Mumbai's International Finance Centre: Part I and Part II

By R.N.Bhaskar

October 2007 (published in the DNA).

The MIFC story: Part I

The MIFC story: Part II

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The MIFC story: Part I

“Given the current exchange rate, India is a trillion dollar economy. outflows and inflows together account for nearly 106 per cent of the GDP. As the economy becomes more open and trade intensity increases, giant financial flows will be intermediated in India. India is a purchaser of international financial services. A recent report has estimated the value of these services at US$ 13 billion a year and has concluded that this will rise to US$ 48 billion by the year 2015. While India will continue to be a purchaser of financial services, we believe that there is an opportunity for India to become a provider of financial services as well. It is, therefore, our intention to make Mumbai an International Financial Centre. We commissioned a report for this purpose.”

-- Excerpt from the speech of Union Finance Minister P. Chidambaram at the ICICI Securities Annual Investor Conference in New York on October 18, 2007:-

Many who heard the finance minister make these remarks in New York, and applauded, must not have heard the finance minister speak on the same subject six months ago. On 23 April, 2007, at a function in Mumbai, Chidambaram spoke at length on the report which tried to make a very strong pitch for Mumbai (hence India) as an International Finance Centre. The report – authored by Vijay Kelkar and Brooks Entwistle – came into the public domain on April 3, 2007.

In his address to the gathering in Mumbai, the finance minister had then cautioned the audience that notwithstanding the recommendations of the Kelkar and Entwistle committee that had authored the report, he had serious reservations about Mumbai becoming an International Finance Centre (IFC).

According to him his reservations were on account of fears that not all political parties were willing to embrace a high rate of economic growth. He was possibly referring to the stand of the Leftist parties who had shown great opposition to the privatization of public sector units and foreign investments.

A second objection voiced by the minister was that in order to make Mumbai an IFC was that it required several changes to be made in matters relating to the governance of activities in the financial sector. First, it required the Reserve Bank of India to be free from all other regulatory functions except ensuring that inflation did not go out of control. the manner in which the reserve Bank of India. It would require convertibility on capital account to be introduced as well. Chidambaram had expressed fears that such changes could not be introduced very soon in India.

A third reservation he expressed related to the governance of Mumbai itself. “It is not what powers Mumbai has, but what kind of governance structures Mumbai will have . . . for good houses, schools, drinking water…energy…roads and law and order,” he stated. He said that such issues could not be swept under the carpet, and that Mumbai had also “acquired an odious reputation that it is under the influence of not over-the-ground elements”.

While Chidambaram did express hope that some day the plans outlined in the Mumbai International Finance Centre report would come to pass, his reservations made it abundantly clear that none of these would happen soon, more particularly in a city like Mumbai where governance was a big question mark.

Then why did the Union finance minister make quite the opposite observations in New York? Why then did he make an unequivocal statement that is his “intention to make Mumbai an International Financial Centre”?

Observers are a bit perplexed. Was it to play to the gallery in New York? Or was it because he was aware of how the state government of Gujarat had quietly stolen a march over Maharashtra in starting its own version of an International Finance City.

It may be recalled how, on 28 June, just two months after Chidambaram’s Mumbai talk, Gujarat unveiled plans of opening the Gujarat International Finance Tech-city (quaintly acronymed GIFT) as the largest International Finance Service (IFS) centres in the world. It would be located on a 500-acre development project near Gandhinagar, on the banks of the river Sabarmati, at an investment outlay of approximately Rs.24,500 crore (US$ 6 billion). Unlike many projects announced by both the centre and Maharashtra, the Gujarat government has already allocated land for this project, and has witnessed the signing of MoUs with Kotak Bank, Chescor and IL&FS each expressing a willingness to take up at least one million square feet of office space in GIFT. The project is expected to become fully functional by 2012. If all goes well, the IFS sector alone could result in 9 million jobs and contribution to GDP of an additional US$ 385 billion by 2020. More about this project will be unveiled in second part of this article.

Could Gujarat’s plans have compelled the finance minister to assure the world that the Mumbai International Finance Centre concept was still being actively pursued?

In any case, there are sceptics who point out that – except for Dubai – no international financial centre sponsored by the government has ever come up anywhere in the world. They also point out that unless the issue of speedy and effective dispute resolution is settled, India cannot have an IFC. At best it can have an International Financial Services Centre – on the lines that Gujarat has proposed. They point out how even the 1992 Harshad Mehta case continues to drag along in the courts – even after appointing a special court to resolve the issue. Financial disputes need to be resolved within hours, not years or decades!

What then was the Union Finance Minister talking about in New York?

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The MIFC story: Part II

Gujarat’s GIFT – a challenge to Mumbai?

On 28 June, just two months after P.Chidambaram, Union Finance Minister unveiled plans relating to Mumbai’s potential for becoming an International Financial Centre (IFC), Gujarat unveiled plans of opening its Gujarat International Finance Tech-city (quaintly acronymed GIFT) as the largest International Finance Service (IFS) centre in the world. Instead of dealing with cross-border finances, it would look at outsourcing finances and local trade.

It appeared a more pragmatic approach to a sector that will always be bedevilled by the creaking dispute resolution machinery India has. The reluctance of the government to appoint more judges and to help clear the backlog of cases has hobbled India’s growth. It has pushed up the cost of doing business in India, and has severely restricted the growth of financial services in the country. After all, how can financial services blossom if creditors cannot even take recourse to attaching mortgaged goods in the event of a default in repayments? Obviously, Gujarat did not believe that India would be in a position to host an IFC. That could explain why it opted for an IFS instead.

Unlike Mumbai, the plans were backed with concrete actions. Its location has been finalized -- on a 500-acre development project near Gandhinagar, on the banks of the river Sabarmati. Its investment outlay has been pegged at approximately Rs.24,500 crore (US$ 6 billion). Unlike many projects announced by both the centre and Maharashtra, the Gujarat government has already allocated land for this project, and has witnessed the signing of MoUs with Kotak Bank, Chescor and IL&FS each expressing a willingness to take up at least one million square feet of office space in GIFT. The project is expected to become fully functional by 2012. If all goes well, the IFS sector alone could result in 9 million jobs and contribution to GDP of an additional US$ 385 billion by 2020.

The sheer scale and size of the project can be best understood when one compares it with the best financial service centres in the world (see table 1):

Table 1: Comparing GIFT with the best

Equally staggering are the plans of further development that is planned to make GIFT the hub of activity surrounded by model townships (see table 2)

Table 2: The full picture

Components	Area (in acres)
GIFT	500
Knowledge City	2,500
Integrated Township	12,963
Integrated Township	10,683
Total	26,646

The project, as outlined, is to have two parts. One would be the Domestic Tariff Area (DTA) which would account for 250 acres, and the other a Special Economic Zone (SEZ) for which an application has been made by the Gujarat Finance and City Development Company (GFCDC) to the Union government for formal approval. Significantly, to make the SEZ part of the finance city more attractive, the government has also mooted availability of liquor in this city.

The DTA part of GIFT will have the Domestic financial district, Domestic techno park, Fin/tech services (Export oriented undertakings) park, Domestic markets zone, and Domestic utilities.

The SEZ part of the project is to be further divided into two parts – the processing areas and the non-processing areas. The processing areas of the SEZ would include International Financial Service Centre (IFSC), International Techno Park, STPI Units – Technology (STPI being an acronym for Software Technology Parks of India), International Market Zone, Exchanges, Service Units, International Education Zone

The Non-processing areas of the SEZ would have the following: Utilities, Integrated townships, Entertainment zone, Hotel/convention centre, Shopping malls, Health services and Schooling

Broadly speaking, five types of businesses have been targetted in phases:

Global Business Process Outsourcing (BPO) hub for financial services: The Gujarat government believes GIFT will be the preferred off-shoring location for global financial services players. Currently, some banks have opted for territories located in Tamil Nadu in South India (Citibank has moved its global backoffice operations to that place) or at Gurgaon in North India (where GE has moved its backoffice operations through another associate BPO company). Gujaratis believe that their home state could be the next big hub for all financial services partly because the people of Gujarat have traditionally shown a natural inclination towards finance and commerce, and also because of the infrastructure that is sought to be created at GIFT which, in turn, could further spur the creation of IFS related activities at GIFT.

Operations hub for domestic financial services: The Gujarat state government is confident that it could make GIFT the centralized hub for mid-office and back-office related activities for domestic financial services. With the surge in banking and insurance and a steep increase in consumer financing, backoffice operations for purely domestic business is also likely to grow exponentially. And that is where GIFT hopes to make a mark.

Global IT hub for financial services: A great deal of emphasis is being paid to the development of the IT infrastructure at GIFT. It could account for almost one-third of the total financial outlay (please see the box on ICT). This, when implemented could make it one of the most work-friendly environments to live in.

Global R&D hub for emerging sectors: With the gathering of the best of talent in GIFT and its surroundings, this place could become the preferred R&D centre for industry. This is likely to be more relevant to the pharmaceutical sector where Gujarat has a distinct lead. In fact, even today, some of the biggest pharmaceutical players are headquartered in Gujarat, and the state is already the country’s centre for industries related to chemicals, super specialty chemicals and petrochemicals.

Financial centre for select product markets: GIFT hopes to emerge as an integrated financial centre dealing with the full set of financial services products including capital markets and trading. However, this may require some changes in government policy, as full convertibility on the current and capital accounts would be required to be in place before these businesses could opt for any place in India as their operational hub.