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[ Due diligence - a legal perspective ]
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[ Privatisation and divestment ]
[Securitisation and structured finance ]
[ Shareholder agreements: enforceability issues ]
[ In-house Q&A ]
One of the world's fastest growing economies, India is discovering the demands of globalisation while pursuing an ambitious economic reform program. The law meanwhile is struggling to keep up. Lauren Scott reports from New Delhi and Mumbai.
The past decade has been a time of great change for India. Still a developing country that fought fiercely to achieve independence in 1947 after two centuries of British colonial rule, it has been forced to the realisation that a 'silo' mentality does not hold sway in today's global economy - and may not benefit it in the long-term.
It was a payments crisis sparked by depleted foreign exchange reserves that underlined the urgency of economic reform, and compelled the then ruling Congress party, whose former leaders include members of the Gandhi family, to begin the liberalisation process in 1991. One wonders what the great leader - Mahatma Mohandas Gandhi - who led the burning of foreign goods during the independence struggle, might have made of his India now laying out the welcome mat to overseas investors and their products.
The global slowdown that has dealt a heavy blow to more developed economies has certainly impacted India in terms of reduced foreign investment inflows. But it has also enabled it to capitalise on its relative strengths. With a population of 1.2 billion and growing, the country has a ready labour force which multinationals have been more than willing to tap. IT and financial services companies alike have outsourced their call centre operations to take advantage of cheaper labour costs, while local law firms have revealed that US firms are outsourcing research work on major cases to them, taking advantage of their lower charge-out rates.
The process of opening India's economy moved into its second phase in 1996, after the Bharatiya Janata Party (BJP) came to power. Such has been its pace that the question now is not which sectors the government has yet to open up, but which it has not opened up fully. Foreign direct investment (FDI), governed by the Foreign Exchange Management Act 1999 (FEMA), is permitted to 100% in industries such as drugs and pharmaceuticals, in city and regional level urban infrastructure facilities and in IT and B2B e-commerce, while the airports and hotel and tourism sectors have also been liberalised.
The government most recently announced an increase in permitted FDI in India's private banking sector to 74% from 49%, to encourage the expansion of foreign banks. Foreign institutional investors, who account for the majority of capital inflow into India, are also able to make portfolio investments in Indian companies up to a maximum of 49% of the company's capital (up from 40%), subject to shareholder approval.
Yet as one might expect in a land where religious, social and political divisions remain its hallmark, the reform process has not been without its problems - and critics. Even India's political leaders acknowledge the constant turmoil in which the country has found itself. At the recent annual conference and meeting of the IPBA in New Delhi, Union minister for disinvestment, IT and telecommunications, former journalist Arun Shourie, acknowledged that India constantly lurched from "one crisis to the next", but carried on regardless.
"Things are opening up, but it's a painfully slow process," says Anish Ghoshal, a partner of Dua Associates, a firm with a 20-year history and a staff of more than 150. It has six offices in India, including in Mumbai and New Delhi, and claims itself among the first firms to advise private and public sector clients on participating in projects in key infrastructure sectors such as power, mining and telecommunications when the government began opening them up.
"Certain sectors are very close to the government's heart," says Ghoshal, identifying these as road and rail, shipping, oil and gas and mining. "These are core sectors which, if opened up properly, the country will see a lot of investment in."
Foreign concerns
Therein lies the rub. The government's record on the treatment of foreign investors took a battering with the collapse of the Dabhol Power Project, described by one lawyer as an "unfortunate political event". Conceived in 1992 upon the opening up of the power sector, Dabhol was supposed to alleviate the massive power shortage in one of India's largest and most politically influential states, Maharashrtra.
The Dabhol Power Corporation plant ultimately began generating power in 1999. But by June 2001, it was clear the problems that had dogged it were insurmountable. Citing the plant's high power costs, the Maharashtra government announced it was terminating the agreement with DPC and sought to have it voided on the basis of fraud and misrepresentation. The project soon found itself in arbitration, although litigation is pending in the courts concerning the enforceability of the arbitration clause in the original PPA. Creditors have most recently been discussing a restructuring, with one of India's largest electricity providers agreeing to take on the project.
For the time being, then, future investment in the power sector looks shaky. The State Electricity Boards are seen as the weakest link and in desperate need of reform. The government's inability to guarantee its debts is also a problem.
Alfred Adebare, a consultant with Titus & Co. in New Delhi, predicts a continuing lack of funding for major infrastructure projects until the government demonstrates a genuine commitment to accommodating foreign investors.
Concerns over India's bureaucracy and an inconsistent regulatory approach are also common. Ravi Kulkarni of Little & Co. puts it plainly: "When you make a commitment to a project, whether the project will see the light of day is dependent on so many factors not necessarily related to the merits."
The power sector has been particularly plagued by regulator indecision. Adebare cites the example of one major foreign power corporation that was left in limbo for a number of years, waiting for a decision on whether the terms of its proposed power purchase agreement were acceptable.
"Not too many investors want to do that," he says. "To have documentation they have been working on for four years gunned down."
Rajkumar Dubey, who left Singhania & Co. to set up New Delhi firm Dubey & Partners in July 2002, is frank about investor concerns. "No-one's coming here for charity," he says. "No-one's interested in your country if they can't take out what they want."
But he is bullish about the prospects for future investment, despite the Dabhol debacle. "The Indian government has recognised that this is the time of globalisation. You have to change your policies and develop your systems so they comply with the interests of foreign investors."
The 2003-04 budget, which finance minister Jasawant Singh delivered in February, certainly signals a continuing willingness to accommodate and encourage investors. Investment in infrastructure, for example, qualifies for a tax holiday and previously closely held sectors are being opened up. The minister also announced the government's intention to establish the India Development Initiative, with Rs2bn in the coffers, to promote India as an investment destination and production centre.
Sanjay Asher, a partner of Crawford Bayley & Co. in Mumbai, says: "It's unfortunate the government did not honour its state and central guarantee with Dabhol. But in my mind, India is totally committed to opening up and attracting foreign direct investment. Steps are being take in the right direction."
Another lawyer comments: "Politically, they [the BJP] can sell anything to the Indian people. They have carried the liberalisation process much further. That's given a comfort level to foreigners."
Yet some doubt the government has what it takes to keep the reform process on track. While many describe the political situation as the most stable it has ever been, this is not helping to alleviate concerns.
Says Shardul Thacker, a partner of Mulla & Mulla in Mumbai: "There is a political will there, but the political ability may not be there. Even up to three or four years ago, the whole liberalisation policy was hanging in a bit of doubt."
Ravi Kulkarni of Little & Co. is equally adamant. "Between the effort being made by the government and its implementation, there is a big gap," he says. "There doesn't appear to be any genuine political consensus to the way the country needs to go forward. There are some extremely articulate and vocal parties who are questioning the entire process. The kind of structural and administrative reforms which are needed can't get a mandate."
There may be some foundation for this view. The government's privatisation - or disinvestment, as it is known - programme has not quite taken off in the way it had hoped. Common concerns include a reluctance to implement necessary labour law reforms and the management philosophy of some Indian companies, which observers say is still deeply embedded in the past.
One lawyer cites the example of Air India, which he claims has an 'employee to aircraft' ratio of 700 to one, compared with the global average of 70. Foreign players are unlikely to want to take on workforces of this size.
Ghoshal detects traces of a change in mindset, but says it will still take time for privatisation to really take off. "These are government companies that have been run in a particular way for decade. The government still keeps a certain amount of control."
Sanjay Asher believes India more than rivals China as an attractive destination for foreign investment, pointing to the latter's unreliable legal system and opaque decision-making processes. And, he says, it's a question of spreading your risk.
"Would you try to put your eggs in one basket?" he asks. "China may attract 10 times more foreign investment than India, but what about an alternative? I think people are finding India a good alternative to China. Our bureaucracy should improve. In the last 10 years, there has been a total paradigm shift in mindset."
Regardless of the pace of reform, interest in India will only heighten, according to Pankaj Prakash of Fox Mandal. "India as a market cannot be ignored by anybody," he says. "It's a fact of life. Because here is a population with a huge middle class [and a purchasing power to match]."
Legal reform
Hand in hand with economic reform has been a dramatic overhaul of India's laws. Pallavi Shroff, a partner of Amarchand Mangaldas, was involved in drafting India's new competition law (yet to receive the presidential assent) and is advising the government on draft merger control rules. She says the new law is critical to the government's ability to carry out its privatisation programme. "You cannot have a situation where you are privatising the economy and you don't have a modern competition law to deal with monopolistic tendencies companies have."
A raft of new legislation has been passed since the second phase of liberalisation began. A new Securitization Act came into force in December 2002 which, despite a legal challenge to recovery powers vested in lenders, is hoped to encourage securitisation as a tool for restructuring an estimated US$20bn in non-performing assets of the country's corporate and financial services sector.
The technique is not new to India. Mona Bhide of Mumbai-based three-partner firm Dave & Girish & Co. says the firm has been advising Citibank on securitisations since 1991, while Udwadia Udeshi & Berjis was involved in 2001 in the Rs16bn (US$355m) securitisation for Jet Airways of future aircraft hire-purchase receivables. The firm recently splintered, with name partner Berjis taking 11 colleagues to J.Sagar as of April 1 this year to give the firm corporate and financial services capability in Mumbai.
The Sick Industries Special Provisions Act 1985, that previously allowed debtors to suspend creditor debt for up to seven years, has also been amended to give creditors broader powers to deal with a debtor's assets. Lawyers say the changes are already having an effect, with companies starting to make payments in settlement of long-standing arrears.
The revised laws are expected to increase restructuring work. Shardul Shroff describes the Bangalore Petrochemical Refinery restructuring - involving 22 lenders and Rs2.1bn - as a "precursor of things to come". His firm Amarchand Mangaldas, which acts predominantly for lenders, has handled work for KAMCO (the Korean Asset Management Corporation), set up to help restructure South Korea's ailing financial services sector through the purchase of non-performing loans. Shroff says it is hoped KAMCO's learning will be transferred to India.
The Arbitration and Conciliation Act 1996 has also been passed to encourage an alternative method of resolving disputes. This avoids India's notoriously slow litigation system, where some cases are known to have taken up to seven years from commencement to judgment.
India has found itself in the somewhat enviable position of being able to draw on the experience of other jurisdictions in formulating its own laws. In devising the new competition law, for example, the drafters looked to the UK, EU, Canada and Australia.
Says Dua Associates' Ghoshal: "We've gone from here," raising his left hand to signal a starting point, "to here. We've leapfrogged... countries have walked the length - right through - picking up experience and a mindset as they go. We haven't done that."
In fact, he says, India's ability to pick and choose from other countries' best laws is helping to propel it ahead in some areas. "In telecommunications, we are way ahead of a lot of countries," he declares. "The reason for that is we haven't gone through any innovation/invention process. It's like shopping - we've just gone out and bought the latest cell phone."
But views are mixed about whether legal reform is keeping pace with economic reform. Shardul Thacker says there is still a gap between the laws being enacted and market requirements. "Quite often, the real realities of what the market wants is not heard by the legislature, which is what had kept the players from finally coming in."
De-mergers and amalgamations continue apace, although M&A has generally slowed from earlier levels. Says Fox Mandal's Prakash: "Companies are realising they have to stick to their core business. I see a slowdown in that particular aspect. The jigsaw has come into place. It's [M&A] ongoing work, but not as big as it was two years back. More or less everyone has consolidated their position."
Ghoshal does not agree, saying he continues to advise on M&A transactions across a "wide spectrum" of industries, including software and pharmaceuticals. "We've completed some pretty large transactions for overseas clients with a presence in India. In some cases, we have acted for overseas clients who have de-merged. There is a fair amount of interest."
The telecommunications sector in particular has experienced a high level of M&A activity. Local firm Pathak & Associates acted with US firm Jones Day on Bharti Tele-Ventures' US$172m IPO, the first listing by an Indian mobile phone company and India's largest IPO for six years.
And although the government's disinvestment programme has been foundering, there is work going on in the area. Crawford Bayley & Co. advised India's largest consumer subscribed ISP, Videsh Sanchar Nigam Limited (VSNL), on the sale of a 25% stake in the company to the Tata Group for a cash price of US$300m. Amarchand Mangaldas advised Tata.
New areas of opportunity are fast emerging, including biotechnology, business process outsourcing and healthcare and pharmaceuticals. Wholesale trading in consumer products - India has yet to allow overseas retail brands into the market - is also growing, as is the entertainment industry, which is becoming particularly big business in India. The Bollywood film industry based in Mumbai is world-famous, and what has previously been a very closed sector is now being opened up.
As one lawyer comments: "James Bond in India speaks Hindi" - foreign players identifying the revenue potential in dubbing foreign films.
The Western concept of cinema multiplexes is also being popularised, with a major project under construction in New Delhi.
Opening up - but how far?
The opening up of new business sectors and accompanying investment means increased demand for legal services - and India certainly has no shortage of law firms. Lawyers speak of firms "mushrooming" and the ease with which one can gain a practising certificate. But there are limits. Partner numbers are restricted to 20, and a 1997 proposal to the Bar Council to increase the number to 50 was swiftly repelled.
The Bar Council wields its influence with a firm hand and is the bane of firms that are looking to mirror the larger, full-service practices of Western-style firms. Some are looking further to the future. H. Jayesh, who has experience working in a London law firm, says he set up financial services boutique Juris Corp in October 2000 - "contrary to the trend of cross-border mega-mergers of law firms" - to address what he anticipates will be a growing demand for specialised legal services.
Firms are not permitted to advertise their services and the Council has been known to issue 'show cause' notices to those that flout its broad restrictions.
The restrictions highlight a weightier issue - the capacity of Indian firms to service large transactions. One lawyer puts it this way: "The transactions are becoming bigger. The amounts are bigger. The stakes are very high." But big is not always best. Most of India's larger firms have offices in the country's major centres - New Delhi, Bangalore, Chennai, Hyderabad, Mumbai and Kolkata [Calcutta]. Some lawyers claim firms are expanding into other Indian cities simply to impress the large foreign firms on whom they depend for work, and do not have sufficient depth or quality behind them.
Most local firms have relationships with foreign firms, although the nature and extent of these is uncertain. Dave & Girish & Co. names Clifford Chance, Lovells, Simmons & Simmons, Stephenson Harwood, Herbert Smith and Allen & Overy as among its foreign firm friends. There are also 'behind the scenes' alliances.
But the issue of opening up the legal sector is a sensitive one. When the Reserve Bank of India exercised its powers a few years back under Foreign Exchange Regulations to grant licences to three firms - Chadbourne & Parke, White & Case, and Ashurst Morris Crisp - to open liaison offices, local lawyers were quick to condemn the action.
Mulla & Mulla's Thacker says of the reluctance to welcome foreign firms: "There is a large amount of vested interest in not allowing international firms in. But if a Competition Bill can be passed and Coca-Cola can come in, I don't see why lawyers don't allow for competition."
He describes the failure to open up the legal market to date as a "retrograde" step. "It's time the international players came in and gave us that benefit of legal services that should be available to Indian industries," he says. "As much as the Indian firms would like to say otherwise... large Indian industries need to have the service of a large firm."
It will need a 'softly, softly' approach. India still bears the scars of colonisation. Shardul Shroff of Amarchand Mangaldas, one of the country's largest and most respected family-owned firms, believes liberalisation is still a couple of years away.
"India has emerged out of the mindset of the independence movement," he says. "It [liberalisation] needs careful handling. It does not need a rapacious approach. I don't think firms are ready or that the attorney general's office is equipped."
While some regard liberalisation as inevitable, they sound a note of caution for would-be entrants to the market. Says Dua Associates' Ghoshal: "With all due respect [to foreign firms], it won't be easy. The market is such that firms coming in take an awful lot of time to understand it."
At the end of the day, he says, who gets the work will come down to the consumer. "If I can't match your quality, I'll lose the business. I've got to get my act together. If foreign law firms are able to make an appreciable difference, it will be a good thing."
[ Aircraft Financing ]
[ Corporate governance ]
[ Due diligence - a legal perspective ]
[ Media and entertainment ]
[ Privatisation and divestment ]
[ Securitisation and structured finance ]
[ Shareholder agreements: enforceability issues ]
[ In-house Q&A ]