India: Open for business?

After much debate and anticipation, the liberalization of the legal sector now seems imminent. Gautam Kagalwala speaks to lawyers about the arrival of foreign firms and other key developments affecting the state of play in India’s legal market

The legal community is abuzz about the long-awaited arrival of foreign law firms in India with Commerce Secretary Rita Teaotia conveying to law firms behind closed doors that it was a top priority for Prime Minister Narendra Modi. Several lawyers identified this development as a challenge for the legal sector when we queried them about the areas of concern. “The entry of foreign law firms is seen by many to be the biggest threat to the existing law firms who have miles to go before catching up with the quality and delivery of the better foreign law firms,” says Srinivas Kotni, the managing partner of LEXport. Kotni blamed the inadequacy of the legal education system for producing law graduates who are not able to match the quality of their foreign counterparts. Optimists say the entry of law firms from around the world would bring healthy competition and greater efficiency within the profession.

At the time of writing this article, the government was considering liberalizing the legal sector in a phased manner with foreign firms allowed to set up in special economic zones such as the Gujarat Financial Tech City. Shivpriya Nanda, joint managing partner at J Sagar Associates, supports a phased opening of the sector. “So far, many foreign law firms have been servicing their India-based clients from other locations. Their arrival could be both a threat and a fantastic opportunity for Indian firms. It will depend on how nimble the Indian law firms are in restructuring their governance and strategy to deal with this issue.”

Jaya Bhatnagar, the founder of Sieben IP, says foreign firms possess processes and systems such as risk management systems which would make their journey to India expensive if they brought their operating protocols here. “The cost of upholding such a standard in India would result in them charging much higher fees than expected. Moreover, they would have to sustain heavy losses for a duration that may range from three to five years.”

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Insolvency and Bankruptcy Code

India has a low rank of 130 out of 190 countries on the World Bank’s 2017 Doing Business index, which the government has expressed determination to improve. The World Bank has similarly given India a low rank of 136 in the area of resolving insolvencies, and the passage of the Insolvency and Bankruptcy Code, 2016 (IBC), is expected to improve this.

“The introduction of the code and amendment to the Companies Act has led to formulation of the National Company Law Tribunal (NCLT), which has merged various jurisdictions including the erstwhile CLB [Company Law Board], BIFR [Board for Industrial and Financial Reconstruction], AIFR [Appellate Authority for Industrial and Financial Reconstruction] and company court of high courts, in the matters of mergers, demergers, amalgamations, revival, restructuring, winding up and reduction of capital,” says Ranjana Roy Gawai, managing partner at RRG & Associates.

The code gives financial creditors the ability to assess whether the corporate debtor’s business is suitable for revival or liquidation. Creditors are able to access the insolvency resolution process via the NCLT, which will appoint an insolvency professional to operate the debtor’s business. “The IBC replaced a fragmented legal and institutional framework that had been delivering poor outcomes for years for creditors and distressed businesses,” says Rupin Pawha, managing partner at Juris Legal. “The IBC offers a time-bound resolution process aimed at maximizing the value of a distressed business. This is expected to benefit not just the creditor and debtor companies, but also the overall economy because capital and productive resources will get redeployed relatively quickly.”

The establishment of the NCLT is expected to reduce the load on the debt recovery tribunals, which were reported to be handling over 95,000 cases as of October 2016. The NCLT in August passed its first insolvency resolution order under the IBC, for Synergies-Dooray Automotive, in response to a claim by asset reconstruction companies and other creditors. As per the resolution plan, the company would be merged with its creditor Synergies Casting. The order shows that the IBC is about reviving companies, not merely closing them.

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“Insolvency and bankruptcy is going to be the most promising area of practice in coming years,” says Akshat Pande, a partner at Alpha Partners. Among the lawyers who shared their views with us, almost a third identified this as one of the areas which will generate the most amount of work for law firms.

Alternative dispute resolution

Lawyers also identified alternative dispute resolution (ADR) as a significant area of practice which would see a high amount of activity in the coming year. “India has been a highly litigative country. MNCs brought their culture of litigation ‘as a last resort’ in India,” says Mahua Roy Chowdhury, a partner at Royzz & Co. “Litigation has become relatively expensive and slow-paced, and Indian judicial system is under pressure for fast disposal. Due to this, ADR has emerged as an important area of practice.”

Nidhi Mathur, a partner at Integrity Law Offices, agrees with this view: “The massive foreign investment is responsible for the growth in ADR. Moreover, the establishment of Mumbai Centre for International Arbitration and ASSOCHAM International Council of Alternate Dispute Resolution has given it a further boost.”

The government is keen to establish an institutional arbitration ecosystem in India, with Modi himself saying, “An enabling alternate dispute resolution ecosystem is a national priority for India” at a conference in 2016.

At the moment, Indian companies view Singapore as a preferable destination for arbitration, with India ranking second behind China on the number of cases it takes to the city-state. The Arbitration and Conciliation (Amendment) Act, 2015, has been called one of the most significant legal changes in recent years, while Maharashtra became the first state to have an institutional arbitration policy. The Supreme Court in August added a legal bite to orders passed by arbitral tribunals under 27(5) of the Arbitration and Conciliation Act, 1996. It stated that non-compliance can be tried under the Contempt of Courts Act, 1971, by an appropriate court.

Goods and services tax

The goods and service tax (GST), which came into effect on 1 July, had a far-reaching impact across sectors. The tax was 17 years in the making and encountered a number of delays prior to its passage. GST avoids duplication of taxes and establishes uniform tax rates across states. The ordering of products and services into four tax slabs left winners and losers in its wake. For example, the GST Council applied the highest rate of 28% on white goods such as air-conditioners and refrigerators, even though their manufacturers argued for a lower rate on the basis that these goods had become essential for Indian homes.

“Since GST is a unique law this finds the legal profession extremely busy to understand and in turn to advise the clients about the nuances of this law,” says Lalit Bhasin, president of the Society of Indian Law Firms and the managing partner at Bhasin & Co. “The law firms have acquired a very responsible position in advising their respective clients about the implications of these developments [GST and the IBC], which have the potential of providing more lucrative work for the law firms.” Bhasin adds that the legal profession was not adversely or directly affected due to the new GST law.

Business owners looked forward to GST as it would increase ease of doing business and reduce compliance requirements. On the other hand, lawyers welcomed GST for the amount of indirect tax advisory work it would generate with regards to its implementation. “GST is and will continue being an extremely active practice area, be it in the advisory space or transactional space or the litigation space,” says Arti Mashru, a principal at LexBlurb, a communications consultancy for law firms.

Technology: Opportunity or threat?

Some lawyers expressed concern about not being quick enough to harness legal technology, while others said law firms should recognize the challenge of artificial intelligence (AI). World-renowned physicist Stephen Hawking warned that automation and AI would decimate middle class jobs, while McKinsey estimated that 23% of the lawyer’s job can be automated based on current technology. “The emergence of technology-enabled platforms that use AI, analytics and automation are to reduce certain repetitive aspects of traditional lawyering,” says Shuva Mandal, managing partner at Fox Mandal. He adds that this nascent trend will gather momentum in the coming years, spurred by the demands of foreign clients and talent shortages.

Customized legal and machine learning software is being used for contract analysis, case predictions, the monitoring of regulatory updates and other legal research. Cyril Amarchand Mangaldas early this year became the first Indian law firm to make use of AI legal assistance software from Kira Systems, a Canadian company. “The key challenge and opportunity will lie in pivoting the law firm from being a service provider, to becoming a ‘knowledge’ partner through a focus on the intellectual content and value addition in their offerings,” says Ramanand Mundkur, managing partner at Mundkur Law Partners. “With wider use of technology to replace a number of legal tasks, clients are more likely to turn to technology for services they previously obtained from law firms.”

Rajesh Begur, the managing partner of ARA Law, shares this view and says he observed a decline in preference for traditional lawyers among cost-conscious clients such as start-up companies. “Slowly legal service marketplaces are gaining a stronghold on account of them offering more cost-effective solutions to consumers. The online revolution has seen the mushrooming of a lot of online legal portals which have been backed by VC [venture capitalists] and PEs [private equity funds].”

Patents are another area where AI can assist with filings by cutting down on routine and time-consuming tasks and sorting data more efficiently to improve the accuracy of database searches. Patent filings have been growing steadily over the past two decades. Based on figures in the World Intellectual Property Organization’s statistics database, filings increased to 2.8 million in 2015, up 7.8% from the previous year.

“Within the IP space that we practice in, further expansion into automation and perhaps slowly introducing AI into the practice will greatly enhance turnaround times, client satisfaction as well as marked improvements to the bottom line of Indian law firms,” says Xerxes Ranina, a partner at Neolegal Associates.

Outlook and profitability

Lawyers with a positive view for the future seem to outnumber pessimists about two to one. Mohit Saraf, senior partner at Luthra & Luthra, is among the optimists: “In the last three years, our regulations have become more transparent. The bureaucracy and ministers are losing discretionary powers. We have become more process driven and more transparent. The current year for Luthra & Luthra was better than 2016 with revenues as well as per associate revenue on the rise. We expect the next year to be better than 2017,” says Saraf, adding that: “Law firms which are able to become institutions would attract the best clients and talent.”

Pravin Anand, managing partner at Anand and Anand, notes that India’s ranking on the World Bank’s annual Doing Business Index, has not improved in the past few years. With an ambivalent outlook he says, “it does seem the current BJP government is more serious about developing India into a skilled economy due to initiatives like Make in India, Digital India, National IPR Policy, etc. But, there are still major gaps in reform initiatives and actual implementation.”

The government outlined an ambitious target to improve its ranking on the Doing Business Index in an output-outcome framework document released this year. It sought to reach the 30th position by 2020 from 130th this year. Lawyers who think that lawmakers have facilitated ease of doing business seem to outnumber those who don’t about four to one. Lawyers with a positive outlook say the regulatory environment has become dynamic in the past few years and lawmakers have worked to streamline various statutes and secondary legislation. “There has been a significant move on this front. Both on paper and in practice, the policies and procedures have become more business friendly. The government seems to be taking active interest in introducing and promoting business friendly laws,” says Ashish Porwal, founder of Hreem Legal.

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