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Liberalization of Indian Legal Services

Faculty Contributor: Rupa Chanda, Professor
Student Contributors: Guruprasad S, Hari Ganapathy

Legal services encompass numerous activities of economic and social consequences. Most of the demand for legal services comes from business and organizations. Recently, increasing activities such as corporate restructuring, intellectual property rights and cross border M&A's have forced the industry to come up with sophisticated legal services. Are we ready to provide such services or is it better to open up the industry to experienced foreign players? The national character of law has created some obstacles for cross-border trade in legal services. This article explores liberalisation in the field of law and the challenges coming up in the future.

Need for Liberalisation

While there has been divided opinion on the issue of opening up, many developments over the years have brought up the need to liberalise the sector. Some of them are:

Increasing trans-national deals: It is no secret now that Indian companies are looking to tap markets abroad. Additionally, sectors like IT, Biotechnology and BPOs work full time for international clients, increasing the need for legal services spanning jurisdictions.

Specialized advisory: Specialised advisory is needed many a times and foreign companies more often than not possess expertise in these. A recent example could be the licensing of 3G spectrum.

Reciprocity interests: If Indian law firms want to take a cue from other sectors and expand internationally, they should support the opening up. As Som Mandal, partner of Fox Mandal puts it "...it is only fair and in the interest of reciprocity that foreign firms be allowed to practise in India. Indian law firms are allowed to open offices and practise in many jurisdictions."¹

Positive Impact on other sectors: Opening up of legal sector will have a positive impact on emerging Indian sectors like real estate and retail. For example, this played a crucial part in Singapore becoming a financial hub.

Professionalizing the industry: Finally, opening up will result in more professional practices being followed since currently many Indian law firms are family owned and fall behind in terms of the professional approach compared to their foreign counterparts

Current Situation: Legal Issues Involved in Liberalisation

Legal service, like many other professional services, is a sector where regulatory barriers are rather high. Some of the barriers to entry by foreign players are:

Citizenship: In India, legal services can be provided only by naturalized citizens or by citizens of a country with whom India has reciprocity agreement (provided the law degree is recognized by the Bar council of India (BCI)). Foreign firms that set up operations may not prefer to use the services of Indian lawyers alone and they would want to bring in experts from different places.

Definition of Legal Practice: Legal Services can be classified as - i) counselling done by solicitors, ii) pleading (representing the client in the court) done by barristers and iii) notarial activities done by public notaries. The Advocates' Act 1961 integrated the entire profession and all functions (counseling, drafting and pleading) under advocate's responsibility. The problem with this structure now is that for practicing any form of advocacy, the person has to be admitted by the BCI as an advocate. So even if India wants to liberalize only the soliciting activity, it faces obstacles as per the current Advocates Act.

Multidisciplinary Practice: An advocate in India cannot enter into a partnership or any other arrangement with a non-advocate. So, a corporate client who prefers a law firm to provide all professional services like accounting, taxation etc. across jurisdictions may not find an Indian law firm attractive.

Partnerships & Liability: Sec.11 of the Companies Act provides that a partnership with more than 20 partners if not registered as a company, shall be an unlawful assembly. Thus Indian law firms cannot have more than 20 partners. Also, Indian law firms do not have limited liability requiring at least one equity-holder to be bearing unlimited liability. This limits the size and expansion options of Indian law firms.

Advertising: Indian firms cannot advertise their existence in any form of media including internet. This creates a non-level playing field compared to foreign firms that have extensive websites and advertising flexibility. But developments in this regard seem to be heading in the direction of allowing Indian firms to advertise with the BCI amending the rule.

Interview Insights

Though the BCI is opposing the opening up of the sector, not much study has been done to identify the reasons for this. We conducted interviews with various stakeholders - law firms, corporate, academicians and law students to gauge the impact of opening up as discussed below.

Cost / Price: We found that availability of foreign lawyers would reduce costs to the Indian business enterprises, since expenses on travel etc. can be avoided. So, even with similar absolute fees, the overall cost the corporations incur will come down. But the dearth of well qualified lawyers would mean that salaries will go up in the short run since foreign law firms will try to poach talent. But this will not be sustainable in the long run since the price they charge to the client may not go up by an equal amount. But when it comes to differentiators like legal services for 3G licensing etc. foreign law firms may charge a premium price.

Quality: In areas like international contract, arbitration etc Indian law firms are well established and there are very few gaps in their services & quality. But in newer areas like water privatization, foreign law firms are better suited to provide quality service because of their experience and the nascent stage of such services in the Indian context. Also Indian law firms lack professional practices since they are largely family owned. Foreign law firms, on the other hand have better process and documentation standards. Hence the overall quality can be expected to go up.

Brain Drain: We found that fear of brain drain is uncalled for. Students from premier law schools in India who take up jobs abroad have intentions to come back. This short term brain drain phenomenon can be reversed in the long run if the sector is opened up and more opportunities are available here. This would also make people start returning to India. A case in point is Australia and New Zealand. When they opened up initially they lost lawyers to UK and US firms. As a consequence the native firms strove to become more competent and started attracting the best talent again.

Areas of Interest: It is found that foreign lawyers are interested in transactional services - wherever there is corporate documentation involved or value of transaction and margin is fairly high like Mergers and Acquisitions, International law et al. Therefore foreign law firms may not be interested in litigation which is of major interest to the Indian firms today.

Employment: Currently, foreign law firms employ graduates from NLS which clearly brings out that Indian graduates are perceived on par with others in this field. Also for practicing Indian law (if allowed to), foreign firms will have to recruit Indian lawyers. Therefore, to a certain extent we can say that employment opportunities will be created. Legal Process Outsourcing (LPOs) will also benefit hugely and consequently offer better salaries to students of tier-II and tier-III law colleges to attract talent.

Regulatory Aspects: Most of the partners we interviewed believed that advertising should be allowed in a restricted manner so that it does not get misused. This will also ensure the profession gets the required respect. As for partnerships, some believe that the 20 partner restriction is not a barrier because the law firms can always become companies. Even the big four accounting firms have done well in India with this restriction. But nevertheless, to ensure a level the playing field in terms of the size of the firms, Limited Liability Partnership bill has to be passed before opening up.

Recommendations

While advocating liberalisation, there is no denying the fact that measures have to be taken to level the playing field between foreign and Indian law firms. The opening up can be done in phases as proposed below so as to allow Indian firms to cope with the change.

Phase I: Liberalise Domestic Market

The main opposition comes from the fear of a non-level playing field between the Indian and foreign firms. This can be eliminated to an extent through domestic reforms like:

1. Passing the Limited Liability Partnership bill and allowing more partners be part of the firm
2. Removing restrictions on advertising
3. On a parallel front, initiating reforms in the education sector is necessary to ensure availability of a good talent pool in legal profession

Phase II: Restricted Entry of Foreign Firms

After few years of phase 1, allow foreign law firms to set up shops in India. The following policies will hold here:

1. Foreign firms will be allowed to practice only foreign law. Define clear areas of practice.
2. Foreign firms will not be allowed to form joint ventures (JVs)
3. Need for recruitment of Indian lawyers may not arise here. If needed, define specific ratios of foreign lawyers to Indian lawyers in the foreign law firm
4. Grant specific number of licenses as the market may need

Phase III: Expand Practice of Foreign Firms

Based on market reactions and responses by Indian law firms, proceed to phase three. The major policy changes here could be:

1. Allow foreign firms to form JVs with maximum of 49% holding for the foreign firm.
2. Foreign firms should be allowed to recruit Indian lawyers and practice Indian law.
3. Pass laws for profit sharing between Indian and foreign lawyers / firms.

In future, foreign firms should be allowed to set up own shops or acquire 100% of Indian firms.

Recommendations for Indian Firms

Consolidation: Indian firms can merge with one another will give much needed economies of scale, bargaining power and influence to policy decisions

Professionalize: Indian firms being family owned lack the professional approach found in foreign firms. Indian firms will be able to attract skilled talent only when they convey a truly professional image.

Differentiate: Indian firms should work on diverse projects and equip themselves in specific skills. This will help them in differentiating from one another which will in turn enable them to attract good talent and charge premium prices.

Soft Skills: They need to invest in specific trainings to improve soft skills and also push for these things to become important part of the legal education curriculum.

Global footprint: Indian firms can follow the path of Trilegal and set up offices in other parts of the world. This will enable them to get business from MNCs willing to expand in India. Getting this kind of clientele will help them compete against the global players.

Education Sector Reforms

The basic reform process has to come from the educational system. Some of the recommendations based on comparison of Indian and British legal education systems are:

1. Professionalize educational setup and centralize admission process.
2. Consider phasing out of the old legal education system and move into an uniform process.
3. Increase spending on teachers and campus infrastructure.
4. Follow the Japan system of separately identifying students eligible to be judges and lawyers and train them accordingly.
5. Grant autonomous status to the universities and set up a regulatory body for legal education.
6. Increase the role of information technology in delivering legal education.
7. Increase focus on drafting and other soft skills.

Authors

Prof. Rupa Chanda is a Professor in the Economics and Social Science Area at IIM Bangalore. She holds a Ph.D. from Columbia University with specialization in International Trade and Macroeconomics. She can be reached at rupa@iimb.ernet.in

Guruprasad S (PGP 2007-09) holds a B.E. in Computer Science from Birla Institute of Technology & Sciences (BITS), Pilani. He can be reached at guruprasads07@iimb.ernet.in

Hari Ganapathy (PGP 2007-09) holds a B.Sc. in Physics from University of Madras. He can be reached at harig07@iimb.ernet.in

Keywords

Legal Service, Public Policy, India, Liberalisation, Foreign investment, Law firms

References

1. 'Legal MNCs may get summons', The Economic Times, 16 November, 2007, http://www.foxmandallittle.com/Articles/ET_16th_Nov07MrMandalsQuote.pdf , Last accessed on 15 October, 2009.