Given the Gujarat International Finance Tec-City (GIFT) enjoys the full backing of prime minister Narendra Modi, it is likely the government will push for the idea of a financial sector SEZ, for that is what GIFT is. A blueprint of how a financial sector SEZ is to work, and the legal changes required, has been put out by NIPFP a few weeks ago, and the finance ministry has just begun a public consultation on this. The starting premise, and correctly so, is that if the larger proportion of India-centred trades—such as in rupee or Nifty derivatives—are taking place in offshore markets like Singapore and Dubai, India needs to reclaim this market. Similarly, if Indian firms are going to raise more money overseas, why not pay the substantive portion of these fees to firms located in India? This was first talked about by the Percy Mistry committee in its report on Mumbai as an international financial centre, and it estimated that Indian firms could earn as much as $48 billion by 2015 if this was achieved. While India had the finance professionals and mathematical genius (that is a critical component of all financial trades) for this, the argument in those days was that you couldn’t get top professionals to stay in, say Mumbai, if the infrastructure was the mess it currently is. While Maharashtra chief minister Devendra Fadnavis is looking at fixing the plumbing, the latest thinking is that this can be done through an SEZ, like the GIFT one.
The big analogy drawn here is with Hong Kong. China had a relatively closed market in the financial sector, as does India. But since Hong Kong had a minimum number of regulations, or taxes, it served as a financing window to China. Small Chinese firms no investor in New York would have heard of were able to get financed through Hong Kong-based funds. Similarly, the argument is that smaller Indian firms can get financed through big investment firms located out of India—home-country advantage is what NIPFP calls this. While the government and RBI and other regulators are still not too comfortable with, say, relaxing position limits on currency trading in mainland stock exchanges, this could be done in a financial SEZ where, as in the case of other SEZs, many local laws do not apply. In a finance SEZ, similarly, there will be no securities or commodity taxes that are currently driving away trades to places like Singapore and Dubai. Apart from convincing regulators like Sebi and RBI, the government will have to expeditiously work on creating a brand-new judicial structure, including arbitration, for such centres—if contracts take decades to be settled, the financial SEZ is dead in the water. Given how such large parts of Indian markets are being off-shored due to tax and other restrictions in India, it would be a pity if we didn’t make a big pitch to try and retrieve lost ground.