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Need for 'off-shore banking' stressed

There is a need to establish a legal framework enabling creation and operation of 'off-shore banking' in India, the PHD Chamber of Commerce and Industry has said.

A note prepared by the chamber on off-shore financial centres says that the policy-makers and the government should realise the economic benefits of off-shore banking for the nation. What is needed is a legal framework for administrating off-shore banking and ensuring secrecy to investors, the chamber said.

In the Indian context an off-shore bank is a bank (Indian, foreign or subsidiary or branch of a bank) operating physically and technically from India but catering to deposits from non-residents, that is those residing off-shore. These transactions are not governed by Indian tax laws like the Foreign Exchange Regulation Act.

The off-shore bank can, however, lend or invest in India. India would thus have the advantage of attracting foreign funds for investment in infrastructure.

An off-shore centre promotes integration of national capital markets, encourages mobilisation and allocation of savings on a regional basis. Integration of national capital market helps to eliminate local and sectoral monopoly and monopsony and stimulates the formation of savings. Allocational efficiency is optimised at a regional or even a global level.

For a developing nation, which is capital scarce, an off-shore centre can provide a trans-national substitute till the development of its own domestic capital market. Location of an off-shore centre in a developing country stimulates the growth of financial infrastructure for a local capital market, the chamber said.

Off-shore centres stimulate the internationalisation of the local economy. They attract not only foreign investment but encourage the flow of valuable financial, commercial and industrial intelligence. They indirectly provide the foreign direct investment in the host country and joint ventures with local partners, helping local industries to become internationally competitive.

Nearly half of the world's financial transactions today take place off-shore with off-shore financial centres holding nearly $ 5 trillion in funds overseas, said the chamber note.

An off-shore financial centre provides tax benefits for trans-national transactions or activities. These centres exist because the benefits of routing trans-national transactions through them outweigh the costs.

In the recent past, cross-border financial flows have shown an increase and international banks have come to play a key role in funding the privatisation process.

Also, the off-shore financial centres have matured substantially and tax mitigation is no longer the key focus area. Their role has expanded to include certain non tax-based activities.

UNI