Indian law firms face a daunting pace attack from big accountancy firms amid a slow-wicket economy. On top of this, in-house counsel are facing up to more work internally, leaving less for law firms. Can a flurry of litigation and insolvency boost their run rate? Gautam Kagalwala finds out

India Business Law Journal polled 38 Indian law firms of all shapes and sizes for their thoughts on the state of, and current trends within, the legal market. As in previous years, the legal market in 2018-19 saw both law firm fragmentation and the merging of practices. But what is worrying managing partners is the growing independence of in-house counsel and their ability to handle greater amounts of legal work without outsourcing.

The results of our survey reflect this, as 66% of law firms either expressed agreement or strong agreement with the statement that in-house counsel are taking on more work internally. This squeeze on demand is impacting the ability of law firms to source new business, maintain fees and hire new talent. Similarly, 69% of law firms predicted that competition and price undercutting will intensify in 2019-20, with only 10% disagreeing with this outlook.

Despite these findings, 50% of firms still say they are experiencing greater profitability in comparison to the previous year, while 37% are not.

“Companies are now approaching law firms mostly for tricky opinions,” says Mahua Roy Chowdhury, the founder of Royzz & Co. “Thus, the dependency of companies on law firms for day-to-day activities has reduced, leaving space only for dynamic lawyers to interpret new legislation and provide pragmatic business solutions.”

Traditionally, in-house counsel have acted as the interface with law firms and played a smaller role on the company’s deals, but as costs are trimmed this role has evolved.

“The companies have started attracting better-quality lawyers as in-house counsel and are compensating them well,” says Ravi Singhania, the managing partner at Singhania & Partners. “They have taken up a significant role in providing legal services to the company versus most of the work being outsourced to law firms.” He agrees that there is now an obligation on law firms to provide better-quality services.

law firmsMoving in-house

Prem Rajani, the managing partner at Rajani Associates, says he has observed in-house teams being expanded in sectors including banking, non-banking financial companies, insurance, telecoms, and other larger businesses. “[The hires] mostly cater to day-to-day affairs and senior experienced lawyers [are hired for] regulatory-related issues, compliance and large M&A deals,” he says.

Along with good pay, the quality of work and the promise of a less stressful environment is attracting private practice lawyers in-house. “We can see a shift taking place where working in-house is becoming as attractive as, if not more than, joining a law firm,” says Rajesh Begur, the managing partner at ARA LAW. “In-house departments are becoming the primary service providers for most companies, expanding in status, variety of expertise, exposure, and even the complexity of the work. Many companies, especially in the information technology and pharmaceutical sectors, have expanded their in-house legal teams.”

Law firm partners especially hold allure for their company clients to hire in-house due to their experience and existing work relationship, along with the prospect of reducing legal costs. Private practice lawyers say large Indian companies have shown a preference for hiring partners to expand their in-house teams.

Law firm profitability

Statement:
Indian law firms will experience greater profitability in 2019-20 compared to the previous financial year

law firm

Price competition

Statement:
Price competition and undercutting among law firms will intensify in the current Financial Year

law firm

Outsourcing work

Statement:
In-house counsel are now handling more legal work internally than in previous years

law firm

The graphs in this article are based on a poll of 38 law firms in which respondents were asked to indicate their level of agreement with a series of statements

Some notable examples of law firm partners going in-house in India in the past year are: former Khaitan & Co partner GT Thomas Phillippe, who joined unicorn food delivery company Zomato as its general counsel; Hammurabi & Solomon partner Pathik Arora, who became the general counsel of Senvion Wind Technology; and Trilegal counsel Shaswata Dutta, who became the executive director, legal at Goldman Sachs.

Begur says the work pressure and high revenue targets of law firm partners make working in-house a more attractive proposition. Anandaday Misshra, the founder of AMLEGALS, agrees. “More lawyers are willing to move in-house in comparison to earlier years,” he says. “This mindset comes from having a more relaxed work environment and getting a good income as well. Lawyers, who have toiled in their initial years at a mid-senior level and are looking for a more relaxed approach to life, are willing to shift in-house.”

As companies handle more work internally, lawyers say the knock-on effect of greater competition will increase firm promotions to promote loyalty.

Alternate view

However, Archana Balasubramanian, a partner at Agama Law Associates, does not agree that there is a trend. “It is not certain that companies are seeking to handle more work internally,” she says. Companies typically outsource their litigation work and Balasubramanian says this will continue to be the case. She says in-house lawyers are instead looking to increase the number of law firms they work with, and assign them according to the importance of the matter.

“Even with contract drafting, many companies are moving forward to keep law firms on low retainers rather than [take on the] cost of such resources in-house,” she says, adding, “of course, IP-intensive companies continue to outsource less and less.”

PM Thimmaiah, a partner at Bengaluru-based MD&T Partners, says the engagement between law firms and clients has become more holistic. “Law firms help as architects of the transaction from start to finish, and leverage their connections across sectors to facilitate this,” he says, adding that law firms can help companies diversify and expand into new areas.

“For us at MD&T it has been a good year, with several high-value transactions in the areas of M&A, project finance, real estate, startups and energy. This in turn has led to more retainer arrangements as well as new clients who have seen our work, or have been referred to us.”

Apurv Sardeshmukh, a partner at Legasis Partners, points to the paradox of new firms opening up. “With multiple law firms coming up, job opportunities will increase for lawyers,” he says. “However, this will also increase undercutting and impact profitability.” He admits the past year was below average for his firm as “new opportunities were hard to come by”.

Lawyers agree with this view, with 53% of those surveyed expressing agreement or strong agreement that there were more legal jobs available in comparison to the previous year, while 26% disagreed.

Lawyers also say there has been a greater fragmentation of the legal market this year in comparison to the previous year, with 76% agreeing in the poll. Ravichandra Hegde left his equity partner position at J Sagar Associates (JSA) in October 2018 and started the litigation firm Parinam Law Associates with former Juris Corp partner Hitesh Jain. He says the decision to start his own practice was a good one. “I would say that it was a great year for us.”

On the subject of increased competition in the market, he says, “A good service and excellent handling of matters have always resulted in retaining good clients, irrespective of discounts and undercutting on invoices. For a big client, the fee issue never exists.”

Parul Kashyap, who left her role as projects and energy counsel at Clasis Law in August 2018 to launch SunLegal, is also upbeat about her decision to start her own firm.

law firms“This was our first year and we had our hands full with project and corporate advisory work, where we advised concessionaires, engineering companies, authorities, international manufacturing companies as well as a number of international SMEs,” she says, adding there are plenty of opportunities in the country. “One just needs to persevere to understand the client’s sensitivities, their requirements, and offer rational prices for services.”

Other breakaways this year include: disputes equity partner Aditya Narayan, who left Argus Partners in June with indirect tax partner Megha Narayan and M&A and corporate partner Siddharth Raja to start their own firm, Saakshya Law; and former HSA partner Aniket Prasoon, who left in September 2018 to start regulatory disputes and projects advisory firm PLA Advocates.

Work opportunities

Statement:
There are more job opportunities in comparison to the previous Financial Year

law firm

Fragmentation

Statement:
The fragmentation of the legal market is happening faster than in previous years

law firm

The graphs in this article are based on a poll of 38 law firms in which respondents were asked to indicate their level of agreement with a series of statements

Other challenges

The Bar Council of Delhi notice to the “Big Four” accountancy firms in May 2019 temporarily banning them from legal practice has once again brought to the fore the practice of auditing firms providing legal advice through their affiliates. Private practice lawyers are upset at the thought of losing business and want to slow down their progress before auditing firms move into areas other than taxation.

“This problem has only worsened in recent years, with many of the bigger [accounting] firms setting up separate legal practice arms and doing this in a formal manner,” says Salman Waris, the managing partner of TechLegis.

Rukshad Davar, a partner at Majmudar & Partners, shares Waris’ apprehension. “Yes, there does lie a concern about accountancy firms doing the work done by law firms,” he says. “However, in specialized areas clients will still prefer to engage a law firm over an accounting firm.”

law firmsThe deep pockets of the Big Four give them an easy edge over smaller firms that have expenses such as office rent and firm infrastructure to take care of.

Priti Suri, the managing partner of PSA Legal, says accounting firms are overstepping their territory and pose a challenge to the growth of law firms. “The practice of law has to be consistent with the Advocates Act,” she says. “If the Advocates Act needs to be revamped, then that action should [take place], before they are allowed to engage in the ‘practice of law’.”

In a further sign that all is not well, Mergermarket, in its Global & Regional M&A Report for the first half of 2019, stated that five of the seven top-ranked Indian law firms, in terms of deal value, saw their values fall by between 39% to 68% in the first half of 2019 in comparison to the same period in 2018.

There are also concerns about the slowing economy, both within and outside legal circles, with poor performance and widespread job losses reported in the auto, real estate and fast-moving consumer goods sectors.

Lalit Bhasin, the managing partner of Bhasin & Company, says the legal sector has faced challenges on account of the economy. “The Indian legal market has not fared well in the last financial year,” he says. “We managed to maintain our profitability of the previous year, even though there was no substantial increase in business opportunities.”

“Many clients have defaulted on payments as they have suffered losses,” says Waris, attributing this to the sluggish economy. “Bill recovery and non-payment of fees by clients has been a significant issue impacting the legal market this year.”

Lawyers say delayed payments impact cashflow and hinder growth plans, especially for mid-sized firms and startups. Clients that fail to offer legitimate reasons for late payments can expect to see a dilution in quality of legal advice, with firms devoting less than the required time.

“The concern is with delayed payments and not necessarily non-payments,” says Suri. “In some cases, clients obtain the advice with promises to pay [a typical challenge with startups]. Honestly, I do not see how entities come up with excuses or fail to pay, particularly when they have taken the benefit of the advice. It is deplorable, more so when the quantum of fees is agreed upfront.”

law firmsPromising practices

But even in this gloomy scenario there is a silver lining with dispute resolution and insolvency and bankruptcy practices expected to thrive during the downturn in the economy. Firms such as Cyril Amarchand Mangaldas, Khaitan & Co, IndusLaw, Argus Partners, HSA Advocates, Link Legal India Law Services and Wadia Ghandy & Co have expanded their dispute practices in the past year.

“We generally had a good year with a significant increase in regulatory work and disputes,” says Mathew Chacko, a partner at Spice Route Legal. For Chacko, the legal market has consistently shown signs of growth and profitability on account of “increased investments, increased exits, an increase in restructuring, and an increase in disputes”.

The Insolvency and Bankruptcy Code, 2016 (IBC), is considered by many lawyers as one of the most important pieces of legislation in recent years. Firms have reached out to creditors to assist them with recoveries and keep them informed of the evolving insolvency regime. But, of the 12,000 insolvency petitions filed since the code came into effect in May 2016, fewer than 2,200 cases had been admitted by the National Company Law Tribunal by June 2019. This has, nonetheless, resulted in an increase in work for law firms.

“The IBC is considered a landmark reform among various ease of doing business initiatives undertaken by the government,” says SK Singhi, the managing partner of SK Singhi & Co. “[Its introduction] has reduced the time taken for winding up a company in India from over four years to less than a year.”

Singhania, of Singhania & Partners says: “The banks aggressively pursued NPAs [non-performing assets] and resorted to litigation before the NCLT [National Company Law Tribunal]. A number of businesses were taken to the NCLT, which resulted in the loss of control by the promoters, and fights among the promoters and investors, to bid for these assets.”

Abhijit Joshi, the founding partner of Veritas Legal, says: “The disputes practice has seen a sizeable increase in matters. These relate to investigations, white-collar crime, and generally relating to strategies for prevention of prosecution on investigation by multiple government agencies.”

law firmsPrateek Bagaria, a partner at Singularity Legal, says there has been a notable growth in international dispute services in India. “The Indian legal market, when seen from the perspective of an international disputes lawyer, has been very exciting in the past financial year,” he says. “There is a large volume of Indian construction, shipping and energy multinational cases that have supplied the market with high-value cross-border litigations, and commercial and investment arbitrations.”

Lawyers, it seems, are adept at seizing opportunities from adversity to stay ahead of the game.