Tom Young

IFLR Asia reporter

India is on the brink of opening its doors to foreign firms. After 11 years of economic growth and lawyers conducting deals out of hotel rooms, the country's Ministry of Finance has finally responded to the pleas of banks and corporates and is now behind deregulation. But while change is inevitable, it won't be easy. Both international and local firms have a lot at stake in India, and the path to foreign entry is proving harder than expected.

In January, the UK Joint Economic and Trade Committee (Jetco) legal team visited India for talks about the liberalization of the country's legal services market with its Indian counterpart. The breakthrough in the trip came when the Bar Council of India, previously opposed to deregulation, joined the Jetco legal team for talks. During the trip the Law Society also signed a memorandum of understanding with other associations the Society of Indian Law Firms and the Bar Association of India, calling for more cooperation between the two countries.

Also in January, The Law Society of England and Wales and the Society of Indian Law firms (Silf) signed an accord of symbolic significance, though its scope is limited to exchanges of information, visits and seminars. At the time, Alex Pease, chairman of Allen & Overy's India group, likened the accord to building "the first few strands of a bridge over the raging torrent of misunderstandings and cultural differences".

This came immediately after representatives of US and Indian law firms, the American Bar Association and the Bar Council of India formed a working group.

Things will change soon. The Indian government is looking to increase foreign direct investment, international banks are yearning for the reassuring presence of a magic circle firm to handle their capital markets work, and Indian corporates are calling for a rise in legal service standards.

If you build it

Firms will come. The incentive for opening in India is clear, with the size of the average Indian foreign acquisition rising tenfold to $315 million in recent years. The removal of remaining barriers to foreign direct investment in India will also bring another burst of liquidity. And the country carries added respectability for investors following Standard & Poor's investment grade rating in January (Fitch upgraded India in August last year). India is also bathing in the (perhaps short lived) glow of a real estate boom.

Domestic capital markets have soared. The changes introduced to securities regulations in 2005, designed to prevent a flight of capital to foreign markets, have meant Indian companies are thinking twice about floating on Aim. And unlisted companies have alternatives. There is a glut of private equity available in the country, mostly from US and European funds attracted to the prospects of the Indian unquoted sector.

And the growing strength of the domestic market has encouraged Indian banks to lend at rates and levels that compete with those available in foreign markets.

Even listed Indian companies, which had been suffering from a setback in the global depositary receipt market in 2005, have bounced back. The introduction of qualified institutions placements (Qips) in 2006 boosted morale: as a private placing of shares or convertible securities in an Indian company, Qips are less complex than public offerings and lower companies' cost of raising capital.

Foreign firms will have plenty of work. While domestic M&A is a captive market for Indian firms, and an area where their fees are substantially lower, the real play for international firms is global clients. Foreign banks are aching to get involved in derivatives and more complex structured products. Foreign firms can add value here, producing products for the Indian market that the banks adapt and use elsewhere.

Outbound M&A will also offer mandates, and the sector will grow as Indian companies plot to emulate Tata's Corus acquisition. M&A in India is deeply competitive, and companies will be looking to raise the bar. (Outbound M&A totalled $10.7 billion over 32 deals in the first three months of 2007 while 2006 saw 168 deals total $23.1 billion).

Total Indian M&A (domestic and inbound)

A lot to lose

Yet all is not right in India's legal market. While Silf signs accords with its UK counterparts through gritted teeth and international firms have drinks parties in the Taj Palace hotel, things aren't moving as smoothly as they seem. Indian firms have been feeding off the country's growth for over a decade with no competition. And a powerful few, with a lot to lose and the ear of government, have been privately lobbying against foreign entry.

Many firms in India are family run, with dominant personalities at the top and badly paid associates at the bottom, often with no path to equity. There are a few exceptions, and some that have forcibly institutionalized their operations, by introducing a path to equity and fairer pay structures. But generally the competitiveness of family firms diminishes because they compromise quality. And the promotion of relatives to partner level has negative knock-on effects: even if the new partners are up to standard, clients that are aware of the family structure of the firm have their doubts. Internally, this creates problems too. When senior partners start promoting their son or daughter in the firm, the nepotism creates confusion among younger lawyers. And the firm's growth is inhibited as disgruntled associates leave.

Some family-run firms are polished and professional (examples include Fox Mandal Little and Amarchand & Mangaldas & Suresh A Shroff), while others are so-called mom and pop shops dealing purely in litigation. But even the polished family partnerships will suffer from deregulation. Amarchand's dominance under brothers Shardul and Cyril Shroff looks particularly vulnerable. "It [Amarchand] is the obvious example of a firm that, unless it fundamentally changes its structure, will lose its good partners and associates immediately," says one senior partner at a large US firm.

Somasekhar Sundaresan, J Sagar Associates

The structure of these family firms has deterred some Indian lawyers from practising altogether, while others have sought a path to equity in UK or US firms. Deregulation would see an increased shift of talent to the international firms, even if it means giving up the right to practise Indian law, which is likely. "Many of them [family firms] are run like sweat shops," says Somasekhar Sundaresan, partner at J Sagar Associates in Mumbai, who didn't start practising law for five years after graduating because the pay was so poor.

But the flow of Indian lawyers to international firms operating in the country has already begun. Linklaters regularly recruits from Bangalore law school and makes lateral hires from Indian firms, while White & Case, Allen & Overy and Herbert Smith are just a few firms always looking to recruit. The latter invites students to join an internship programme with subsequent training contracts offered. The firm is also recruiting qualified Indian lawyers to practise English law in London.

Indian firms insist that it works both ways though, with lawyers working for international firms wanting to return to India having hit a glass ceiling in London or New York. "A lot want to come back to India where the action is," says Sundaresan.

In-house counsel welcome the prospect of deregulation. Turnover times will decrease, with deals going through quicker, and client services will improve. "We'd love to have some of the firms that we work with overseas. I'd like them all to come in," says Ruby Anand, general counsel at General Electric in Delhi.

The silent fight

With so much to lose, some Indian firms will not allow foreign entry without a fight, though a private one. While all parties are keeping up appearances so as not to reduce their chances of referral work, some are doing what they can to stymie change. "It's a fear driven by a few powerful people," says Anand. This lobbying takes place behind closed doors and the anonymity provided by bar associations and counsels.

The identity of the opponents to deregulation is a badly kept secret. No one mentions them, but everyone knows who they are. And with so much referral business to lose from upsetting international firms, their secrecy is understandable. "The lobbying firms can't openly oppose because they'll be telling their friendly client to get out," says Sundaresan. So who are they? "I'm not mentioning names, but you just have to take the top three or four firms in India" said one UK firm's India group head.

And the Indian lobbying process is unique. There are no lobbying firms or practices and discretion is valued. The process relies on relationships with ministers and finding out which arm of the government is taking which view. "If you say you are a lobbyist in public, it's as good as saying you're a fixer rather than a mobilizer of opinion," says Sundaresan.

While private lobbying remains harmful enough to the cause of deregulation, public spats between bar associations are more damaging. A disagreement in March between the All-Indian Bar Association (AIBA) and the official Bar Council of India (BCI) hampered progress considerably.

On March 13, AIBA declared that it was in support of deregulating the country's legal system, as long as the UK agreed to a reciprocal arrangement, allowing Indian firms to open up in the country. AIBA chairman Adish Aggarwala said at the time that assuming the UK government would let Indian firms in, they would do the same, saying, "I feel that we'll 99% be able to convince our lawyers to agree [to UK firms entering]."

The following day, The Bar Council of India made clear that Aggerwala would have to think twice before rolling out the welcome mat. BCI chairman Jagannath Patnaik hit back with the insistence that only the BCI represented the legal profession in the India, and it wasn't the job of a private organisation like AIBA to invite foreign firms in.

The Bar Council's grievances stem partly from a fear that international firms will practise litigation, the life blood of almost 80% of India's lawyers. As an organization that represents every Indian lawyer, most of whom practise litigation, the fear comes as no surprise. However, international firms insist that they have no desire to practise in Indian courts, with their idiosyncratic procedures. Nevertheless, differing definitions of litigation are causing upset. Appearing before the Indian regulatory authorities in a corporate matter is tantamount to litigation and Indian firms know it. A regulatory dispute in capital markets work, for instance, would technically be litigation, but some would argue it to be purely regulatory. These distinctions need to be clarified, if only to put Indian litigators' minds at rest.

Billing practices are also contentious. India's tradition of finding the lowest service cost used to be seen as a stick with which to beat the higher-charging international firms. Foreign firms may have quicker response times, say local firms, but they're not cheap. This might not matter: as Indian corporates have grown, they have become more sophisticated and adjusted to paying international fees. And the higher profile Indian firms have begun charging similar dollar rates to foreign firms, often without comparable quality.

Getting away with it

It's easy to see why firms are charging higher fees: they can get away with it. There is a take it or leave it situation now, says Bharat Vasani, group general counsel for Tata. "They [Indian firms] have realized that the corporates have nowhere else to go. And there is so much work in the market that they don't care which clients are available or not at the moment," he says.

This will not last forever. The Bar Council's hand is being forced. With the government backing deregulation, and the economic sense of such a move becoming plainer with every plea from domestic and foreign in-house counsel, change is inevitable. What is less clear is how it will affect the legal market.

Both international and Indian firms are being cagey. With so much liquidity to be captured, international firms are reluctant to publicly commit to opening offices, fearing it will spur others on. Many firms complained about the high rental rates in Mumbai (they are the fifth highest in the world) as well as the misleading optimism brought by headline deals such as Tata's romanticized $8.1 billion Corus acquisition and Vodafone's $11 billion swoop for Hutchison Essar.

Pessimism also comes from predictions of the form that deregulation will take. Some predict, though few favour, a joint venture system, similar to the Singaporean model. Although international firms are courting the quality local firms in anticipation of such a development, the move is unpopular. Firstly, there are not enough potential local partners, so the quality practices are being chased frantically. And secondly, Sandeep Katwala, head of Linklaters' India group, points to the failure of joint partnerships in Indian financial services as a warning. Morgan Stanley and Goldman Sachs separated from their local partners, while Merrill Lynch increased the stake in theirs.

These banks want their Indian operation to be on the same platform as their global one, and law firms are no different in that respect, says Katwala. He argues the need for people on the ground to be part and parcel of the people in the firm.

It is not merely the international firms that are against joint ventures. Many family-run firms believe it unthinkable, on ideological grounds. "The family-run firm is, in its own eyes, the Queen. They feel like this foreign party is making a pass at them. And everyone knows that you can't make a pass at the Queen," says Sundaresan.

However, while a mandatory joint venture may not appeal, wholesale deregulation would spell disaster for some family firms. "If the market opens up completely, some firms will sink," said one senior partner at a US firm. The reality will probably be either a mandatory joint venture or a constrained entry, where firms are restricted to certain practice areas and partner numbers.

Already here

Nipun Gupta, White & Case: relieved firms are looking at deregulation seriously

Some contend that international law firms are already in India. While not physically established, most have an Indian presence. Every big firm has an Indian group, normally with an Indian national at its helm (Sandeep Katwala at Linklaters, Nipun Gupta at White & Case, Nimi Patel at Herbert Smith). They are getting work, and not just outbound M&A. Even domestic initial public offerings that are regularly marketed to outside institutional investors have foreign lawyers working on them.

This presence is best illustrated by the conjecture surrounding Linklaters' referral firm, Thawar Thakore & Associates (TT&A). Established in January and run by Shobhan Thakore and Suresh Talwar, the firm seconds lawyers to Linklaters and the two offices refer work to each other. This has not been well received. Some say the commercial reality is that they are competing with a UK magic circle firm, not a two-partner Indian outfit. "I would rather fight someone openly than have to deal with surrogate outfits which, for all practical purposes, are international firms," says Sundaresan. "You can give it any sort of euphemism, but foreign firms are here already," he adds.

Giles White, Linklaters' Asia managing partner denies this. He says the firm is acting no differently from Slaughter & May in Korea, which has two tie-up relationships with local firms. "It [TT&A] is not a Linklaters office. We have a best-friend relationship. That is all." White says that while TT&A seconds its lawyers to Linklaters, and the two firms refer work to each other, it is not an exclusive arrangement. He also thinks the firm will have good relationships with other Indian domestic firms too.

Some observers disagree. "We don't see Linklaters picking up the phone and recommending a competing Indian firm and vice versa, because everyone knows they are here," says Sundaresan.

While the Indian firms may not like it, Linklaters is at least showing its intentions. When deregulation does arrive, the international firms that in-house counsel rely on will arrive too. But so far only the larger magic circle firms are publicizing their interest. Reasons for this silence are varied. Some think that they are genuinely sceptical after having fingers burnt when setting up in other prosperous Asian counties whose boom didn't last. What is more likely is that there is a reluctance to spur other firms on by declaring intentions too soon.

Estimates vary on when the rules will change. Some say as little as a year, others think five years; most say no more than two. "They [international firms] have a finger on the pulse of this issue and I get the feeling they know something is going to happen," says Anand. And while the protectionism of a powerful few will slow things down, there is a feeling that at least deregulation is now being looked into maturely.

Nipun Gupta, a partner in White & Case's India practice is hopeful: "Regardless of which model they go with, at least they are starting to look at different variations intelligently. Now firms are saying: 'OK, we know what we need to do on the ground, but we also need to know what's on offer.' There's a very high level of analysis going on at the moment, and that's a good thing."

There is no doubt India is prospering. But certain domestic firms need to stop lobbying and start modernizing. There can be plenty of work for everyone. If, as expected, foreign firms are limited to international law and thus need local advice, the quality domestic firms will survive and could even prosper. For in-house counsel though, the situation is untenable and needs to change. There are not enough quality lawyers or firms to match the work, making foreign entry a necessity. Only when the Bar Council finally stands to one side and allows full deregulation will India's legal market, not just its economy, flourish.