Bombay: A Centre for International Finance?
I watched the international media elaborately indulge in polite euphemisms as Hong Kong went under the iron curtain. It was hard to appreciate the celebrations for a transition into a police state. Business interests were certainly part of it - I was not surprised when the commentator from Far East Economic Review was "quite confident" that everything would be okay. Far East Economic Review is published from Hong Kong, it will now be using "voluntary censorship", and now needs to be in the good books of China.
Everyone who is invested in Hong Kong needs to believe that the dictatorship will somehow be sufficiently imbued with the liberal ethos to allow a modern society to flourish, and allow Hong Kong to continue to be a centre of international business and finance.
It is hard to visualise how a dictatorship can be hospitable to the energy, innovation and openness which feeds the modern economy. If these fears prove well-founded, Hong Kong will be significantly weakened as a centre for international finance. Can Bombay seize this opportunity to establish itself in this role? With convertibility on the horizon, we need no longer think in an India-centric way about the financial industry that is shaping up in Bombay. Convertibility brings competition for this industry, so that components which are not internationally competitive will become extinct. Convertibility also admits foreign investors and issuers as users of the services of Indian markets and intermediaries.
When we look at the great financial centres of the world - Chicago, New York, London, Singapore, Hong Kong (until last week) - we see a complex web of skills, institutions and infrastructure coming together to generate a hotbed of innovation and market liquidity. This attracts investors and companies from all parts of the world. It brings enormous revenues into these cities, in the form of fees for listing, brokerage, transactions, funds management, advisory, research services and legal-tax-accounting services.
How are we placed in terms of the skills required of a centre of international finance? What is needed here is a confluence of four kinds of human skills:
- - people who have risk-taking abilities, and can identify mispriced assets in realtime,
- - people who are honest and efficient, and run exchanges, market regulation, law-enforcement, etc.
- - people who invent new instruments, use modern financial economics, do research, price derivatives, etc.
- - people who can wield the most modern computer and communications technology in implementing the financial industry in a way which avoids the pre-technological styles of functioning which are common in the worldwide financial industry.
As I look around me in India, I see an abundance of these four kinds of skills. We do have many failures, in terms of not plugging in the right people for the right jobs, but the underlying human resources in India are quite strong in each of these areas. This gives me a sense that Bombay does have an opportunity to be a centre for international finance: a place where foreign companies and investors come in order to raise capital and buy a whole range of financial services ranging from secondary market trading to research.
Human skills do not immediately yield a well functioning financial system. Institutional development is a complex matter. In India we have one remarkable success story in the transformation of the equity market. As of 1993, the securities industry in India would have been considered primitive by world standards: it was then steeped in floor-based trading, the dangerous leverage and manipulative possibilities that went with badla, the regular occurence of payments crises and paper-based settlement. The securities industry as of then had little competitive strength when compared with the financial markets of New York and Singapore.
Today, just four years later, the picture has been substantially altered. India has progressed through online trading and clearing corporation into depository and rolling settlement in a shorter time than most other countries. The modern securities industry in India has the advantages that come with a late start, and compares well with many OECD countries. The use of computerised order-matching (instead of market makers) and the use of dematerialisation at the depository (instead of immobilisation) are examples of situations where the securities industry in India is ahead of the New York Stock Exchange, the London Stock Exchange, etc.
The agenda for further institutional development in India's financial system today, in reaching for international competitiveness, may be defined as six areas:
- A fresh approach to commercial law, both in the drafting of relevant acts and in the implementation,
- A payments system which works 24 hours and is connected to the major institutions of the securities industry, both in India and abroad,
- Modern trading practises in the debt market,
- The development of "margin trading" facilities for borrowed funds and securities,
- Derivatives markets in the five major areas of equity, debt, foreign exchange, commodities and real estate,
- Superior methods for conducting primary issues, such as auctions and bookbuilding.
Policy initiatives in these areas are often mired in destructive political conflicts and in poor execution. These objectives are, however, the agenda for reforms in the financial sector for the coming two years.
A major hurdle for Bombay as a financial centre lies in transport and communications. The air and road transport facilities connecting into Bombay are primitive by world standards.
Restrictions by the DOT are proving to be a critical hurdle in the way of the development of the financial sector. As observed in the report of the Dave Committee on Infrastructure for the Capital Markets, the two most-needed elements of reform are (a) the abolition of DOT's "closed user group" policy and (b) policy reforms designed at ensuring that Internet services are available to companies in India at international rates (i.e. 2 Mb/s lines at Rs.7 lakh a year).
The Internet is a fascinating example of the strengths of India vis-a-vis China. The Internet is shaping up to become the common data highway for the worldwide financial industry, linking up investors, intermediaries and issuers. Numerous market practices in the financial sector need to be re-implemented in an Internet-centric way, thus obsoleting much old technology and market practice. The gains from remarkably cheap initiatives are highly apparent: e.g., if all the commercial buildings of Bombay were wired up with an intra-city network running at 2 Mb/s, it would generate a quantum leap in the quality of functioning.
In India, the hurdles in the way of the spread of the Internet are (a) economic illiteracy and (b) the entrenched interests of the DOT. These are smaller hurdles, and more tractable as compared with the ideological and philosophical barriers to the Internet, and the openness that it represents, which is found in China. In addition, India has an intrinsic advantage in terms of the extensive use of English, the lingua franca of the Internet and of the international finance community.
As the lights fadeout in Hong Kong, and with the dawn of convertibility in India, we should be highly conscious of the unique opportunities and challenges which are presented for Bombay, and for India.
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