The following article was part of The Gateway of India Dialogue 2016 compendium ‘Where Geopolitics meets Business‘. This piece has been published separately.
The Gateway of India Geoeconomic Dialogue will happen on 13-14 February 2017.
India’s second international financial services centre (IFSC) is scheduled to open soon in Mumbai’s Bandra-Kurla commercial complex. The IFSC will have an edge over neighbouring Gujarat’s GIFT (Gujarat International Financial Tec-City), which opened in April last year, for two main reasons: it is located in India’s financial capital, and it can draw on Mumbai’s legacy as an international financial centre from the late 19th to the mid-20th century.
The push for Mumbai as the ideal location for an IFSC began with the 2007 ‘Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre’ (popularly known as the ‘Percy Mistry report’). [1] This report’s recommendations largely drew on the fact that Mumbai already had a pool of professionals, institutions, banks, corporate headquarters, and markets.
To this mix can be added Mumbai’s long history as an IFSC a century ago, when the city managed the monetary policies of geographical regions such as the Trucial Coast (the United Arab Emirates), Bahrain, Qatar, Oman, and the Protectorate of East Africa (Tanzania, Kenya, and Uganda), under the British Raj. These are the same regions which Mumbai’s IFSC can now serve, especially because of the high-value transactions and remittances between India and the Gulf.
Many Indian multinational companies currently have investments in the Gulf, including a major project by L&T, the Rs. 2,085 crores Al Batinah expressway in Oman. [2] Moreover, remittances from Indians working in the Gulf countries form an important component of India’s foreign exchange earnings; inward remittances were worth $48 billion in the current fiscal year, as of March 2016. [3]
However, Mumbai’s historic role as a nodal hub for banking services, commerce, trade, and shipping, and its enormous financial and political clout in the past, are little known today because the city was unable to build on this legacy after India’s Independence in 1947. A combination of factors contributed: restrictive foreign exchange and trade policies, energy dependency, and a polarised world economy.
The potential to reactivate Bombay’s past links multiplies the city’s chances of developing better, broader, and deeper markets for the circulation of foreign capital, currency, and credit through its IFSC.
The rupee and the subcontinent’s first financial centre
Long before Dubai and Singapore became major financial centres, from the mid-19th to the mid-20th centuries, the city of Mumbai was a global trade and finance hub. This was a time when New York, London, Hong Kong, and Shanghai were also hubs—a role they are still engaged in 100 years later.
Mumbai’s role, like that of these historic centres, became more central when a global economy coalesced due to European imperialism between 1870-1914. This was aided by better transportation (an expansion in railways, steamers, and the opening of the Suez and Panama canals) and communications (the telegraph and the beginnings of the telephone). [4]
One of the strongest factors that made the city a financial hub was the wide acceptance of the Indian rupee as a currency of circulation. During the 1890s, the fiscal and monetary policies of the Trucial Coast (UAE), Bahrain, and Qatar, were determined by the Presidency of Bombay.
This role devolved on the city with the signing of the Exclusive Agreement (from 6-13 March 1892) between each Trucial sheikhdom and Britain. Under the fiduciary clauses of this treaty, the British Indian government looked after the fiscal and monetary policies of these sheikhdoms. Subsequently, the Indian rupee became the official currency. Other regions soon followed, including Oman and Kuwait, and for a brief period, the British Protectorate of East Africa.
Though the Indian rupee became the official currency of circulation in these British-dominated regions, the old multi-currency regime of the Indian Ocean trading world continued alongside.
But even before it became an official currency the rupee was already in circulation in these Arabian Sea littoral regions. It circulated first as the Mughal rupee, which was the precursor of the rupee of Bombaim (first struck at the Bombay mint in 1677). This Bombay silver rupee and its denominations remained in circulation till 1835, when the three separate currency circles of the presidencies of Bombay, Bengal, and Madras were abolished. They were replaced first by the East India Company rupee (till 1858) and then various issues of what is commonly referred to as the British Indian rupee (1858-1947).
Three factors promoted the popularity of the rupee in the 19th century: one, the sheer volume of the dhow merchandise trade between the subcontinent and this region; two, the large Indian diaspora (notably in Muscat and Oman) who preferred using the rupee; and three, the silver rupee’s credibility which derived from its standardisation and metallic value (weighing 180 grains or 11.66 grams, with a silver content of 165 grains (11/12 fineness) after uniform coinage was introduced in 1835. [5]
With the formation of the Reserve Bank of India (RBI) on 1 April 1935, the monetary and fiscal policies of these regions came under the purview of the RBI (headquartered in Bombay). In fact, these countries maintained a sterling balance with the RBI, against which Indian rupees were issued to them. This continued even after Indian Independence and until 1959, when the RBI issued a special currency for this region, the Gulf rupee, to distinguish it from the Indian rupee. The Gulf rupee remained in circulation till 1970, when Oman, among the last of the fiduciary sheikhdoms, shifted to its own currency, the Omani rial. [6]
International banking in Bombay
As the financial capital of British India, Mumbai was also closely linked to the City of London, the world’s banking and money market capital since the 19th century.
In the early-to-mid-19th century, the East India Company largely controlled the foreign exchange business emanating from Bombay. This option was not open to the quasi-government Bank of Bombay—the city’s first modern bank as well as its first Anglo-Saxon bank, set up in 1840 as a chartered presidency bank on the initiative of a mix of expatriate and Indian merchants. [7]
The Company appropriated this privilege even after its India Charter lapsed in 1813. This monopoly increased the cost of foreign trade credit for Indian and British merchants, and kept the cost of remittances high, as the exchange rate offered by the Company on the British pound and Indian rupee was always to the disadvantage of its clients.
The Bank of Western India was an attempt by its promoters (among them well-known merchants Jagannath Shankarshet and Dadabhoy Rustomjee) to break into the lucrative foreign exchange business. But it was only in 1851 that this bank, founded in 1842 (and renamed in 1849 as the Oriental Banking Corporation, OBC), succeeded in its fight for a charter that endorsed its foreign exchange business and gave it the protection of limited liability. The litigation was necessitated as banks then were partnership firms with unlimited liability. The protection of limited liability could only be acquired through a charter from the Company or the British Parliament.
The fall-out of the Bank of Western India’s nine-year-long litigation was that as the OBC it became headquartered in London, came under the control of a European board of directors, and became the first British overseas bank with a charter to operate in India.
Soon after, a multitude of exchange or British overseas banks set up branches in the city. The most well-known was the Chartered Bank of India, Australia & China (today’s Standard Chartered Bank), which opened its Bombay branch in 1858. Various other foreign banks started operations in Bombay, with the mandate of facilitating trade between their region or country and the subcontinent. Among these were France’s Comptoir National D’ Escompte in 1861, the Hong Kong & Shanghai Banking Corporation (HSBC) in 1869, and the Yokohama Specie Bank in 1894. By 1908, four British overseas banks and three foreign banks were operating in the city. [8]
In turn, banks founded by Mumbai’s local merchant community, like the Indian Specie Bank (1906) and the Tata Industrial Bank (1917), opened branch offices in London in the early 20th century. This further strengthened the connection between the city and the London inter-bank money market and foreign currency market.
In the final count, Bombay’s centrality as a finance and trade hub would not have been possible—even with its captive financial hinterland and overseas connections—without the dynamism of its indigenous merchant and banking community. If it wasn’t for the feisty fight put up by the Bank of Western India, the London-headquartered British overseas banks would not have had a presence in India, and branches of Indian banks (like the Indian Specie Bank) would not have been opened abroad..
This was just one important component among others that made Bombay an international financial centre from the late 19th to mid-20th century.
A century later, will Mumbai live up to this legacy through its new IFSC? It certainly can. Mumbai has all the financial micro-structures and fluencies that only a city with a deep history of such networks can possess. Besides, India already has world-class capital market structures (like Mumbai’s stock exchange) and regulations, and these could act as a platform to integrate the money, bonds, foreign exchange, and commodities markets. This, in turn, can attract global capital that can be processed through the city’s IFSC.
Sifra Lentin is the Bombay History Fellow at Gateway House.
The Gateway of India Dialogue was co-hosted by Gateway House and the Ministry of External Affairs on 13-14 of June 2016. The 2017 conference, The Gateway of India Geoeconomic Dialogue will be held on 13-14 of February 2017.
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References
[1] Ministry of Finance, Government of India, Report of the High Powered Committee on Making Mumbai an International Finance Centre (2007), <http://finmin.nic.in/mifc/mifcreport.pdf(2007)>
[2] Kumaraswamy, P.R., ed., Persian Gulf 2014: India’s Relations with the Region (New Delhi, Sage India, 2013), p 153. See also: <http://timesofindia.indiatimes.com/business/india-business/LT-wins-Rs-2085-crore-contract-for-building-expressway-in-Oman/articleshow/21119113.cms>
[3] Reuters, After benefits of cheap oil, India counts cost of reduced Gulf remittances, Economic Times, 25 May 2016, <http://economictimes.indiatimes.com/nri/forex-and-remittance/after-benefits-of-cheap-oil-india-counts-cost-of-reduced-gulf-remittances/articleshow/52428340.cms>
[4] Overy, Richard, ed., The Times Complete History of The World (London, HarperCollins, 2010), pp 276-77.
[5] From the author’s interview in 2013 with Bazil Shaikh, former RBI principal chief general manager and secretary.
[6] Ranjan, Ravi, and Anand Prakash, Internationalisation of Currency: The case of the Indian Rupee and the Chinese Renmimbi (Mumbai, RBI, 18 May 2010), < http://www.w-t-w.org/en/wp-content/uploads/2013/10/Internationalization-of-Currency.pdf >
[7] Bagchi, Amiya Kumar, The Evolution of the State Bank of India: The Roots 1806-1876 ( New Delhi, Penguin India, 2007), p 473.
[8] Edwardes, S.M, The Gazetteer of Bombay City And Island: Volume 1, 1909,( Bombay, Gazetteer Department Government of Maharashtra, Reprint 1978), pp 292-93.