Absolutely Brilliant: An Idea called the Srinagar Stock Exchange

Aaatif wonders if J&K Government is serious enough about improving state's economy to try a radically different approach

(Mr. Aaatif Ahmad Mehjoor, 25, was born in Srinagar. He received his primary education in London and Srinagar, with the final two years at the Burn Hall School. He attended Ernest Blevin College London in 1999-2001, King's College London in 2001-2004, and the University of Oxford in 2004-2005. A lawyer by profession, he has received academic awards from the Arts and Humanities Board for Post-graduate Study, and the Judges & Silks Award for Highest Honours in the LLB. He is an Associate of the Securities and Investment Institute, London, and Barrister of Lincoln's Inn. His personal interests are: financial markets & investment, Kashmir, cricket, and ancient history & archaeology.)

Srinagar Stock Exchange

Economic development and job creation would be top priorities for any government that comes to power in the upcoming elections. However, hardly any of the major political parties have come up with any fresh, innovative ideas about overhauling Kashmir’s ailing economy. The focus is on job creation and reducing unemployment amongst Kashmir’s English-speaking graduates and post-graduates. Yet, nearly all the parties are still trapped in the outdated economic thinking that has prevented Kashmir’s economy from growing as fast as it could.

Creating more government jobs that are paid for by Indian money is not the way to reduce unemployment or uplift the economy. It is the private sector that needs to grow.

There is one important sector in which Kashmir could excel. It is the financial services industry. At the moment, the major financial centres in India are Mumbai and Delhi and it is not my suggestion that Kashmir should aim to match these cities. However, there are certain areas in which Kashmir can carve out a niche for itself, much like the off-shore jurisdictions. Thus, in Europe, London and Frankfurt are major mainstream financial centres. However, this does not stop other countries such as Ireland and Switzerland from specialising in offering services that London and Frankfurt cannot or do not wish to offer.

The key to establishing Kashmir as a financial centre is to enable it to be used for “regulatory arbitrage”. This term refers to the practice of companies and firms whereby they choose to locate their establishments in those countries where the regulations are minimal. Take for example India. The financial services industry is heavily regulated. The stock markets are regulated by the Securities and Exchange Board of India (SEBI) which prescribes stringent criteria for the listing of securities and other financial instruments on the exchanges. This makes it difficult for companies in India to raise finance. By contrast, the London Stock Exchange has standards and rules that are less strict and easier to comply with. This is why a large number of foreign companies (including companies from India) have been raising finance in London. There are also stock exchanges that cater for complex, thinly traded instruments such as the Irish or Luxembourg stock exchanges.

Hence, the key to establishing Srinagar as a financial centre is to enact regulations that make Srinagar more attractive. These regulations can cover not just rules governing the establishment of financial institutions, but also rules governing the admission of securities for listing. Furthermore, fiscal and other incentives can be given to make establishing companies in Kashmir more attractive (e.g. if a company has to pay, say, 20% tax in Mumbai on profits charge only 10% here).

To kick start this process, the government should first establish a stock exchange in Srinagar. There is already enormous appetite for trading and investing in stocks in Kashmir with tens of crores worth of securities traded every day. This offers the government an opportunity to tap into the public’s savings for the purpose of overhauling ailing government-owned enterprises. Already, the government has decided to offer shares in the Power Development Corporation to the public. By establishing a stock exchange where government-owned (and private) enterprises can be listed, the government will find it much easier to raise capital for the purposes of turning loss-making government companies into profit-making ones.

The government will obviously have to negotiate with SEBI and look into the legislative powers of the J&K State Legislature. However, under Article 370 of the Indian constitution and the Instrument of Accession, the regulation and setting up of capital markets and exchanges is not something within India’s jurisdiction. Currency is of course a Central subject and a Srinagar Stock Exchange would have to comply with the foreign exchange regulations of the Reserve Bank of India. This means that Srinagar, as a financial centre, will be unable to compete with the rest of the world. However, this should not stop it from competing against other financial centres in India and taking business away from them. It should also not stop the J&K Government from setting up a system for raising capital from the public.

Therefore, I would urge the current government (or any political party participating in elections) to set up a working group to explore the idea of setting up a financial centre in Kashmir. This group could be manned by experts and would then submit proposals to the government.