Full float needed to make Mumbai a financial hub

The idea may be to turn Mumbai into a regional financial hub on the lines of London, New York or Tokyo, but implementation of the plan will need a policy overhaul. A high-powered expert group on setting up an International Financial Centre in Mumbai has recommended that trading in new instruments be allowed for which it wants a currency trading exchange where the minimum transaction size is proposed to be fixed at around $225,000. There is also a suggestion to allow currency derivatives, which should be open to all players including FIIs. While it may be easy to push through some of the initiatives suggested by the expert group, officials themselves concede that getting a political green signal and securing regulatory clearances may be a tough task. Some of the policy prescriptions require faster implementation of earlier reform strategies. For instance, the committee has suggested that capital account convertibility (CAC) should be introduced by December 2008. The panel has argued that capital controls pose a high barrier to Indian financial firms offering services abroad, besides depriving them of potentially higher revenues. But despite two committees going into the CAC in the last decade, the government and RBI are reluctant to open up completely. The panel's report, which was made public on Monday, has suggested allowing wholesale asset management companies where the minimum size of customer funds is Rs 10 crore. There is also a suggestion to legislate a new statute — Financial Services Modernisation Act. Besides, it has proposed a regulatory set up with more powers vested with Sebi that would be akin to a common regulator for financial services, and has recommended that the government draw upon the law governing UK's Financial Services Authority. But at a time when the government is unable to reduce its stake in public sector banks, financial institutions and insurance companies below 51%, the committee has suggested that the Centre should exit from these state-run entities. According to the panel's roadmap, government should reduce its stake in PSU banks to under 49% by 2008-09 and cut it further to 33% in the following year and follow it up with 26% stake in 2010-11 and exit by 2015. And that's not all. The committee wants unrestricted entry of well-known global accounting and legal firms — something that the local players have resisted all these years — in the IFC. In fact, the pressure from local auditors and lawyers has meant that the government has offered a host of services for opening up in WTO negotiations barring these two. Similarly, at a time when the US and Singapore are cagey about allowing the likes of State Bank of India and ICICI Bank to set up more branches, the high-powered committee wants India to do away with all restrictions on allowing foreign banks to set up branches in India. It has also recommended a a financial system that is completely open to global participation subject to prudential regulations and fitness tests and wants the government to commit to these measures at the WTO. There is also a suggestion to lift curbs on Indian corporate houses to hold stakes in banks. RBI has resisted any move to allow companies to acquire large stakes in banks and has fixed a 10% ceiling to prevent corporates from gaining undue financial muscle. On allowing foreign investors in the stock markets, the committee wants Sebi and government to remove all restrictions on entry of hedge funds. There is also a recommendation to give greater play to FIIs in bond market.

SOURCE : THE TIMES OF INDIA