Undercutting of legal fees is set to continue, as opposing forces of fragmentation and consolidation battle to shape the legal profession. Gautam Kagalwala reports

To coincide with the publication of the 2018-19 edition of India Business Law Directory, India Business Law Journal polled 60 Indian law firms of all shapes and sizes to identify the current trends in the profession and provide a snapshot of the state of the country’s legal market.

The results paint an intriguing picture of opportunity tainted by some unique challenges, foremost among them unhealthy price competition and the growth in the number of law firms. Based on the responses, we have compiled a series of graphics showing the level of agreement and disagreement with various statements on key issues affecting the profession. These are shown throughout this article. We have also compiled a SWOT analysis illustrating the perceived strengths, weaknesses, opportunities and threats facing India’s legal profession (see SWOT analysis of India’s legal market).

Self-inflicted wounds

Generally, our respondents were optimistic about the state of business and regulation in the country, with 66% of those polled expecting the ease of doing business in India to improve in the year ahead. However, they were less optimistic about their own sector of the economy, with just 43% expecting the profitability of India’s law firms to increase (see below). In what has been a largely self-inflicted wound by the profession, the biggest pressure on law firm profitability has been the rampant undercutting of fees, which has driven down billing rates for all but the most resilient firms and put particular pressure on mid-size general practice firms. Just 13% of the firms polled expect price competition to abate in the year ahead, while 65% expect it to intensify (see below).

Ease-of-doing-business-in-India Law-Firm-Profitability-of-Indian-law-firms

Price-competition-and-undercutting-of-law-firms-in-India

Senior lawyers fuel fragmentation

The most prominent trend highlighted by our respondents was that of experienced lawyers pursuing their entrepreneurial spirits and breaking away from established firms. This trend was evident among old hands at some of the country’s largest law firms, as well as lawyers with a decade or so of experience. In October, former equity partner S Seetharaman left Lakshmikumaran & Sridharan after 17 years to start his own firm focusing on international trade matters.

At the time, Seetharaman told India Business Law Journal that he wanted to create a firm where lawyers could focus on the delivery of professional services rather than be inundated with administrative work. In another significant departure, Percival Billimoria left as partner and Delhi head at Cyril Amarchand Mangaldas to establish his own independent counsel practice.

Elsewhere, seven partners left Krishnamurthy & Co (K Law) to establish their own firm, Anoma Legal, in three cities. Most of the seven had been with K Law for less than three years.

So, what is driving the exodus?

Bhumesh-Verma,-Corp-Comm-Legal

“Most non-family and non-promoter partners feel suffocated in a big law firm after a certain saturation point,” says Bhumesh Verma, managing partner at Corp Comm Legal, a firm he founded himself after holding partnership positions at several large firms.

“There is no flexibility of approach, no say in fee structure, highly intrusive audit systems running at whims and fancies of IIM [Indian Institute of Management] graduates and BPO [business process outsourcing] managers,” he adds.

Verma expects the exodus from big law firms to continue because partners are saddled with the responsibility of generating business in multiples of their team remuneration without sufficient support. “Those good enough to generate business on their own strength and goodwill may find it better to do away with golden handcuffs and live their lives [on their own terms]. Most of my peers at big law firms have conveyed similar feelings to me,” Verma says.

Jayendra Kapadia, managing partner at Little & Co, says: “The experience gained from working in law firms gives [big law firm partners] confidence and makes them independent enough to work without the supervision of any senior partner. At the same time, [going solo] gives them autonomy to be their own bosses and earn more.”

Some exiting lawyers are setting up boutique law firms that rely on niche specializations to compete with their larger counterparts. “The trend in India is that a full-service law firm is one that is larger than others, but not necessarily specialized in all the areas in which they profess to practice,” says Tarun Gulati, a partner at PDS Legal. Gulati says boutique firms have established niches in some areas, such as tax, intellectual property, regulatory and competition, and savvy clients prefer to work with them.

Goods-and-service-tax-in-India

Consolidation takes hold

A paradox in India’s legal market is that while partners continue to exit large law firms in significant numbers, consolidation is also taking hold. Indeed, many of the new firms being set up by former partners of large firms are themselves being positioned as acquisition targets, either for other Indian firms or for foreign firms if the market should be opened up.

Salman Waris, managing partner at TechLegis, views consolidation as an indication of the gradual maturing of the Indian legal market. “In the last 10 years, there has been a trend towards more specialized and regional practices being set up because of the continuing trend of corporate partner exits. [Now] these specialist or regional practices are merging among themselves or with some bigger firms to take on increasing competition both locally and from foreign law firms.”

With India well known for the fragmented nature of its legal market – and with many of the high-profile mergers that took place in recent years having ended in high-profile breakups – it is perhaps significant that a large number of lawyers surveyed recently by India Business Law Journal spoke of consolidation as one of the most significant current trends in the legal profession.

“Consolidation among law firms was the most important trend I observed in the legal market last year,” says Tanuj Sud, a partner at Gravitas Legal. Last October, Gravitas merged with Kay Legal & Associates to expand its reach into southern India. “For us, the merger catalysed the optimization of our litigation capabilities and gave us a foothold in Mumbai. The expected benefits from consolidation and synergies are tangible – augmented bandwidth, more partners contributing to the turnover, addition of practice area offerings and advantages of combining established brands.”

Sud admits that, although consolidation will be a prominent theme, partners and team exits from tier-1 and tier-2 law firms will continue due to pressure from financial targets.

One of several notable mergers in the past year was that of Anand and Anand’s Mumbai office with media law firm Khimani & Associates to become Anand and Anand & Khimani. Another was Link Legal India Law Services’ takeover of RM Partners in November 2017. One of RM Partners’ founders, Jyoti Maheshwari, told India Business Law Journal at the time that they saw promise in Link Legal’s growth, and therefore merged their practices. But in a stark reminder that consolidation is not taming the free spirits of India’s legal professionals, the other founder, Nikhil Rodrigues, left the merged firm to become head of litigation at Aditya Birla Finance.

Insolvency code ‘comes of age’

If price wars and fragmentation are the nemesis of Indian law firms, the Insolvency and Bankruptcy Code, 2016 (IBC), has been its saviour. The IBC has been a boon for Indian law firms, generating huge amounts of work that has filtered down to just about every firm. Ask any law firm which practice areas have been the most active during 2018, and chances are that bankruptcy, insolvency and related restructuring work will be near the top of the list.

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“The most important trend we have observed in the legal market in the past year is that the IBC has come of age and the number of references for restructuring across sectors has increased substantially, says Dina Wadia, joint managing partner at J Sagar Associates. “This legislation and the key interlocutors around are driving considerable change in the corporate landscape and have created a substantial work stream for finance lawyers, litigators and M&A lawyers.”

The approval of the National Company Law Tribunal (NCLT) this May for Tata Steel subsidiary Bamnipal Steel to acquire a controlling stake in Bhushan Steel was the first big win for the IBC. Bhushan Steel topped the Reserve Bank of India’s list of 12 companies with loans constituting 25% of the country’s non-performing assets. The resolution also became associated with another aspect of the IBC, widely discussed this year. Section 29A was introduced in the Insolvency and Bankruptcy Code (Amendment) Bill, 2017, to restrict wilful defaulters, promoters of a corporate debtor or a related party from submitting a resolution plan.

Rohan Kumar, a partner at Poovayya & Co, says the responsiveness of the regulators, the government, the courts and other stakeholders to ensure resolution of matters referred to the NCLT under the IBC was the most important trend in the past year. “All stakeholders have, for some time, been focused on streamlining the insolvency resolution framework in India. The ‘ripple effect’ of the code can be seen in increased M&A activity, the coming of age of the distressed asset-investment landscape in India, and, perhaps more hopefully, a sea change in the mindset of debtors towards honouring future repayment obligations.”

Of the law firms polled in our survey, 58% expressed the view that the IBC is adequately tackling the problem of non-performing assets in India. Just 22% felt that it isn’t (see below).

Insolvency-and-Bankruptcy-Code-in-India

Integration of law and tech

This year, many law firms have made a point of investing in new technology, including knowledge management, customer-relationship management and legal-process management systems. Law firms are now expressing an openness to technology to deliver international standards of practice, as well as to reduce certain repetitive aspects of traditional lawyering and save costs. “The use of technology in legal practice by in-house counsel, as well as law firms, is a major development [because] we were way behind the rest of the world,” notes Ravi Singhania, managing partner at Singhania & Partners.

Ashwin Julka, managing partner at Remfry & Sagar, hails technology as one of the most transformative trends in the legal profession. “Routine work and research, standard contract clauses, due diligence projects – all these are in the process of being automated as the use of advanced software and artificial intelligence (AI) gathers momentum. What this increasingly leads to is that legal services are being delivered not just by private practice lawyers and law firms, but also through non-traditional legal service providers, such as consultancies.”

In spite of the progress, Seema Jhingan, a partner at LexCounsel, feels law firms are still reluctant to embrace technology. “India continues to be a technology-driven country witnessing new initiatives and programmes in every sector. However, Indian law firms are less receptive to the new technology. While the capital investments and acquisition costs could be deterrents for small and mid-sized firms, resistance to change on how things are usually done, and a lack of understanding, could be other strong factors.”

As they grapple with the introduction of new technology, Indian lawyers must be mindful of international developments to ensure they remain competitive. An Australian lawyer has started a law firm, Cartland Law, staffed by an AI named Ailira, offering tax and estate-planning services. In the UK, an AI named Case Cruncher Alpha beat 100 lawyers in a competition analysing hundreds of insurance claims.

Cashing in on startups

Another significant trend in India’s legal market has been law firms positioning themselves to cater to startup companies. There are now an estimated 40,000 startups in India, and since 2014 they have received US$33.6 billion in funding. Law firms, mindful of the long-term benefits of fostering relationships with the Zomatos, Olas and other unicorns of tomorrow, are vying for a share of this pie.

“As a result of definitive policies and measures of the government to develop and promote the startup ecosystem, this sector in India is emerging pretty well,” says Ashish Porwal, founder of Hreem Legal. “There have been a couple of marquee transactions involving startups in recent times. In fact, several older and larger firms have also begun taking keen interest in the startup ecosystem.”

Santosh Vikram Singh, a partner at Fox Mandal, notes that pricing is an important deciding factor for startups. “Startup clients are cost conscious and prefer price over quality. These startups search for quick and easy solutions. This has also forced law firms to strengthen their presence on the internet and have an ongoing engagement in order to connect with these young entrepreneurs.”

Challenge for the year ahead

Lawyers predict that the development of super-speciality practices areas, such as insolvency and bankruptcy, as well as data protection, will reshape the profession in the year ahead due to transformative developments in these areas. Meanwhile the Supreme Court’s decision in March to bar foreign law firms from opening offices in India may become a driver for continued domestic consolidation. “With foreign law firms going cold on the Indian market, we may see Indian law firms considering inorganic practice-driven consolidation to corner sizeable market shares for their key practices,” says Vineet Aneja, managing partner at Clasis Law.

Foreign-law-firms-in-India-by-2020

India Business Law Journal’s poll found divergent views on the likelihood of foreign firms being allowed into India any time soon. 25% of respondents thought it was likely that foreign firms would be allowed in by the year 2020, but 33% thought the opposite. The majority of respondents – 42% – said they were unsure.

Still, Surendra Singhi, the founder and managing partner of SK Singhi & Co, offers a stark reminder that the issue of foreign law firms in India has not gone away. “Business lobbies in India have been putting increasing pressure on the government to open the legal market to foreign firms, primarily in order to push large Indian law firms out of their comfort zones and pit them against international competition.”

Those parts of the legal establishment that have lobbied to keep foreign law firms out of the country are not out of the woods yet.

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SWOT analysis of India’s legal market

Strengths
  • A change in the mindset of large companies and groups to only engage top tier firms for legal services
  • Law firms in India have a vast pool of talent that has the right mix of skill, qualification and experience
  • An ability to offer a full range of legal services at competitive prices (especially compared with firms in the US, UK and EU)
  • The Indian legal market is extremely adaptable and will adapt well to changes ahead
  • Domain knowledge of Indian law, practice and procedures
Weaknesses
  • Unhealthy price competition and undercutting of fees by large firms that do not allow a level playing field to young and upcoming firms
  • The inability of associate-level lawyers to bring new clients to the firm
  • Inability to promote India as an international arbitration hub
  • Resistance of traditional laws firms (especially litigation offices) to more technology-driven strategies
  • Firms do not give enough attention to training junior associates
Opportunities
  • Newer reforms such as goods and service tax, the Real Estate (Regulation and Development) Act, 2016, and the Insolvency and Bankruptcy, 2016, will provide a number of opportunities for law firms to demonstrate expertise and provide solutions
  • Increase in assignments due to a booming economy
  • Great opportunity in the fields of bankruptcy and distressed assets, and this is across practice areas
  • Consolidation and establishing branch offices in small metros to establish a pan-India presence
  • Expansion in areas such as biotechnology and clinical trials; cryptocurrencies and initial coin offerings; and insolvency laws
Threats
  • Loss of business to foreign law firms and their internationally based India practice groups
  • Chartered accountants and company secretaries will make inroads into transactions and corporate law
  • The insecurities emerging out of corporate India’s decision to build their in-house practices, which has already intensified competition.
  • Growing number of law firms
  • Lack of realization about the power of technology to increase the efficiency of operations

SWOT = strengths, weaknesses, opportunities and threats. Comments provided by law firms surveyed