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MUMBAI:MUMBAI: An International Financial Centre?An International Financial Centre?

[MIFC][MIFC]

High Powered Expert Committee (HPEC) ReportHigh Powered Expert Committee (HPEC) Report

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1. Does India Need an IFC? -11. Does India Need an IFC? -1

From Now On – Absolutely!From Now On – Absolutely! WHY?WHY? Because of India’s:Because of India’s:

Inherent Size and GrowthInherent Size and Growth Trade, Investment and GlobalisationTrade, Investment and Globalisation Enormous Infra-Investment NeedsEnormous Infra-Investment Needs Rapidly Emerging Global SignificanceRapidly Emerging Global Significance Indian Economy: 4Indian Economy: 4thth Largest by 2025 Largest by 2025

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1. Does India Need an IFC? - 21. Does India Need an IFC? - 2

Export Revenue Export Revenue GrowthGrowth Export Services Export Services DiversificationDiversification B-o-P Considerations: Why Import B-o-P Considerations: Why Import

IFS?IFS? IFS Exports will automatically IFS Exports will automatically

improve quality of Domestic improve quality of Domestic Financial ServicesFinancial Services

India’s Next Stages of Growth & India’s Next Stages of Growth & Globalisation will be highly IFS Globalisation will be highly IFS reliantreliant

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2. What kind of IFC?2. What kind of IFC? A.A. Global Global - GFC? <<<< 2- GFC? <<<< 2 B.B. Regional Regional - RFC?- RFC? C.C. National National - IFC? - IFC?

>>>> 1>>>> 1 D. D. Offshore Offshore - OFC?- OFC? E.E. Niche Niche - NFC?- NFC? Most Likely Path for MumbaiMumbai:

Phase 1 – IFC (C) 2008-2012 Phase 2 - GFC (A) 2013-2020

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3. Inherent Logic of M-IFC3. Inherent Logic of M-IFC

An Indian IFC (in Mumbai) must be:

Rooted in the domestic financial system Serve the hinterland + external IFS markets Full-fledged and NOT just an ‘OFC-in-SEZ’ Regulated under a unified DFS+IFS regime World Class in capability, integrity, width,

depth, full range of IFS services and market liquidity Properly integrated NOT artificially segmented Able to evolve toward LON/NY capabilities

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4.1 Implications of this Logic for:4.1 Implications of this Logic for:

Macroeconomic Policy & Management Financial System Regulation Approach Financial Market Structure/Integration Current Universe of Financial Firms Critical Support Systems for IFS: i.e.

Legal Support of Global Quality Standards World Class Accounting/Auditing Support Cutting Edge ICT Hardware and Software

Support World Class Business Consulting Systems High-Powered Applied Financial Research

Support

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4.2 Implications of this Logic for:4.2 Implications of this Logic for:

Social Institutional (Soft) Infrastructure Physical (Hard) Infrastructure Mechanisms for Transparency Mechanisms for Accountability Standards of Capability & Governance

Corporate Governance & Compliance Public: Centre, State, Municipal, PSUs Judicial System & Law-Order Enforcement Political/Legislative System

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5.1 What are IFS?5.1 What are IFS?

Fund RaisingFund Raising for all types of entities: for all types of entities: public, private, mixed, multilateral, voluntarypublic, private, mixed, multilateral, voluntary

Fund/Asset ManagementFund/Asset Management Private Wealth ManagementPrivate Wealth Management Corporate Treasury ManagementCorporate Treasury Management Diversified Risk ManagementDiversified Risk Management Exchange TradingExchange Trading of all kinds of EBCD of all kinds of EBCD

instruments and variants instruments and variants

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5.2 What are IFS?5.2 What are IFS?

Global Transfer Pricing Global Tax Management Complex Financial Engineering Cross Border M&A Complex Public-Private

Partnerships

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6.1 Can India Provide IFS? - Pros6.1 Can India Provide IFS? - Pros

More easily than most countries. Why?

Human Resources & Endowments Constitutional Basis for Rule of Law Established Capital Markets w/Potential Lead in ICT Service Provision, BPO/KPO Common Use of English Global ‘Mindshare’ Location: i.e. Geography & Time Zone 21st Century is the ASIAN Century India ideally placed to serve Asia’s IFS

needs

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6.2 Can India Provide IFS? – Cons 16.2 Can India Provide IFS? – Cons 1

But there are significant impediments:

Financial System Regulatory Regime Regulatory Architecture for DFS & IFS Deep Macroeconomic Dysfunctionalities Financial Market Deficits: Absent-BCD Financial Firm Shortcomings resulting in: Absence of Scale/Scope Economies Absence of Sufficient Competition Absence of Financial Innovation

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6.3 Can India Provide IFS? – Cons 26.3 Can India Provide IFS? – Cons 2

Domestic Skill Sets are ‘Behind the Curve’ Legal & IFS Support System Deficiencies Political & Administrative Weaknesses Governance Deficits: Centre, State, City Physical & Social Infrastructure Deficits State as Owner of a Large Part of the DFS Resultant Conflicts-of-Interest in Roles Perceptions of Disadvantage for Others

All figures in nominal USD termsAll figures in nominal USD terms 1313

7. Illustrative Dimensions of IFS7. Illustrative Dimensions of IFS

YearYear 20052005 20102010 20152015 20202020World OutputWorld Output $44.0 T.$44.0 T. $63.1 T.$63.1 T. $ 88.6 T.$ 88.6 T. $ 122 T.$ 122 T.

Global IFS Rev.Global IFS Rev. $ 1.1 T.$ 1.1 T. $ 1.9 T.$ 1.9 T. $ 3.6 T.$ 3.6 T. $ 6.9 T.$ 6.9 T.

India GNIIndia GNI $ 740 B.$ 740 B. $ 1.4 T. $ 1.4 T. $ 2.8 T.$ 2.8 T. $ 5.5 T.$ 5.5 T.

B-o-P FlowsB-o-P Flows $ 658 B.$ 658 B. $ 1.4 T.$ 1.4 T. $ 3.4 T.$ 3.4 T. $ 6.8 T. $ 6.8 T.

IFS Revenues IFS Revenues $ 13.1 B.$ 13.1 B. $ 26.1 $ 26.1 B.B.

$ 62.8 B.$ 62.8 B. $ 150+ B$ 150+ B

Indian MarketIndian Market $ 13.14 B.$ 13.14 B. $ 23.61 B.$ 23.61 B. $ 47.80 B.$ 47.80 B. $ 100+ B.$ 100+ B.

Other MarketsOther Markets $ 0.00 B.$ 0.00 B. $ 3.50 B.$ 3.50 B. $ 15.00 B.$ 15.00 B. $ 50+ B.$ 50+ B.

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8. A Glimpse of the Future8. A Glimpse of the Future

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9. Removing Policy Impediments9. Removing Policy Impediments

A.A. Market DeficienciesMarket Deficiencies Fill Gaps in the BCD NexusFill Gaps in the BCD Nexus Bonds, Currencies, Full Range of Bonds, Currencies, Full Range of

DerivativesDerivatives Strengthen Institutional Investor UniverseStrengthen Institutional Investor Universe Rectify Weaknesses in Banking SystemRectify Weaknesses in Banking System Foster Strong Indian Foster Strong Indian InvestmentInvestment Banks Banks Strengthen Insurance and ReinsuranceStrengthen Insurance and Reinsurance Globalise Exchanges and Capital MarketsGlobalise Exchanges and Capital Markets Restructure Securities Brokerage IndustryRestructure Securities Brokerage Industry Encourage Wholesale Asset ManagementEncourage Wholesale Asset Management

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9A. What is the BCD Nexus?9A. What is the BCD Nexus?

A liquid, efficient A liquid, efficient sovereignsovereign Bond MarketBond Market with with arbitrage free INR yield-curve for maturity arbitrage free INR yield-curve for maturity spectrumspectrum

A wide range of A wide range of derivatives on INR interest ratesderivatives on INR interest rates to enable investors to hedge against interest rate to enable investors to hedge against interest rate shiftsshifts

A liquid spot market for INR A liquid spot market for INR corporatecorporate bonds bonds across the full maturity spectrumacross the full maturity spectrum

Credit derivativesCredit derivatives on credit spreads and credit on credit spreads and credit events to enable credit default risk to be managedevents to enable credit default risk to be managed

A liquid and efficient A liquid and efficient currency trading marketcurrency trading market for for INR vs. major globally traded currenciesINR vs. major globally traded currencies

A full range of A full range of currency derivativescurrency derivatives (futures, (futures, options, swaps, swaptions, collars and caps)options, swaps, swaptions, collars and caps)

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9B. The BCD Nexus: A Graphic9B. The BCD Nexus: A Graphic

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9.1 Removing Policy Impediments9.1 Removing Policy Impediments

B. Macroeconomic Policy TwistsB. Macroeconomic Policy Twists

Reduce Consolidated Fiscal Deficits Reduce Public Debt/GDP Ratio Finance Public Debt Differently Open INR-GoI Bonds to Global Investors Modernise/Shift Public Debt Management Monetary Policy: Focus on Inflation Target Eliminate Regulatory Conflicts-of-Interest Accelerate Schedule for Full Convertibility

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9.2 What Risks Does Convertibility Entail?9.2 What Risks Does Convertibility Entail?

Risks associated with Capital INFLOWSRisks associated with Capital INFLOWS Short-Term Speculative Surges that are destabilisingShort-Term Speculative Surges that are destabilising Loss of Control over management of the Exchange Loss of Control over management of the Exchange

RateRate Domestic Money Supply Impact and Sterilisation RisksDomestic Money Supply Impact and Sterilisation Risks Asset Price Inflation caused by speculative investment Asset Price Inflation caused by speculative investment Risks of increased foreign ownership of ‘Indian’ assetsRisks of increased foreign ownership of ‘Indian’ assets Risk of foreign preferences driving macro-economyRisk of foreign preferences driving macro-economy

Risks associated with Capital OUTFLOWSRisks associated with Capital OUTFLOWS Destabilising outflow surge in response to policy shifts Destabilising outflow surge in response to policy shifts

or to changed market expectationsor to changed market expectations Destabilising sudden outflows caused by external Destabilising sudden outflows caused by external

eventsevents Sudden unanticipated loss of investment and reservesSudden unanticipated loss of investment and reserves Collapse of prices in securities or property marketsCollapse of prices in securities or property markets Triggering of internal and external payments crisisTriggering of internal and external payments crisis

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9.3 Removing Policy Impediments9.3 Removing Policy Impediments

C. Financial Regime GovernanceC. Financial Regime Governance FRG ‘intrinsic’ to financial service/product Extant Regulatory/Ownership Regime:

Fosters fragmentation of market segments Re-arranges markets to suit regulators Discourages Competition in/across Segments Impedes Service/Product Innovation Creates Cost-Inefficiencies and Illiquidity Prevents Scale Economies being realised Discourages Market-driven System Evolution

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10.1 Reforming Financial Regulatory & Governance 10.1 Reforming Financial Regulatory & Governance RegimeRegime

Shift from Rules-based Regulation to Principles-Based Regulation Permit use of apex ‘holding companies’

to: Create Indian Financial Conglomerates Remove artificial barriers between various

financial market segments Focus Attention of Central Bank on

Monetary Policy ONLY

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10.2 Reforming Financial Regulatory & 10.2 Reforming Financial Regulatory & Governance RegimeGovernance Regime

Create Separate Banking Regulator Combine SEBI and Commodities Regulator Keep Pensions and Insurance Regulators Encourage Financial Regulatory System to

move toward fusion with a Single Regulator

Shift from Entity to Domain Regulation Strengthen Legal System via IFSAT

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11. Tax Policy for an IFC11. Tax Policy for an IFC

No Need for MIFC to be a Tax HavenNo Need for MIFC to be a Tax Haven No Need for Tax Exemptions or IncentivesNo Need for Tax Exemptions or Incentives No Need to extend SEZ Tax Treatment to IFCNo Need to extend SEZ Tax Treatment to IFC But Taxes on IFS must be But Taxes on IFS must be

sensible/competitivesensible/competitive Low-Competitive Income Taxes on IFS Low-Competitive Income Taxes on IFS

ProvidersProviders No Capital Gains Taxes on IFS (or DFS)No Capital Gains Taxes on IFS (or DFS) No Transactions or Turnover Taxes on No Transactions or Turnover Taxes on

FinanceFinance Application of GST to Financial ServicesApplication of GST to Financial Services GST/VAT to be Zero-Rated for IFS ExportsGST/VAT to be Zero-Rated for IFS Exports

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12. Mumbai’s Physical Infrastructure12. Mumbai’s Physical Infrastructure

City’s Infrastructure Deficits are Serious/CriticalCity’s Infrastructure Deficits are Serious/Critical To be an IFC: Mumbai needs to be 1To be an IFC: Mumbai needs to be 1stst world city world city World Class Power Supply – stable, reliableWorld Class Power Supply – stable, reliable Transport Linkages with rest of India & WorldTransport Linkages with rest of India & World Urban Transport- Mass Transit, Road/Rail/CoastUrban Transport- Mass Transit, Road/Rail/Coast Water Supply for Residential & Commercial UseWater Supply for Residential & Commercial Use Sewerage & Liquid/Solid Waste Disposal NeedsSewerage & Liquid/Solid Waste Disposal Needs Massive Revamp of Drainage & Flood ControlMassive Revamp of Drainage & Flood Control Telecommunications: land, cellular, broadbandTelecommunications: land, cellular, broadband Investment in all much larger than envisagedInvestment in all much larger than envisaged World Class Project Management & ExecutionWorld Class Project Management & Execution

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13. Mumbai’s Social Infrastructure13. Mumbai’s Social Infrastructure

World Class Social Infrastructure Needed in:World Class Social Infrastructure Needed in:

Healthcare Facilities of all kindsHealthcare Facilities of all kinds Education & Vocational Training across board Education & Vocational Training across board Specific EVT Facilities for Financial SkillsSpecific EVT Facilities for Financial Skills Adequate Range of Civic OrganisationsAdequate Range of Civic Organisations Sports/Recreational Facilities of world standardSports/Recreational Facilities of world standard Cultural Facilities catering to Global tastesCultural Facilities catering to Global tastes Media & Entertainment facilities Media & Entertainment facilities Global Range of hotels and restaurantsGlobal Range of hotels and restaurants Facilities catering to large expatriate populationFacilities catering to large expatriate population User-friendly state and city governmentsUser-friendly state and city governments

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14. Mumbai’s Governance14. Mumbai’s Governance

Institutional Arrangements for City Governance are:

Inappropriate. Inadequate. Need Revamp City’s Governance must be independent of State City’s Management needs to be autonomous,

transparent and accountable to City residents Rural electoral influences on central/state

resource allocation to City need to be moderated

Better co-ordination of central, state and city resources allocated to urban infrastructure

Political, Administrative and ‘Popular’ Ethos needs to welcome and embrace ‘foreigners’ as part of Mumbai’s own HR base

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15. HPEC Recommendations15. HPEC Recommendations

48 Ambitious but Clear Recommendations48 Ambitious but Clear Recommendations Along with a further 23 Sub-RecommendationsAlong with a further 23 Sub-Recommendations Clear and Ambitious Timelines for eachClear and Ambitious Timelines for each Together they constitute a specific Road-MapTogether they constitute a specific Road-Map HPEC asked to opine on what to do to create IFCHPEC asked to opine on what to do to create IFC That has been done as comprehensively as That has been done as comprehensively as

possiblepossible It is now up to Policy-Makers to DecideIt is now up to Policy-Makers to Decide Tough Political Economy Constraints on ActionTough Political Economy Constraints on Action But one way or another an IFC will emergeBut one way or another an IFC will emerge Question: Will it be efficient and competitive or a Question: Will it be efficient and competitive or a

“meddle-and-muddle” mutant?“meddle-and-muddle” mutant?