Recently, the Confederation of Indian Industries (CII) organized a conference on 'Mumbai as an International Financial Centre' in Mumbai. This aspect has been engaging the attention of Bombay First for quite some years now. An initiative in this regard had also been taken by the organization. Accordingly, the CRISIL was commissioned to do a detailed study on this subject and it came out with a comprehensive report titled 'Mumbai as an International Financial Centre- A Roadmap'. There is apparently a renewed interest in operationalising the strategy underlying the creation of international financial operations in Mumbai. The latest EXIM policy, wherein the Special Economic Zones are given permission to undertake such activities gives credence to this concept. What does the creation of an International Financial Centre (IFC) involve? The CII points out the following key dimensions:
* A centre from which international financial business can be conducted profitably, easily and efficiently
* A centre with skilled management and intellectual talent covering finance and interdependent services such as legal and accounting, to provide multi-disciplined teams that facilitates large cross-border transactions in the shortest possible time-frames
* World competitive tax and regulatory regimes which attract foreign investment and offshore business flows
* A centre with deep, liquid and sophisticated capital markets
* A centre that can add significant value to financial services provided from it, through a workforce that can respond in an innovative manner to evolving business conditions
* A centre where business can be done both onshore and offshore in all areas of financial services; banking, insurance, superannuation and funds management, capital and equities markets
* A centre with the world's best communications and IT capacity and a plentiful, well-educated, multi-lingual workforce.
Financial centers can be normally classified according to their importance and the areas they are catering to: national centres for local requirements of the nation state; regional centres for a specific geographical region; and international centres for a host of financial services across the world. Different financial centres have followed divergent models to get to where they are today. Some models have been less successful than others. London, Singapore and Hong Kong have become big financial centers by leveraging their position as key trade centres. Another key driver for financial centers has been the requirement to serve a large and sophisticated market. New York is the prime example of such a centre.
Surely, international financial operations would confer some distinct benefits to the economy of Mumbai and the country at large. As per the CII, the importance of maintaining a credible and well-respected centre leads directly to their local economic benefits. Some important advantages flowing from IFC are as follows:
* Increased capital flows: IFC will attract global capital, which will give an opportunity to acquire sophisticated skills in its management. It will impart international experience to local firms on account of proximity to world-class competence.
* Employment potential: Much of this job creation is obviously going to be highly skill oriented. Experience also shows that IFCs also create jobs in the hinterland cities for back offices and ancillary services. In Hong Kong, international business employs more than 2,50,000 people in core financial functions of banking, asset management, insurance and related services, of which 74,000 are employed in international banking alone. In Singapore, financial services largely catering to offshore markets, accounted for 28% of new jobs in 1983-96.
* Government revenues: Currently half the government revenues in the Cayman Islands, and Jersey are derived from their offshore financial services sector. In Mauritius, global business activity accounts for over 25% of the country's GDP.
In order to strategize international financial operations, the CII has identified various necessary regulatory/institutional changes. Some of the major proposals are summarized below:
(a) Taxation:
* International practices which include exemptions from income and wealth taxes, capital gains tax on foreign sourced income and gains
* The 10-year Tax holiday to be extended to the export of services
* Exemption from service-tax on services provided abroad, and on services provided to entities in the IFCs from entities outside
* Lowering/abolition of stamp duties on transaction in the IFC
* No withholding of tax on dividend and interest income generated in the IFC
(b) Exchange Controls:
* Greater freedom to the movement of funds that belong to entities who are otherwise not subject to exchange control restrictions
* Free repatriation of capital for units in the IFC
* Companies incorporated in the IFC may be capitalized in any currency
(c)Banking:
* Creation of a separate category of licensed banks for offshore operations
* Such banks to conduct offshore business activities (foreign currency trading, syndicating foreign currency loans, issuing guarantees for forex exposures etc.)
* Foreign investment cap should be removed to allow 100% FDI
Given the latest EXIM policy initiatives, keen interest of Government of Maharashtra and efforts of various professional institutions, and in particular of Bombay First, there are now hopes that the dream of Mumbai as an IFC will soon become a reality!