India’s “DIY” approach needs fixing

The principle of “swadeshi” (self-reliance, self-sovereignty) was pioneered by Ghandi and fueled the Indian independence movement against British colonisers. Fast forward seven decades and India’s need to assert its own power, autonomy and identity seems to have found a permanent home in the authorities regulating the country’s legal market. Indeed, the recent Indian Supreme court ruling confirmed the current “fly-in” “fly- out” rule, which is a restriction imposed on foreign lawyers who can only visit India (on a casual basis) when advising domestic lawyers or clients on foreign law and international cases.

Many are left scratching their heads as they observe how this protectionist decision stands in stark contrast with the economic liberalisation that the rest of the country’s sectors have been undergoing since 1991, when India opened up to the capitalist world, welcoming competition, international trade, foreign money and foreign businesses.

Before I get all analytical on the importance of this topic, I thought I’d give a brief recap of the story. However, because this debate has been troubling all interested parties for over two decades, you readers will have to bear with many complicated twists and turns, so brace yourself.

A Brief Recap

1995-2009

Once upon a time (actually in 1995), law firms such as White & Case and Ashurst were undisturbedly working in India under the blessing of the RBI (Reserve Bank of India) who had allowed them to set up liaison offices in the country. Unfortunately, (most) good things come to an end and in 1995 a professional organisation called Lawyers Collective decided to play the bad guys. The organisation claimed that international law firms were infringing the law imposed by the Advocates Act 1961, which prohibits non-Indian citizens without the relevant qualifications from “practicing law” in the country. They were also outraged by the fact that foreign firms set themselves up as “liaison offices” only in name whilst they were actually conducting business in the country. This was a problem because a liaison office is technically only allowed to act as a channel of communication and as such cannot undertake any direct or indirect commercial, trading or industrial activity. So, you can see why Lawyers Collective might have felt cheated.

The case was brought before and heard by the Bombay High Court (BHC) who decided that Indian advocates were, in fact, the only ones entitled to “practice law”. They defined the practice of law as “giving legal advice as attorney, drafting, drawing legal documents or advising clients on the international standards and customary practice relating to their transactions” …exactly what the foreign lawyers were (without permission!) also doing.

Therefore, on 9 October 1995 the court gave an interim order* in favour of Lawyers Collective.
So that was the end of fun for international law firms who, understandably unhappy with the outcome, appealed to the Supreme Court in the following year (1996). However, the Supreme Court decided it had more important issues to deal with and sent the case right back to the BHC for a “quick decision”. The BHC probably didn’t get the memo and only chose to hear the case after it had been festering there for 13 years. Funnily enough, the court took all this thinking time only to reaffirm in 2009 that foreign law firm offices and lawyers were unlawful because the only class of persons allowed to “practice law” were the Indian advocates enrolled on the Indian Bar Council. The BHC ruled that this decision applied to both contentious and transactional work.

2012-2018

So the BHC had apparently banned all foreign law firms and foreign lawyers from practicing law the country. The reason I say apparently is because the court forgot to mention whether “practice of law” also included non-Indian law transactional work and also forgot deal with any indirect methods through which foreign law firms could work on India-based transactions. And because the law is made to be tip-toed around (all within reason, of course), this meant that referral arrangements and “best friend” agreements were still technically on the table. International firms wasted no time and within a few months of the decision, Ashurst decided to enter in a best friends agreement with a Delhi based Indian law firm.

Just as foreign law firms had started to think that they had smugly circumvented the new regulations, a lawyer from Tamil Nadu, who goes by the name of A.K Balaji, filed a petition before the Madras High Court (MHC) against 31 foreign law firms and their right to practice any sort of law in India. Thankfully (for foreign law firms), the MHC turned out to be more lenient than the BHC and in February 2012, it ruled foreign lawyers could visit India on a temporary “fly in- fly out” basis to advise clients on foreign law and international legal issues . The Court also decided to allow international lawyers to act in commercial arbitrations*, which if you ask me was a pretty commonsensical decision considering the government’s intentions to make India an international arbitration hub.

Referral arrangementsAny situation where a lawyer receives business from, or refers business to a third party.

Unfortunately and unsurprisingly, this concession did not go down well with everyone and as soon as the decision was out, India’s top regulator, the Bar Council of India (BCI) re- appealed the case to the Supreme Court where it was left pending until this year.

Although some say that the ruling dispensed by the Supreme Court this March merely reconfirmed the status quo, it could be argued that it actually made entry for foreign law firms even tougher because it specified that “fly in “and “fly out” visits could not be regular (as this would amount to “practice of law”, which as discussed before is prohibited by the Advocates Act 1961). It also ruled that the BCI should establish the code of conduct and make specific rules for what international lawyers are permitted to do in the country. Overall, it seems like Indian authorities can’t take a step forwards without taking two steps back, and firms such as Clifford Chance, Norton Rose and Bird and Bird who attended the hearing, all went home feeling disgruntled.

So, this is the story for now. Most of you are probably wondering why bother entering India if it is such a hassle right? Can’t firms just go elsewhere? Also, why are authorities such as the BCI, or the Courts so against the entry of international lawyers? Essentially…

Why is the Indian market so attractive?

In 2015, India was named the 7th largest economy in the world and US government projections believe it will step up on the podium by 2029, surpassing Japan and becoming the 3rd largest economy at market exchange rates. Most importantly for businesses, India has a growing population of 1.3 billion and a very young median age (of around 28). A young median age is good for the economy because it creates a large working age population so the government must support fewer retired people.

So, to make this simple: more people working = more money into the economy = a more attractive environment for businesses to invest in = a lot of work for lawyers who have to facilitate this new economic activity.

However, India does not just have demographics on its side: the prime minister Narendra Modi and central banker Raghuran Rajan have played a big part in making the country’s macro-environment appealing to investors. The dynamic duo is not afraid to take a stance and in 2016 Mr. Modi demonetised* two large-denomination banknotes in an attempt to move towards a clean and taxpaying digital economy. Furthermore, with the aim of simplifying the tax system and boosting revenues, last summer the prime minister also implemented a national goods and services tax, an indirect tax* for the whole economy.

On the other hand, foreign investors admire the discipline of Raghuran Rajan’s monetary policy. The central banker is focused on keeping interest rates down, inflation under control and the rupee stable.

Overall, it seems that their tenacity has paid off as this year the value of M&A in the country hit an all-time-high, with $99bn of deals being completed from January until now. To put it in perspective for you , M&A deal value increased by 37% from last year where for the whole of 2017, deal value only reached $62bn. This euphoria has infected all economic activities: indeed, the record breaking inbound and domestic acquisitions were matched by an equally impressive level of outbound transactions, which has not been this high since 2010.

As India moves towards full urbanization, sectors such as healthcare and technology are developing at a monstrous pace. For instance, in a bid to transform India into a country of “job creators and not job seekers”, Mr. Modi initiated “Startup India”, a government-backed platform aimed at stimulating the tech sector which offers tax exemptions and state funding (up to 1.5bn) to startups. Again, these reforms seem to be working: India is now 3rd on the global list for tech-driven startups, just behind the UK and US. It is estimated that by 2020 there will be over 2,100 tech startups in the country.

These changes have not gone unnoticed by the world’s biggest corporates, who have started to pour in billions of dollars into this fast-growing sector, leading to some mouthwatering deals for lawyers.

For example, in May, US retail giant Walmart invested $16 billion to buy a majority stake in Flipkart, a huge Indian e-commerce company which rivals the likes of Amazon. The FT described this as “easily the world’s biggest e-commerce buyout”. Flipkart’s expansion probably alarmed Amazon who already committed $5 billion to the market. Indeed, Amazon is keen to take up a dominant position in India, especially after it saw its dreams turn to dust in China where Alibaba took 1st place. Jeff Bezos recently claimed to be “impressed and energized by optimism and invention in India”, a country in which he looks to “keep investing and growing”.

Of course, if we are talking tech we are also talking Softbank (the world’s biggest tech-oriented, private equity fund), who, over the last year and a half, invested around $10billion in Indian tech companies such as PayTM and Ola (Uber’s rival).

Now, you can see why foreign firms are so desperate to find a way in: this deal frenzy creates heaps of work for lawyers who can assist both foreign and domestic companies in corporate matters involving mergers and acquisitions, project finance, competition etc.

Just take a moment to picture how frustrating this situation must be for foreign lawyers. It’s like having a luscious chocolate cake in front of you which keeps getting bigger, yet you are only able to look at it.

I imagine most of you readers are children of capitalism and as such have grown up in economically liberal, market-driven societies. If this is the case, surely you have been told time and time again, that competition is good because it promotes productivity and economic growth. This all seems to make sense. So, when in March the Indian authorities (once again) slammed the doors in the face of foreign firms, the inevitable question arises:

Why don’t Indian authorities want to allow the liberalisation of the legal market?

Well, numerous justifications have been given; some, arguably more compelling than others. Not very credible is the statement given by Lalit Bhasin , president of SILF (Society of Indian Law Firms), an interest group who represents India’s elite law firms and who is the most vociferous opponent to liberalisation.

Bhasin claimed that due to its “noble nature”, the legal profession “is not a business” and “should not be vulgarized” by being “put up for sale”. The truth is India’s biggest firms are scared they will lose the monopoly they currently exercise as their share of the market gets taken up by bigger, more efficient and more experienced international law firms. This scenario happened in Germany where British firms entered the market and within two years, Germany’s top firms had been forced to merge with UK rivals. At the time, only Hengeler Mueller retained its independent status and brand name.

Slightly more understandable is the fear that international firms may use their size to lower prices of legal services, thereby pushing Indian law firms outside of the market.

Another valid reason often invoked by Indian regulators when justifying their decision is that the severe restriction framework under which Indian aw firms currently operate, places them at a disadvantage with their foreign counterparts. For example, until recently Indian partnership law dictated that each law firm could not have more than twenty partners. Even if now the law has changed, local firms still have a lot of ground to make up for. For instance, in a survey published last year, the average revenue made by the biggest Indian law firms was around 15 million, whilst the Indian firm with the highest amount of partners was Khaitan & Co, with 104 partners. If we think that Latham & Watkins in 2018 reported revenues of $3 BILLION and that giants like DLA Piper count over 1300 partners across the globe we can begin to understand why Indian lawyers feel so threatened.

This leaves us wondering: can the general quality of legal services really improve if entry to foreigners were to be granted, or is this just a suicide mission? Is there a possible win-win scenario in which Indian businesses can also benefit or is this a zero-sum game? Let’s see.

Assessing the views

First of all, it is important to clarify that Indian law firms are not the small and inexperienced family run businesses that used to dominate the legal sector in the early and mid 1900s. It would have been understandable to consider domestic lawyers unskilled in the 1980s, when India had little to no exposure to cross-border transactions due to the restrictions imposed on its economy. Indeed, there is no doubt that in that scenario skilled international firms and lawyers would have leveraged their superior expertise to put them out of business. However, time changes things and, as the global economy continues to evolve, the Indian legal sector has realised it must evolve with it. In 2018, India flaunts more than 150 law firms who work for the world’s biggest corporates. For example, in 2015 Trilegal did 60% of its business with companies like Heineken, Microsoft, Mistubishi, Vodafone and BP and coordinated the work from various offices across the country.

Furthermore, the myth that there will be no more work for domestic lawyers must be dispelled. Actually, it is quite the opposite. The author of “The Indian Legal Profession in the Age of Globalization” rightly points out that the complex PESTL (political, economic, social, technological and legislative) environment which characterizes India will ensure that “there will always be a place for local knowledge and expertise”. This makes sense if we think about it: why would foreign firms want to pay more and send expatriate lawyers to India? Indian lawyers represent an expense-free option and also come with the cultural package which allows them to better understand and operate in the domestic market. In even greater demand right now are dual-qualified lawyers, who can work both in India and abroad.

What about the clients? At the end of the day, law firms are service providers who have to provide clients the best possible service, and liberalising the legal market would do just that. Logistically speaking, it would be more convenient if law firms and lawyers could offer a single city and time zone to clients. As it stands, Indian clients who wish to receive advice from international lawyers have to hire them from firms based in New York, London, or, more commonly, Singapore.

Liberalising the market would not just avoid messing up the sleeping patterns of those working on cross-border transactions, but it would also ultimately ensure that clients get the best possible service. Why? Because by admitting foreign lawyers, Indian regulators would also be admitting their expertise and international best practices, giving locals the chance to observe, learn, and eventually imitate them. With time, the system would become more robust and encourage even more domestic and foreign investment in the country.

If some of you are still skeptical, just think of the UK! In this country, anyone in possession of the required qualifications is entitled to practice law, regardless of their nationality. It is also no secret that the UK keeps attracting and retaining the best and brightest. You readers out of all people should know this! How many times, when applying, have you encountered statistics as depressing as this one: “we receive over 2000 applications a year, and offer 45 training contracts vacancies”? I thought so. So, if anything, liberalising India’s legal market would make the competition slightly less fierce and the prospect of applying slightly less terrifying.

Lastly, we also have to entertain the possibility that this fear could just be overhyped. If and when the market liberalizes, the invasion of foreign firms is not a given. It is actually arguable that most might be initially weary of establishing a direct presence in a market which has often second-guessed its decisions in the past. Foreign practitioners fear that in India could wake up lawyers one day and unemployed the next.

So…

How are foreign lawyers currently operating in India?

a) India Practice Groups in foreign offices

Most global players today coordinate their India-related transactions from their offices in Singapore, Hong Kong, London or New York. For example, the “Singapore solution” seems to be the preferred one by firms; the country’s proximity to India, its common law background and sophisticated dispute resolution system make it a golden location for foreign firms who coordinate all their India-related work from there.

These groups tend to be headed by Indian law experts, whose firms often recruit straight from Indian law schools. Having India Groups or India Desks enables firms to establish and familiarize themselves with this difficult market, and also gives them a head start which would come in very handy if the market were to liberalise. However, setting up these sort of arrangements might not be very cost-friendly as it is more expensive to hire and train Indian graduates as opposed to hiring an Indian law firm to directly work on the part of the transaction involving Indian Law.

b) “Best Friends” Agreements

Under such agreements, both firms agree to exclusively refer* work to each other when such work involves Indian related matters or vice versa. It is thought that in the event of liberalisation, these agreements would quickly turn into mergers between foreign and domestic law firms. However, these arrangements do not have a great track record. Back in 2009, Clifford Chance tied itself up with AZB & Partners (one of India’s “big”) and in 2011 they had already parted ways. The problem with these agreements is their exclusivity; by promising themselves to one another, both international and Indian law firms do not stand to gain much in terms of business opportunities and client exposure. Also, they don’t always work efficiently. To illustrate, when in 2010 year Bharti Airtel put out a takeover bid of 10.7billion for African business Zain, AZB failed to refer CC. This resulted in AZB acting on behalf of Bharti Airtel, but the international side of the deal was steered by Linklaters and HSF. Similarly, Clyde-Co had to drop their Best Friend agreement with ALMT Legal as it was disappointed with the lack of referrals it received.

Failures of such arrangements should have taught foreign law firms that partnering up with an Indian law firm just to gain access to more legal work makes no sense. What would make sense are non-exclusive “inter-practice” as opposed to exclusive “inter-firm” arrangements. For example, if firm X in Washington has Indian clients looking to complete M&A transactions in India, it would identify Y firm in India with a strong M&A practice and partner up with it. On the other hand, when dealing with litigation, X firm would look for better expertise elsewhere.

c) Fly In, Fly Out

Essentially, the arrangement which was discussed before and allows foreign lawyers to fly into India only on a “casual” basis when advising domestic lawyers and businesses on foreign law. However, although it is always better to build trusted relationships in person, law firms also keep an eye out for their expenses. If they were to fly off their lawyers to expensive hotels in India every time it was needed, their finances would take a hit. Thus, they tend to stick with India practice groups.

Alternative initiatives which have been discussed include joint ventures or. The Indian Government could allow international firms to enter the market by setting up JVs with Indian firms. However, even if joint ventures or independent offices were allowed, it would still be unclear what kind of law the JV would practice (ie Indian law or foreign law), whether it would be able to engage in litigation and whether the local firm in the JLV would be able to retain its separate legal entity.

Lastly, a reciprocal arrangement where India and common law countries, such as the UK, agree a cross-country partnership could also be logical. This would ensure equal opportunities and allow for synergies to develop between two systems.

Conclusion

A recurring sentiment which has, for some time now, found a home in the words of Indian economists and politicians is one that voices the need for the country to “take its rightful place in the world”. However, capitalism is driven by the notion of “exchanging” and it therefore makes logical sense that if the Indian legal sector puts 0 in, it cannot get 1 back. At the end of the day, international law firms are missing out on a lot of interesting work, but the real losers are the Indian lawyers and law firms. Unless the regime is appropriately liberalised, the legal market will not be able to develop to the extent that it could and should for the sake of both businesses and individuals.

Most importantly, this debate also carries a lot of weight on the ideological level and as such it merits attention.
In a time which is becoming increasingly characterized by the concept of walls and fear of outsiders, India should not try and protect itself by keeping people out, rather it should revive the ideals of liberalism that the rest of the world seems to have forgotten. In one of its most recent publications, The Economist rightly accused the world of having lost its “hunger for reform” and of “slowly allowing the competitive spirit of meritocracy, and the principles of efficiency and economic freedom to erode”. It is important to be aware of this situation because, like Jenna Rink quite rightly said in 13 going on 30 (apologies to the majority of the male readership who won’t get this reference ): “we need to remember what used to be good. If we don’t we won’t recognize it, even if it hits us right between the eyes”.

Ginny is a member of TCLA’s writing team. She is Italian, having lived in Milan until the age of 16. Ginny recently completed a Combined Honours in Social Sciences at Durham University and she begins the GDL in September 2018.

You can reach out to Ginny in our forums by clicking here.