Living in a pipe dream

For 18 years, Malay Mukherjee worked with L.N. Mittal's ArcelorMittal, before leaving the world's largest steelmaker in September 2009. For many of those years, the 62-year-old specialist in mining and steel technology worked out of ArcelorMittal's seventh floor UK headquarters in Berkeley Square House in London. The view from his office was impressive — of the towering London Plane trees with their broad trunks, pale grey-green bark and maple-like leaves.

But that pales in comparison to the view today from his 16th floor office at Essar House in central Mumbai — the sprawling Mahalaxmi Race Course, the adjoining golfing greens of the Willingdon Club and, of course, a panoramic vista of the Arabian Sea. Now, Mukherjee didn't join the Essar Group for the view. The CEO of the Ruia flagship, Essar Steel, had also worked in Mexico, Kazakhstan, Germany and Luxembourg. When he joined the Ruias six months ago, it wasn't just a chance to head back to his homeland (Mukherjee was born in Asansol, West Bengal). As he takes in the landscape from his glass window, Mukherjee lets on: "The future of the developed world is not as great as that of the developing one... And Mumbai keeps you busy."

At around the same time that Mukherjee moved to Mumbai, Michael Geoghegan, CEO of HSBC, shifted the bank's base from London to Hong Kong. If that seems like an isolated setback for the British capital, let's not forget the way banks fell like dominoes in Europe and the United States soon after the carnage on Wall Street in the second half of 2008. New York and London aren't going to lose their prominence as global financial centres in a hurry, but they do give emerging hubs like Mumbai, Sao Paulo and Beijing a chance to get a foot in the door of high finance.

At a recent Reuters Emerging Markets Summit in Sao Paulo, a prevalent view was that as such fastgrowing economies begin raising capital in each other's markets and buying each other's assets, they stand a chance of developing into international financial centres in their own right. Back home, when the London headquartered Standard Chartered Plc in May raised half a billion dollars via an issue of Indian depository receipts, or IDRs — the first ever such issue by a foreign entity — it was a reminder of the potential that exists on Dalal Street and around it.

SOPHISTICATED FINANCIAL PRODUCTS HAVE ARRIVED... Equity Derivatives: Options and futures contracts where the underlying assets are individual stocks or indices Commodity Derivatives: Done on commodities like steel, copper, aluminium through options and future contracts Currency Futures: Derivative products where one enters into a contract with another for exchange of currency Interest Rate Futures: Hedges the interest rate risk as buyer takes an opposite position by entering an interest rate futures contract Volatility Index: Captures the volatility in a index over a period of time Algorithmic Trading: Uses computer programmes to enter trading order to give the best result in terms of pricing to a buyer or a seller ... BUT THERE ARE SOME GLARING GAPS Absence of an independent debt management office: The RBI is reluctant to issue rupee-denominated Indian public debt in global debt markets, which restricts growth of domestic debt markets Lack of integration in financial markets: Multiple regulators like the RBI, SEBI, IRDA and Forward Markets Commission make the task of regulation and supervision unwieldy No capital account convertibility: The argument for opening the capital account is that India is a capital-deficient country that needs large amounts of external capital to finance its development Inadequate tax and legal reform: Not enough is being done to rationalise taxation of financial services and transactions Source: Based on the recommendations of the Percy Mistry-chaired high-powered expert committee on making Mumbai an international finance centre

"There is definitely a shift happening towards the East," believes Uday Kotak, Executive Vice Chairman and MD of Kotak Mahindra Bank. "India is today a destination of choice as far as capital flows are concerned, both financial and strategic," adds Pramit Jhaveri, CEO of Citi India. And Manisha Girotra, CEO and Country Head of UBS India, fresh from a mobilisation of close to a billion dollars for the Gujarat-based Adani Enterprises, cites the successful $2.8-billion initial public offering, or IPO, of real estate major DLF in June 2007 as a harbinger of things to come.

Yet, one issue of IDRs isn't enough to make a Mumbai midsummer. For one, the Indian capital markets are fuelled largely by flows from foreign institutional investors, or FIIs, who are estimated to own 16 per cent in publicly-listed Indian stocks. "IDRs will get absorbed only if domestic investors are big buyers," points out Kotak. The share of retail investors in listed stocks currently stands at just eight per cent. Investor appetite for IPOs, too, isn't that high.

"The primary market numbers today are not large enough compared to other global or even regional financial centres," says Ajay Srinivasan, CEO of Financial Services at Aditya Birla Group. For instance, many big-ticket Chinese IPOs get absorbed in the Hong Kong markets. Recently, the Agricultural Bank of China raised $19 billion via Hong Kong. In contrast, the Indian primary markets (IPOs, rights issues, private placements and preferential allotments) collectively raised $18 billion in 2009-10.

The debt markets, which have been virtually asleep for decades, are gradually being opened to foreign investors, albeit with trading limits ($15 billion in corporate debt and $5 billion in government securities). But foreign issuers are not allowed to raise debt in the country — and that may be just what's needed. So: an international railway project could issue bonds in the primary market in Mumbai. Global investors could then buy these bonds and trade them in the secondary market in Mumbai.

Even Indian corporates could raise huge amounts of debt for mega-projects in inf rastructure and related sectors. The Indian equity market has doubtless evolved over the past decade, but then experts say the biggest chunk of trading in international finance centres is not built around equities. "The stakes are higher in products like currency and interest rate derivatives," says Srinivasan, who has spent five years in Hong Kong. Derivatives have just made a beginning in India, but for them to reach the sophistication — and not necessarily exoticism — of such products in the West will take some time.

A view prevalent in the country's commercial capital is that the time is ripe for capital account convertibility, which will allow for easy exchange of local currency with foreign currencies at market-determined rates. It is argued that India is a capitaldeficient country, and needs dollops of external capital to finance its development. Similarly, experts point out that if India has to become an international finance centre, its multiple regulators (the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority, the Forward Markets Commission) have to be more integrated; or better still, a single regulator should take on the task of regulation and supervision.

For industrialists who have built their fortunes in the city, such hurdles aren't enough to dampen their enthusiasm. Says Venugopal Dhoot, Chairman of Videocon Group: "Mumbai is a global centre in the true sense as one can virtually control all the big markets of the world due to our time zone advantage." That's great, but even if you assume that all the financial, legal and tax reforms are in place, Mumbai still lacks something that most financial centres — even regional ones— have: a quality of life.

Srinivasan points out that in Hong Kong he could actually take time out for a jog during a lunch break, have a shower and get back into the office. "That's something we cannot think of doing here," says Srinivasan, with a shrug, as he looks down at the gridlock on the road below him from the 18th floor of the One Indiabulls Centre in central Mumbai. The solution doesn't call for rocket science. As Kotak says: "We have the software, what's missing is the hardware of governance."