An IFC provides a platform for entities to raise large amounts of funds on an international front and not be limited by domestic borders. An IFC would be a one stop shop for all fund requirements, and a hub which would provide innovative financial solutions, along with a ready pool of investors and lucrative investment opportunities to one and all.  It would attract large investment banks, funds and securities firms to get established into the country and provide a range of services.  Out of many, Mumbai is an ideal candidate to provide a platform for an IFC. Mumbai has been a hub of commerce in India for more than a century. Two of India’s premier stock exchanges, a number of public and private banks, insurance companies and other financial intermediaries have their headquarters in Mumbai. Mumbai has been attracting a huge talent pool for the financial sector as being the financial capital of India from the nation and around the globe. Therefore Mumbai transforming into an IFC would be seen as a natural progression in the future. This article tries to analyse some of the major areas which need to be worked upon, to make Mumbai an IFC.

2.         Regulatory hurdles
Stringent approach in regulation would stifle innovations in financial products as seen in the west.   India needs to shift from a rule based regulatory mechanism to a principle based system of regulations. In a principle based regulation system the stress is laid on compliance of principles involved, rather than dictating the exact mode of compliance.  An example of this can be found in the Indian Contract Act, 1872. Although more than a century old, it still meets the need of modern business and the concepts mentioned therein are applicable even though technology has rapidly changed. Although regulatory bodies like Securities Exchange Board of India (SEBI) have started work in adopting principle based regulation system, a lot of ground still has to be covered.
A Single window clearance system should be adopted for regulatory approval rather than a fragmented system of regulations with multiple regulators. This would reduce the issue of conflict of interest amongst various regulators and provide a compressive picture of compliances to the investors. Also a common aspect seen in India is that regulators tend to adopt a traditional approach with regards to financial products, in the name of protecting the common household investor. Due to this approach, even the whole sale market players have to follow rigid regulations although they are professionals and well versed with the risks involved. Therefore the regulators should follow a separate policy approach towards these professional market players providing them greater flexibility in operations. A sector based approach needs to be adopted whereby regulations would regulate the business of the sector rather than the entity doing the business.
The entry and exist policies for entities in the financial sector currently in force, need a relook. The policy makers generally frown on the exit of companies from a given sector and generally tend to become over protective. In today’s competitive business world a timely exit would mean that wastage of valuable resource is prevented.
Finally one of the most important impetus required for turning Mumbai into an IFC, would be Full Capital (Rupee) Account Convertibility. In the alternative the IFC should be given special status of where transaction carried out would be fully convertible. There should also be a sovereign guarantee that the capital would be allowed to freely flow across transnational borders. This would increase foreign investor confidence and would attract a lot of funds in the Indian financial markets. These funds could be utilised to finance domestic as well as international projects. This would also reduce the cost of raising overseas loans for Indian Companies, and foreign funds would be easily availed in India itself.  A model of transparency and monitored approach is needed to see that fund utilisation is done in the optimal manner. Also a mechanism of common Know your customer (KYC) along with the strengthening of the Financial Action Task Force (FATF)[2]regime needs to be placed in India so as to counter the menace of money laundering and unaccounted receipts.

3.         Policy approach

For the year 2013, India as a whole ranked 173 on the World Bank ‘Doing Business’ ranking[3].  Therefore keeping this in mind, efforts should be made to make Mumbai an entrepreneur friendly city. Also the issue of unplanned development plagues India and Mumbai alike. A complete overhaul of the policy approach is needed and all government policy should be driven from the perspective of facilitating the operation of an International Financial centre. Urban planning should target the concept of common good of the public at large. For any revival of urban planning to take place in the pursuit of shared prosperity, four conditions must be met: (i) restoration of public confidence; (ii)repositioning of urban planning in decision making;(iii) deployment of the fullness of its functions across the five dimensions of shared prosperity; and (iv)support for these functions with adequate financing.[4]It is generally seen that urban planning is done with a view to satisfy the self interest groups rather than the common good of the society. It is necessary to undertake public consultation and opinion before the authorities venture into town planning and earmarking of projects.
A Business focused approach needs to be followed, and certain areas of the city should be earmarked only for commercial development thereby allowing no residential projects in that given area. A systematic approach towards town planning needs to be implemented on an urgent basis in Mumbai. This would include giving incentives for the setup of financial service sector based industry in the city. Also incentives should be provided to polluting and manufacturing sectors to shift base from the city limits to other hubs. An industrial belt is required to be setup at the outskirts of Mumbai so as free up resources for the financial services sector in the city.

4.         Incidental matters

A number of other aspects are necessary for attracting investments and developing an IFC, namely stable political scenario, low crime rates. Mumbai has a crime rate 177.3[5].  This when compared to the average of 295.1 all mega cities[6] in India, still provides a promising picture of Mumbai. The most urgent issue which needs to be address is the depleting state of infrastructure in Mumbai. With regards to road infrastructure within the city, in Mumbai only 11% of the land space is devoted to roads[7]. This is very low when compared to an average of 20–30% rate, common in US cities[8].It is necessary that Mumbai develops roads along with other low cost systems of mass transit. Along with the ambitious projects like Metro rail project and Monorail project, the authorities should concentrate on developing models such as bus rapid transport system and the waterways.

Another issue which needs to tackled, is the state of real estate in Mumbai. The prices of properties have sky rocketed making the cost of setting up businesses in Mumbai substantial. It is necessary Government tries to intervene and takes measures to control real estate prices and providing affordable commercial and housing properties in Mumbai. One such measure is the levy of additional property tax on tracks of land lying vacant in the city as the same would avoid speculative hoarding of land and could be an important source of financing for the Brihanmumbai Municipal Corporation (BMC).[9]It is necessary that the BMC be strengthen and given more powers in respect to finance so that it can function smoothly at the very ground level. A cue can be taken from Brazil which in 2001 passed a federal legislation known as the ‘City Statute’[10]which decentralised urban land management and empowers the Urban Local Body Governments.
5.         Conclusion

Although Mumbai has a lot of work to be done in this field, it is still a fore runner candidate for development of an IFC[11]. Mumbai as a city has a distinct identity and has always been the city of dreams and hope. Now in the near future Mumbai would have to transform itself to meet the aspirations of a growing economy. With the combined efforts of the Government and the private sector Mumbai can turn into a competitive IFC.

[1]Planning Commission, Government of India, Mid Term Appraisal for Eleventh Five Year Plan 2007-2012,
[2]World bank, Doing Business, See <> accessed on 7th April 2013
[3]FATF is an inter-governmental body established in 1989 by the Ministers of its Member country with an objective to promote an effective mechanism to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system; See <>accessed on 7th April 2013
[4]UN Habitat, State of the world’s cities 2012/2013: Prosperity of Cities
[5]National Crime Records Bureau, Report on Crime in India – 2011; See <>accessed on 7th April 2013; crime rate means number of IPC crimes per one lakh population
[6]Ibid; the term `Mega City’ here refers to cities having population of over 10 lakh (1 million); there 53 such cities have been considered by the 2011 report; See <>accessed on 7th April 2013
[7]Pucher,Peng, Mittal, Zhu and Korattyswaroopam ‘Urban transport trends and policies in China and India: Impacts of rapid Economic growth’, Transport Reviews, Vol. 27, No. 4, 379–410, July 2007
[8]World Bank, Cities on the Move: A World Bank Urban Transport Strategy Review, 2002
[9]Planning Commission’s 12thFive-year plan Steering committee on Urban Development & Management, Report of the Working Group on Financing Urban Infrastructure, October 2011
[10]Brazil Federal Law No. 10.257
[11]Mumbai has been ranked 66thby ’ The Global FinancialCentresIndex13’, March 2013


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