India: an immense legal market on the brink of opening up

In the last few years, India has significantly developed into an active center for global innovation. This has made the requirement for effective, international-standard legal services an absolute necessity. There has perhaps been more change in terms of market liberalization in the last year, than the two preceding decades. The future can only be brighter from this point onwards.

Ever since the Bharatiya Janata Party won the biggest election mandate in three decades, under the leadership of Narendra Modi in 2014, the new government has made quite a few efforts to attract investment, including easing the rules, especially for foreign investments. Political stability and a favorable economic situation owing to the reforms laid out by a very capable Governer of the Reserve Bank of India, Mr. Raghuram Rajan, have not only enabled India to implement a number of growth-boosting measures, but also to accelerate the liberalization of the Indian legal market.          

Business confidence in India has been rising steadily. In the newly released projection for global growth in 2016-2017, the International Monetary Fund (IMF) has retained its forecast at 7.5 percent GDP growth in India, largely driven by private consumption. With the Rupee undergoing further stabilization, inflation has eased the current account balance, in spite of weaker exports and sluggish credit growth.

Restrictions on the Indian legal market

India has 1.2 million lawyers, which puts it on par with the United States. The country is set to be one of the largest legal markets in the world. However, quite a few obstacles exist, which are restraining further development of the Indian legal market.

Unlike retail, entertainment, aviation and other sectors, legal services are banned from advertising in India, as per the lawyer advertising restrictions specified in the Advocates Act of 1961. In its Rules on Professional Standards, Bar Council of India clearly states that “An advocate shall not solicit work or advertise in any manner.” In 2008 the rules were relaxed to a certain extent, allowing firms to have simple websites, with basic information, though many firms have found ways to bend these rules.

 Therefore, officially speaking, the majority of clients rely on oral referrals for their legal requirements. The legal profession works more by the introduction of a client to a “friend of a friend” than by any standardized criterion for grading lawyers. Currently, some of the more adventurous Indian law firms have used foreign-based publications and directories as a way of advertising themselves to prospective clients and referral partners, and some big firms advertise through other means such as sponsoring events, putting smaller firms at an obvious disadvantage.

 Under such circumstances, the lifting of restrictions will help level the playing field and democratize the legal market.

Efforts at reinvention  

The Indian legal market is no longer strictly top-heavy and set in stone, as was the case even a couple of years ago, when six of the biggest local law firms controlled a majority of the market. Now, many smaller firms are carving out reputations as top-tier in terms of quality. India’s largest firm Amarchand & Mangaldas & Suresh A Shroff & Co has been split into two independent firms after a mediation process that lasted for six months. Ever since then, there has been a mad rush in the market, with the two managing partners (and brothers) Cyril and Shardul vying for retention of their respective lawyers. There was an added uncertainty in terms of which firm would get to keep the much coveted Lex Mundi nomination, until Shardul Amarchand Mangaldas was voted in as the exclusive nominee in July 2015. Cyril Amarchand Mangaldas, in a bid to retain its market position by rapid expansion, went on to hire more than 61 fresh graduates from the top law schools in India, a 30% hike over 2015.

 Together with the push from lobbyists at the new government to liberalize the legal market, along with the progressively increased ease of attracting Foreign Direct Investment (FDI) for businesses, the map of Indian law firms is set to encounter a major upheaval in the next few years.

The times they are a changing’

According to a series of changes proposed to the Companies Act of 2013, startups in India are exempt from all tax liabilities for the first three years including, but not limited to third party tax, compliance duties, form filing and tax on additional funding, starting Feb 1st 2016. This has already resulted in an influx of investors and goes on to show that the country as a whole is very forward-looking and in need of a more structured, internationally effective legal framework.

 Despite a decade-long discourse about liberalization, the Indian legal market has remained largely closed to international law firms for all practical purposes. The consistent opposition from legal juggernauts such as Mr. Lalit Bhasin, president of the Society of Indian Law Firms (SILF), has not helped the cause. So when he recently wrote an opinion piece in The Business Standard, saying that Indian law firms were now “much better placed to face the entry of foreign law firms, although in a phased manner, subject to the approval of the regulatory body, the Bar Council of India (BCI)” and suggested a timeline for the entry of foreign law firms over a period of 5-7 years, it was met with equal amounts of joyful surprise and puzzling confusion.

 Additionally, with over 150,000 cases pending in the Kolkata High Court and more than 90,000 cases awaiting trial in the Bombay High Court, the Indian legal services sector could definitely do with some external help to reach the point of self-sufficiency, in order to truly benefit from this renewed energy in the work environment. Anubhab Sarkar, an associate in the Project Finance department of Indian law firm Krishnamurthy & Co. believes that although the margins on individual cases in Indian courts are lower than say in the UK, foreign firms could definitely benefit from economies of scale and help ease pressure on local legal bodies, once barriers to entry are successfully removed. Entry of foreign law firms will help the country explore foreign markets from the perspective of Indian law.

 Presently, under the Advocates Act enacted in 1961, foreign law firms can’t carry on liaison activities in India without being enrolled as lawyers under the Indian statute. In 2009, the Bombay High Court verdict upheld a ruling that foreign law firms can’t open liaison offices in India, and foreign law firms are still barred from opening liaison offices in India.

According to the most recent news, India could liberalize its legal market as early as September 2016.

As of July 2016, the BCI has completed drafting its proposed rules to allow foreign lawyers and firms to practice non-Indian law in India, following payment of BCI registration fees. If the upcoming discussions go according to plan, then foreign firms would be allowed to appear in international arbitration proceedings held in India as advisors for foreign-headquartered clients. Quite a few US and UK-based law firms, including Allen & Overy, Clifford Chance and Linklaters have expressed an interest in opening offices in India, once the doors are open.

 It is not like there has been a lack of attempts at reform in the past. On April 2015, the Supreme Court sought a response from the Bar Council of India on an appeal filed against the Bombay High Court’s 2009 verdict. Earlier, when the Indian government first opened the economy to foreign investment in 1994, White & Case, Chadbourne & Parke and Ashurst first gained licenses and set up liaison offices in India as foreign law firms. However, Indian lawyers reacted strongly toward these operations and in 1995, the Mumbai High Court ruled that local lawyers have a monopoly on practicing law in the country. White & Case and Chadbourne & Parke pulled out voluntarily after the ruling and only Ashurst stayed on in New Delhi. No new licenses are presently being issues. But Clifford Chance has managed to open up an offshore LPO in Gurgaon to provide IT-enabled processed legal services and help themselves penetrate the Indian market faster through its existing presence, when the market finally does enable them to officially operate in the country.

 For the past decade, India, Asia’s third-largest economy, has been growing at the fastest pace since it achieved independence in 1947. India has emerged as one of the strongest performers in the deal-street across the world in terms of mergers and acquisitions. The number of Private Equity and M&A deals has seen an increase of 18% to 141 since 2015. In the next 15 years, over 2,200 Indian firms are expected to invest in markets overseas. Foreign lawyers are betting India will be a growth market for them once they’re allowed to practice here.

 With businesses getting more and more globalized and international mergers becoming commonplace, the need for foreign firms to practice home law in India is on the verge of losing its importance. Some lawyers in the UK and US are gambling their careers and their firms’ growth structure waiting for the tables to turn in their favor, when the markets open up.

Outcry of liberalization is becoming louder due to local and global needs

An enclosed market situation has restricted both foreign and domestic firms to exploit the growing opportunities in India. Under such a secular conservative arrangement, even the best friend referral relationship is less lucrative. Due to these factors, in 2011, AZB & Partners broke off the relationship with Clifford Chance after only a year. A few months later, ALMT Legal broke with Clyde & Co for the same reason. In 2012, Allen & Overy ended a five-year relationship with Trilegal due to lack of progress on liberalization.

 Constraining this stagnant liberalization is India’s booming economy. FDI soared after Modi’s election and estimates suggested India could attract its highest ever FDI inflows in 2015. With India becoming a top destination for multinational disputes, the espousal of legal liberalization grows ever stronger.

 Shailesh Vara, the UK Justice Minister, said in his earlier visit to India that “many countries like the UK are keen to do business with India and Indian companies.” He emphasized that opening the legal market wouldn’t push Indian lawyer out of jobs but would instead bring benefits such as the creation of new work opportunities, reduced business cost and removal of practical complications that may be disincentives to attracting foreign investments in India.

 More and more Indian attorneys are starting to feel it might be a myopic view to frown on the entry of foreign lawyers, and that they are missing the opportunities of practicing with the best in the world.

People are monitoring developments in the Indian market with bated breath, waiting for the rigid ideas to change and the legal market to be reinvented.