An International Financial Centre in India: Easier said than done

Much is being said in media, political and administrative circles about a city in India becoming an International Financial Centre; with Chennai recently being added to the list. In this piece, Rajiv Rajendra speaks of the massive effort that it would take to move in that direction, and wonders if it might be more prudent to focus more effort on getting the basics right instead of pursuing a dream that sounds correct, but might be one that we do not fully understand.

As you read this article, there is a possibility of a syndicated loan being in inked in Hong Kong, a rights issue being planned in Singapore, a total return swap being executed in London or an energy derivative trade being structured in New York, even in these so called tough times. And contrary to being a victim of the recent turmoil in the global capital markets, International Financial Centres have, with exceptions, emerged stronger, catalyzing some of the recovery that we are seeing around us. The banker, the favourite punching bag of the world in general after the current set of events, might be the one that was responsible for some of these events.

So what is it about the locations where these transactions are taking place? They are concentrated largely around a few locations, International Financial Centres or IFCs, in Asia, Europe and the Americas. Evolving over the years, these cities are now geared to spearhead the financial world into a new phase of development. We in India do not need surveys to tell us that we are not close enough to enter the league of these cities. However, the chatter on India creating its own IFC across the bureaucracy, politics, media and the corporate sector is increasing, with demands from some areas coming in strongly.

Mumbai, so far the de facto capital of monetary India, was obviously the frontrunner in the choice of the mentioned cities. Of late, Chennai has also joined the bandwagon, with rumours of land being allocated for a Financial Park so that global banks may open up back-office and research centres. Unfortunately, these measures might not be sufficient in themselves, and it is disappointing to hear the mention of the transformation of a large commercial city into an IFC, a global presence, in the same breath as availability of real estate, and no further tangible steps in that direction.

We must first ask ourselves, what does it take for a city to be a successful International Financial Centre? With global taxation and focus on money flows and disclosure, the island tax haven model is fast losing relevance, and that leaves us with the other large model of being a market where global or at least regional players have access to invest and access funds and financial products. Two of the prominent studies on related subjects are the Worldwide Centres of Commerce Index published by MasterCard Worldwide and the Global Financial Centres Index published by the City of London Corporation.  The themes, classified differently across various studies, can be broadly categorized as:

1. People

A global workforce needs to be employed, where human capital is selected by talent and ability, not by nationality, race and gender. There will be more employment created for Indians, but Indians will not, and should not be the only people employed. A global workforce has many advantages. Your writer, having had the opportunity to work across continents and with people from over thirty nationalities, is one of the firm believers that a global workforce, especially in an intelligence-heavy environment like finance, can only enrich co-workers, the city and the country.

2. Quality of Life

Choice of place of stay and work is becoming a decision-making factor with increasing importance for a nomadic workforce. Why will great talent come to a place to work? Once the work day is over, what do they do? Where can they live? What keeps the family occupied on weekends? How will their children develop during their stay? Entertainment, arts, lifestyle, dining, urban infrastructure, housing, safety and security, education, weekend getaways, flight connectivity are all some very important aspects that would determine attractiveness to the right workforce quality.

3.     Market Participants

Participants, largely Investors, Issuers, Market Institutions and Regulators, are critical. Investors, firms and individuals, invest their money; as markets like Singapore and Hong Kong have shown, it is a necessity to attract international investors; a local pool is fine, but access to global money cannot be compromised. Issuers, or firms that use the resources that investors or sellers put in; across debt, equity and other asset classes. An army of Intermediaries, Banks, Funds, Brokers, Insurance firms, backup infrastructure of accountants, lawyers and operations personnel will help to ensure a vibrant market and smooth operations. A perception of relative safety compared to other markets is as important, and a set of regulators who maintain the fine balance between control and freedom; the ideal watchdog mentality that trades off between a tight enough leash to ensure things do not get out of hand while providing players with flexibility to innovate, engineer and provide cutting edge financial services; the ability of those who have the financial ability and understanding to undertake financial transactions and their associated risks and benefits, while having enough barriers in place to discourage those who do not fit the criteria to abstain.

4.     Market Scope

The scope of the market would broadly comprise of depth and liquidity (markets being deep enough and of long enough duration to sustain cycles), product availability (investment products, derivatives for hedging and speculation), asset classes (equity, commodity, credit, bonds, rates, foreign exchange) and infrastructure (exchanges, ability to smoothly execute fund flows and execute transactions with maximum automation and minimal but watertight documentation and paperwork).

5. Legal, Regulatory and Business environment

The Business environment is determined by aspects like how easy it is to do business, what is the procedure and timeframe to start a business and conduct operations on a daily basis, the taxation and duty structure (how tax efficient the country is for both the corporate and the employee), the labour law environment  and degree of corruption. On the Regulatory side, approvals and speed of paperwork across various aspects, including free convertibility and flow of money, and the level of self-monitoring would be important. Finally, a strong, time-tested and robust legal infrastructure becomes critical – a strong legal system, its efficiency and transparency, arbitration and a proven track record of clean and administered justice.

Whom is India competing against: Dubai? Singapore? Hong Kong? London? New York? The country need to identify the specific locations and the gap that we need to fill, and also be cognizant that these cities have a massive head start across all these categories, and are working overtime to ensure that they continue to move forward, competing with each other. They are making rapid improvements in their attractiveness to the global workforce from both personal and professional aspects.

Should India rather focus limited resources, financial, administrative and human on developing infrastructure domestically? There is enough monetary capital available in India; and enough brainpower. There is a huge appetite for this money as well, across all strata of society. Perhaps some of the effort can be put in towards ensuring that investors in India have enough opportunities to invest domestically by opening out the local market, making it stronger, improving the legal system and infrastructure; increasing financial literacy and inclusion.

As a country, India is gifted with a lot of firepower, and might as well use it for focussed precision hitting of identified targets; not resort to carpet bombing in the dark with the hope that something will hit.