Indian law firms are grappling with a flood of new legislation as they attempt to capitalize on the resurgent economy

In recent weeks resurgent monsoon rains have brought chaos to India’s capital city as it prepares to host the Commonwealth Games. India’s legal professionals, however, face resurgence of a more welcome kind as they respond to increased business activity. With Indian corporates once again bullish about expansion, confidence among lawyers is on the rise. Now that the hard work of dismantling, rebuilding and reorganizing is drawing to a close, lawyers have begun to structure new deals, recruit new talent and get to grips with a plethora of new laws that will dramatically alter the country’s legal landscape.

Legislative makeover

Legislative and judicial reform dominates the agenda as a stream of new bills are drafted and discussed by parliament. “Every major law is being changed and updated,” says Aaron Solomon, managing partner of Solomon & Co in Mumbai.

Aaron Solomon Managing Partner Solomon & Co

Lawyers are wrestling with new legislation that will modify everything from the tax system, education and competition, to litigation, takeovers, securities and the price of shares issued to non-residents.

As part of new rules for listed companies, the government recently raised the minimum threshold for non-promoter public shareholding from 10% to 25%. “The impact is direct. It forces companies to determine whether they want to stay listed or go private because capital-raising is expensive,” says Rajat Sethi, a partner at S&R Associates in New Delhi. “The squeeze-out provision is notoriously difficult for minority shareholdings in India. The government needs to provide an alternative.”

While many of the moves have been broadly welcomed, opinions differ on the speed of implementation. “Reform of company law should be a priority,” argues Rajan Gupta, a partner at SRGR Law Offices, referring to the Companies Bill, 2010, which is still pending before parliament.

Another development that is being anxiously watched is a master circular on foreign investment. The circular consolidates a deluge of press notes that came before it, but creates uncertainties of its own. “The intent to simplify has got lost and created confusion,” notes Rabindra Jhunjhuwala, a partner at Khaitan & Co. “It’s bit of a dampener for practitioners like me. There are multiple places where ambiguity exists.”

“People wanted clarity on grey areas,” says Aparajit Bhattarchaya, a partner at Hemant Sahai Associates. But “the Department of Industrial Policy and Promotion hasn’t sorted out these issues”.

Other legislative changes signal a greater delegation of powers. “The last few years have seen the evolution of regulatory regimes in India; the Petroleum and Natural Gas Regulatory Board, the Central Electricity Regulatory Commission, the Airports Economic Regulatory Authority,” says Vinod Dhall, founding partner of Dhall Law Chambers. “The liberalization of the economy has seen traditional regulators giving up their power.”

All of this suggests that “the future lies in regulatory practice,” says Ranji Dua, managing partner at Dua Associates. As a result he believes the “courts will go through a major overhaul with quasi-judicial bodies, tribunals, niche areas, etc.”

Ranji Dua Managing Partner Dua Associates

Unclogging India’s courts

Recognizing that the government is the country’s dominant litigant, the law minister recently announced India’s first national litigation policy (NLP), which aims to transform the government into a responsible and efficient litigant. In addition the government plans to focus on welfare legislation and weaker sections of society (see News, page 9).

Even before these changes come into effect, some lawyers are noticing improvements to India’s infamously backlogged court system. “Litigation has become quicker in Delhi High Court where there’s urgency on a matter,” explains Bhattacharya. “Urgencies were disregarded earlier and they used to just give any convenient calendar day.”

Pravin Anand, the managing partner of Anand and Anand, believes that “the dramatic reduction in the lifespan of litigation” is largely due to changes in the Civil Procedure Code. Highlighting improvements in case management by high court judges, he notes that “it is now realistic to finish a complex law suit within a year.”

To reduce the number of pending cases, Delhi High Court recently launched its own arbitral institution, which has reportedly received 40 arbitrations in the last six months. “This is a neutral body that is not expensive like the London Court of International Arbitration. It is attracting domestic disputes, even if there’s no arbitration clause,” says Sumeet Kachwaha, the managing partner of Kachwaha & Partners.

As a result, Kachwaha says that trust in the arbitral process is growing. “The culture of arbitration is still evolving,” he remarks. “We can’t borrow from Hong Kong. We have to see what fits in with our ground realities. It has to be home grown.”

Suman Khaitan, the managing partner of Suman Khaitan & Co, is even more enthusiastic about India’s arbitration offerings. “Now India can compete with London, Paris, Singapore and Hong Kong as an arbitration venue,” he says.

Not everyone, however, is convinced. Many observers believe that India has a long way to go before it can outdo Singapore. Nishith Desai, the managing partner of Nishith Desai Associates, says that “in some cases it’s faster, better and cheaper to fly down to Singapore with your team and go to court there than going to Delhi and filing a case. They have user-friendly technology and the courts send you SMS messages. In some cases, counsel fees are also cheaper.”

Although quasi-judicial bodies such as tribunals and arbitration centres may reduce the burden on the courts, some litigators are concerned. Ramni Taneja, a veteran in the field, is critical of what she calls the “tribunalization” of the judiciary. “There are a plethora of tribunals [which result in] disconnect and disharmony in the judicial cycle,” she says.

Another concern is enforcement, and Manish Desai, the managing partner of Vidhii Partners, argues there is little desire to improve it. “Most lawyers are comfortable blaming the system,” he says. “We thrive on it. It’s easier to tell clients the system has failed.”

“It’s high time things should be done in the judicial system,” says MP Bharucha, a senior partner at Bharucha & Partners. “Pay the damn judges more. [Otherwise] dedication wanes, leading to mediocrity.”

MP Bharucha Senior Partner Bharucha & Partners

Regulating competition

As M&A activity intensifies, lawyers are closely monitoring the development of India’s new Takeover Code. These revisions, along with the Securities and Exchange Board of India’s delisting guidelines, and the eventual notification of the Competition Act’s merger control provisions will dramatically reshape how companies acquire strategic assets.

“General takeover activity, which increased over the past year, has slowed down in anticipation of the new code taking effect,” says Feroz Dubash, a partner at Talwar Thakore & Associates. “Companies are waiting to see what the final version looks like,” he adds.

Feroz Dubash Partner Talwar Thakore & Associates

“It seems to suit everyone to defer the regulations,” notes Lalit Bhasin, the managing partner of Bhasin & Co. However he cautions, “This is not a good signal. It introduces uncertainty to foreign and domestic investors.”

Over the last year the Competition Commission of India (CCI) has settled into its role as India’s new competitions watchdog. “Forty cases have now been filed with the CCI. Orders have been passed in eight cases,” says Dhall of Dhall Law Chambers, who is a former acting chairman of the CCI.

Anand Pathak, the managing partner of P&A Law Offices, warns that staff recruitment and training are problems for the CCI. “It’s going to take time for them to come up to speed with complex cases,” he says. “A lot of the staff at the CCI are ignorant of economics and law. We can’t expect them to pick it up overnight.”

Tax changes raise red flags

India’s new Direct Tax Code (DTC), which has been hotly debated over the last year, is expected to be in place by April 2011. “There will be some amount of bloodshed in the market,” suggests Hemant Sahai, the managing partner of Hemant Sahai Associates. “It’s radical. Conceptually it’s a good idea, but a lot of people have serious reservations,” he says.

“The way in which the DTC draft came was a disaster,” says Desai at Nishith Desai Associates, accusing authorities of adopting a casual approach towards international treaties. “Tax laws are becoming more territorial … There is a tendency to introduce retrospective amendments in large numbers whenever a new budget comes in. This risks upsetting transactions that have been settled.”

Nishith Desai Managing Partner Nishith Desai Associates

“The DTC is raising red flags,” agrees Attreyi Mukherjee, a senior associate at Paras Kuhad & Associates. “There were assumptions that the DTC would prevail over double tax avoidance agreements [DTAAs], but the government has clarified that DTAAs will prevail over the DTC.”

Investor jitters have also been prompted by the Indian government’s re-examination of the India-Mauritius DTAA. “Nearly 43% of FDI [foreign direct investment] in India comes from Mauritius,” says Anand Kumar, a partner at private equity boutique Sand Hill Counsel. Kumar is concerned that any change to the capital gains exemption under the India-Mauritius treaty will not only impact the structuring of investments into India through Mauritius, but also those routed through Singapore. “The Singapore-India DTAA provides for similar capital gain exemptions,” he says. “If the benefit under India-Mauritius treaty goes, the benefit under Singapore treaty also goes.”

The new goods and services tax (GST), which will take effect at the same time as the DTC, is another change lawyers are grappling with. “We’re advising on loopholes; it’s like a fresh piece of cake,” says Badri Narayanan, a partner at Lakshmikumaran & Sridharan. “We’re not able to fathom how it will turn out. It may be closer to the European GST which is origin-based taxed (i.e. where products originate) or a destination-based principle where rich states will get lower taxes. We have a team dedicated to examining these changes.”

Calls for deregulation

Over the past year foreign investors have increasingly pressured the Indian government to liberalize its tightly regulated defence, retail, education and insurance sectors.

While the Foreign Educational Institutions Bill could lead to increased participation from overseas investors, observers point to the political challenges that it could throw up. Sawant Singh, a partner at Phoenix Legal, says there are major concerns about education becoming inaccessible to low-income groups. “The commercialization of education is something people try and steer clear from,” he says.

Abhijit Joshi Partner AZB & Partners

Some observers believe the government should focus on upholding educational standards rather than controlling foreign participation. “[At present] if you want to invest in education, you have to be a trust, society or charity. You cannot attract foreign investors with that,” says Premnath Rai, the managing partner of PRA Law Offices. “Why not corporatize? It’s been done elsewhere. The government needs to set standards, not regulate who can participate!”

“Any sort of move to open up any sector is viewed as a sell-out,” explains Singh. “The nuclear story was the same, multibrand retail is the same, banking is the same and insurance.”

Despite this, lawyers continue to see activity in these sectors, with increased collaborations and joint ventures. “I see defence exploding,” says Priti Suri, the proprietor of PSA. “There will be consolidation and more discussions, sharing and optimization of resources between companies.”

Lira Goswami, a partner at Associated Law Advisers, is similarly upbeat. “There’s a lot of interest, not just from tier-one companies, but tier-two companies as well. There’s a 30% offset obligation in the defence sector and joint ventures qualify as offsets, so this is an attractive route where even the foreign collaborator has a share in the pie,” she says.

While foreign investors continue to monitor the insurance sector for signs of higher FDI caps, law firms in India are ramping up their insurance capabilities. “We’ve seen a lot more liability claims, a new spike which has exceeded US$1.5 billion,” explains Rajat Taimni, a partner at insurance boutique Tuli & Co. “There are new products in the Indian market and there are no precedents on how to deal with these products in the Indian context,” he adds.

Awash with private equity

“Private equity and structured finance deals have picked up again,” says Huzefa Nasikwala, a partner at Juris Corp. Indeed, resurgent investors are pouring funds into sectors as diverse as real estate, healthcare, microfinance, green technology and regulated areas such as education and retail.

“Many private equity funds have become sector-agnostic,”notes Desai at Nishith Desai Associates.

“Private equity is looking at anything they can grow in three to five years – pipes and fittings, organic foods, fashion designing, etc.,” concurs Vishal Gandhi, managing partner at Gandhi & Associates.

“We’re seeing acquisitions on conventional and renewable projects and the return of private equity to roads, infrastructure, etc.,” says Akshay Jaitly, a partner at Trilegal. “Proposals are going out … people are putting their toes in the water and asking regulatory questions.”

Moving beyond the metros

Investors are increasingly looking outside India’s teeming metros for opportunities. Infrastructure and real estate developments are booming in smaller cities such as Ahmedabad, Agra, Jaipur, Jodhpur, Lucknow and Pune.

“We have acted as legal advisers for the Kandla port project and the container terminal in the New Mangalore port”, says Suchitra Chitale, a partner at Chitale & Chitale Partners. “We have also assisted the Asian Development Bank in vetting the transmission agreement for the Jhajjar Power Transmission project; completed legislative drafting for the Meghalaya Infrastructure Development Act and the Karnataka Road Fund Act; and have acted as legal advisers for the setup of a multipurpose stadium in Ahmedabad.”

As more money is pumped into these cities, good legal assistance becomes a necessity. “In tier-two cities, [so far] the need for legal services was for small litigation,” says Sudhir Ravindran, CEO of Altacit Global in Chennai. “Now there is a requirement for much more; 30% of our revenue comes from tier-two cities.”

Sumes Dewan, a partner at FoxMandal Little, agrees. “The metros are already saturated according to retailers. New brands are emerging in smaller cities,” he says.

Flexing global muscle

Lawyers are priming themselves for activity further afield as Indian investors continue to flex their global muscles. “Indian companies are forcing us to expand our boundaries,” says Ravindran. “Their needs are no longer local.”

“India-Africa is the next frontier,” predicts Abhijit Joshi, a partner at AZB & Partners. “A lot of Indian companies have made mining acquisitions there. Anything with natural resources and real estate is doing well. I wouldn’t be surprised if Taj starts looking at hospitality there.”

Abhijit Joshi Partner AZB & Partners

However, Africa may not be suitable for all investors given the potential difficulties in navigating the regulatory and geopolitical landscape. “Nigeria presents security and political risks,” warns Sahai of Hemant Sahai Associates. “Only big players can go in and make profits in a meaningful way.”

Improvements in IP

IP is another area of the law in which practitioners are being encouraged by their clients to adopt a more international outlook.

“We’re now looking at portfolios covering 180 countries,” says Abhai Pandey, a partner at Lex Orbis. “Indian companies with an export market are now looking at Community Trade Mark and US Patent and Trademark Office filings … They are looking to build their IP in export markets. This was absent until a couple of years ago and cost was the initial barrier.”

Within India, observers point to improvements in efficiency. “The Indian Patent Office has made a turnaround change,” says Pandey. “The number of examiners has increased and there is more transparency.”

Such improvements have been accompanied by a steep rise in the number of IP cases and a changing attitude towards IP in many sections of the judiciary. “The number of cases filed in this field has gone up so dramatically that judges have now got extensive experience and to a great extent are also building a healthy attitude towards IP,” notes Pravin Anand of Anand and Anand.

Changes to the copyright law, meanwhile, could enhance “copyright protection for various classes of work, granting rights to lyricists, composers, singers and other contributors to artistic works, independent of the producer,” explains Rahul Chaudhry, a partner at Lall Lahiri & Salhotra.

But perhaps the biggest change to India’s IP landscape has been the increase in awareness among the country’s IP owners. “Awareness has skyrocketed,” says Punthi Shah Lad, an associate at LawQuest. “Every contract is drafted with an IP clause. Previously, people used to hesitate to include these clauses because they thought these were expensive.”

Punthi Shah Lad Associate LawQuest

National tensions and international rivalry

In eastern and central parts of the country, Maoist insurgents have created what India’s prime minister, Manmohan Singh, referred to as the country’s biggest internal security threat. The threat has given rise to anxieties over worker safety and project completion.

“People in mining and large projects in Chhattisgarh, Orissa and Jharkhand may be disrupted,” warns Krrishan Singhania, the managing partner of Singhania & Co. “ArcelorMittal and Posco are carrying out projects in that area, but they have stopped.”

In addition, India’s temporary ban on the import of telecom equipment from China sparked friction earlier this year. While some argue that such actions sour relations between the two emerging powers, others say India’s action is justifiable. “The US has export controls, so actions by India are not unjustified and national security cannot be forsaken for commerce,” argues Bijesh Thakker, the managing partner of Thakker & Thakker.

Some analysts suggest that India may have to be more aggressive in order to compete effectively with China. However, others believe that India’s democratic governance, its common law system and its English-speaking population will give it a competitive edge over other countries in the BRIC (Brazil, Russia, India, China) group. “India is fundamentally much stronger and a fairer environment in which to do business,” says Gandhi of Gandhi & Associates.

“In the long term, we have the capacity to surpass China, predicts Amir Singh Pasrich, the managing partner at International Law Affiliates. “In the region, India is at the centre of the map in terms of a choice of investment destinations.”

North-south divide

In the midst of international rivalry, India’s law firms are also struggling to overcome cultural and regional constraints.

Law firms in the south of the country have particular problems. While salaries in the south are lower, billing is rigid. “Chennai is still conservative from a pricing perspective,” says Kavitha Vijay, a partner at Universal Legal in Chennai. “Hourly billing is something we’d love to have. But there is major discomfort with that.”

Kavitha Vijay Partner Universal Legal

Societal expectations create further complications. “I have women lawyers who say ‘I want to work, but I need to be home by 5:30pm because I need to cook’,” laments Shona Malvi, a partner and head of the Chennai office at Wadia Ghandy & Co. “You’d never hear excuses like that in Mumbai,” she says.

An additional challenge facing southern firms is that persuading a prospective client to engage a law firm at all can be difficult. “Even with very large companies here, you have to convince them to consult a lawyer,” says Rupa Jacob, a partner at Kochhar & Co in Chennai. “Their attitude is that we’ve run this business for 100 years, so we don’t need to consult a lawyer.”

R Vijay Anand, a partner at R&P Partners in Chennai, sees the problem as one of marketing. “In terms of visibility and marketing, the south is nowhere near Mumbai and Delhi,” he says. “No matter how good you are, you need to market yourself; otherwise no one will come to you.”

However, the lack of marketing acumen may not be confined to law firms from the south of the country. Vandana Shroff, a partner at Amarchand Mangaldas, recalls her experience at a conference in New York: “I went to the New York Amercian Bar Association conference and I really felt like we were poor-country cousins,” she says. “They had pen drives, powerpoint slides and glossy files and we had our four-page brochures.”

As India’s established law firms grapple with marketing strategies and other initiatives to increase their competitiveness, they are facing new competition from a wave of recent start-ups, many of which are run by the former partners of well-known firms. Notable start-ups in the last year include: Vidhii Partners, established by ex-Paras Kuhad & Associates partner Manish Desai; SRGR Law Offices, established by Saroj Jha, Ravi Bishnoi, Gaurav Bhatia (who has since left) and Rajan Gupta, all of whom were previously with FoxMandal Little; and Tatva Legal, established by Shishir Sharma, NK Dilip and Shailendra Komatreddy of Dua Associates.

While some see the spate of defections as a sign of volatility and disloyalty, others argue that fragmentation is a reassuring indication of confidence and maturity. “New firms reflect the depth in the market,” says Sahai of Hemant Sahai Associates. “Existing firms have been unable to meet the aspirations of these lawyers. The fact they’ve survived shows there’s space for everyone.”

International competition

While the managing partners of Indian law firms keep one eye on their domestic competitors, they are finding it increasingly necessary to watch prospective international rivals with the other.

Despite the lack of progress so far, most observers believe that India will eventually allow foreign firms to enter, if only to fulfil its international trade obligations. As and when the US government decides this service sector should come under GATT, liberalization in India will happen,” predicts AG Karkhanis, a partner at India Law Services. “The US government has other priorities at the moment. They are building up the atmosphere … the service sector is somewhere down the line.”

“The Law Society of England is harping on about entry,” says Bhasin of Bhasin & Co. “They want India and China very badly and we aren’t playing ball with them.”

For now at least, the game of wait-and-watch continues for foreign law firms. As they sit on the sidelines, they can do little more than jostle for position, build relationships with Indian law firms and strive to win high-profile international roles on India-related deals.

“Last year was ridiculous,” says Joshi of AZB & Partners, which has a best friends relationship with magic circle firm Clifford Chance. “We had foreign lawyers here every single week. It’s nice, but we aren’t used to people focusing on us so much.”