Foreign investment brings local legal windfall

If there is one thing local Indian lawyers have been complaining about over the past year, it has been the distinct lack of time they have to do anything other than work. However, most are not griping too much, as rapid economic growth and regulatory changes have stimulated foreign investment and left a handful of local corporate- and M&A-focused firms with a plethora of transactions and a resultant growth in profits.

The boom is being led by a number of sectors, but law firms nominate the hottest areas as real estate, and inbound and outbound M&A, as well as the flourishing capital markets.

Real estate fever
"I would put real estate on top, followed by M&A," says Rabindra Jhunjhunwala from Khaitan & Co, which given the flurry of M&A activity that has taken place in India reflects just how hot real estate has become for local firms.

The guidelines for foreign investment in real estate were changed in January 2005, allowing direct investment in property providing that residential developments were on a minimum area of 25 acres, and commercial developments on 50,000sqft. The minimum capitalisation requirement is US$10m for wholly-owned subsidiaries of foreign companies and US$5m for joint ventures with an Indian partner.

The result has been an influx of real estate funds investing in development projects, which have included housing townships, commercial office space, hotels and resorts, hospitals, educational institutions, recreational facilities and infrastructure.

Prem Rajani from Rajani & Associates, presently working with three clients on similar projects, says most of these tracts of land are on the outskirts of the bigger cities such as Mumbai.

Firms are getting involved right from due diligence and clearing the title of the property - which is a complex process in India, especially for such large tracts of land with multiple owners - to advising on the agreements and structuring options.

One such FDI deal, the mega Sansara Hotels India development project worth US$60m, was done by FoxMandal when advising Citigroup on an investment with Indian bank HDFC and Portman Holdings. FoxMandal advised Citigroup, while AZB & Partners acted for HDFC and Portman (which holds 10% combined equity) on the deal.

Domestic developers are also involved in the boom. A very recent project was undertaken by Khaitan & Co when it advised Hindustan Motors on all aspects of an agreement to develop 314 acres of property at Uttarpara near Kolkata, West Bengal, India.

Hindustan Motors will create an integrated IT township and real estate Foreign investment brings local legal windfall development in conjunction with Shriram Properties Limited, one of the leading real estate developers. The second integrated IT township and real estate project to be entered into in West Bengal, it was valued at US$69m.

M&A goes outbound
The health of the inbound M&A market was proven in February when UK-based telecom giant Vodafone made the largest ever foreign investment in India (and one of the largest ever M&A deals in India), with the acquisition of a controlling stake in Hutchison Essar for approximately US$19bn (see Deal of the Month, p8). Khaitan & Co advised Hutchison Telecommunications (HTIL) on the sale of the stake in the target, while Freshfields also acted for the seller. Linklaters acted for Vodafone in its contested bid for the group.

Jhunjhunwala from Khaitan & Co, who worked with senior partner Haigreve Khaitan on the sale for HTIL, said the transaction is indicative of an extremely active M&A market in India. He says this activity is being seen across all sectors. Pundits are framing 2007 as a year of mega deals. The value of deals (at the time of going to press) was around US$40bn, twice the amount seen in 2006 and 10 times more than in the corresponding period last year. A figure of US$100bn for the year is expected.

However, India is in the midst of a new trend, with corporates following in the footsteps of Chinese companies in expanding overseas to make large acquisitions. "Three or four years back, there were one or two instances of large players going out and acquiring," Jhunjhunwala says, "but suddenly you see a lot of Indian corporate houses participating."

"Look at Mahindra & Mahindra - every second week they announce an acquisition," he continues. India has seen a slew of recent deals in this vein. At the end of January, the largest private sector steel manufacturer of India acquired the Anglo Dutch Steel maker Corus Group (the second largest in Europe) for a total of US$12.1bn. India's largest non-ferrous metals company Hindalco Industries Limited (part of India's US$12bn diversified Aditya Birla Group) announced an agreement in February to acquire a 100% stake in Novelis, a US-based producer of aluminium rolled products, for around US$6bn.

And, recently, Suzlon Energy, India's largest wind turbine manufacturer, made a tender offer for German wind turbine manufacturer REpower Systems AG valued at US$1.3bn.

Lawyers expect this outbound M&A to increase in proportion to inbound M&A, as Indian corporations look for global investment opportunities to diversify.

India prepares to open its doors 

A lot of momentum has recently built up behind efforts to bring about an opening of the Indian legal market to allow for greater international firm access. Delegations from markets such as the US, UK and Australia have all called on the Bar Council of India and the Indian Ministry of Commerce to move forward on the issue.

"The Government is pretty open to the idea that it should open up," FoxMandal Little managing partner Som Mandal says. "I have taken quite a few international firms to meet with the Minister of Law and Justice, and the feedback has been the market will open." In addition, the Prime Minister, Manmohan Singh, has stated the legal market needs to open.

With the highest level of Indian Government in agreement with international lobbyists, the Bar Council of India is facing intense pressure from all sides. However, Mandal says the government is hoping the industry will take the initiative itself and push for an opening, rather than imposing one on a large number of unwilling local lawyers.

Within the Bar Council, there are groups both for and against the moves, but it is looking at the issue. Recently, a committee of lawyers was appointed to produce a report for the Council on what foreign firms are likely to be doing if an opening were to happen.

Mandal says the government is not likely to wait, so it would be better for local lawyers to get on board and have a hand in framing the rules for foreign entry, rather than see the current grey area of foreign firms setting up surrogate local firms in the market.

Most firms are tipping a limited opening of the market within two years. However, White & Case's UK-based Nipun Gupta says many feel if there are no results during this time, it may be a lot longer before the market sees any action on this.

If an opening is to happen, a number of issues will need to be resolved, such as the model of the market opening, the present maximum limit of 20 partners per firm in the market, and the ability of firms to have websites and market themselves.

Ready or not
There has been heated debate in the local market about firms' readiness for international competition. In a controversial letter to the Indian Attorney-General last year, Som Mandal derided competing firms by saying they were not up to scratch.

"Most of the leading Indian law firms are against entry of foreign law firms as they are not ready to take competition," Mandal wrote. "Neither are they competent enough to be absorbed by a foreign law firm, so [they] want to follow the middle path of the status quo."

Jhunjhunwala says this is "absolutely incorrect". He says while 90% of local firms might not be fully ready, the handful of firms in India that have had the vision and developed their practices in accordance with international standards are very ready for a market opening. He says that at these firms all the systems are in place to handle the competition.

Doug Peel from White & Case agrees. "They are operating to very high standards, and in most cases to international standards," Peel says.

"The only constraint that would hold them back from competing effectively would be finding the right lawyers with international experience. Local firms are struggling with a huge amount of work and foreign firms would put more pressure on that," Peel says.

The firms that internationals name as among the handful able to stand the competition include Amarchand Mangaldas & Suresh A Shroff & Co, FoxMandal Little, Khaitan & Co, AZB & Partners, Crawford Bailey & Co, Luthra and Luthra, Trilegal, J Sagar & Associates, Rajani & Associates, and Mulla & Mulla.

Winners or losers?
The majority of firms in the local top tier believe the market opening is likely to be a win-win for both them and their new international competitors.

"I do not see it affecting our practice - it is just a win-win for us," Jhunjhunwala says. "If you look at some of the other jurisdictions, it has helped the market grow, and the law firms have only gained, so we see it as a positive," he says.

A lot of this benefit will be in growing numbers of transactions, leading to more work for local firms handling local law aspects. "It will bring more FDI in more areas, so we should gracefully let them come in," says Prem Rajani from Rajani & Associates.

Som Mandal also expects his firm will reap the benefits. "Competition is very important for us, because unless we have it, we won't improve ourselves," he says.

Lawyers feel they will not be likely to lose out from the opening because of the long-standing relationships they and their firms have with the large corporations that have developed in India and are now participating in transactions. In fact, many of these lawyers sit on the boards of these companies or their subsidiaries.

"In spite of international firms opening shop in India, they would still want their Indian lawyer on board, because at the end of the day it is that individual or group that knows the client best, so they will be indispensable," Jhunjhunwala says.

The impending opening has international firms acting in different ways in an effort to position themselves for an opening of the market. Linklaters, which has been very active in India, this year made the bold move of aligning itself with a single and newly established local Indian firm, Talwar Thakore & Associates.

Partner with the new start-up firm Shobhan Thakore says the cross-referral arrangement means both firms have agreed to refer work to one another on an arm's length basis subject to three caveats: a conflict on a transaction; a limitation of capacity on very large transactions; and a client's preference for another firm.

Other firms have set up similar relationships with firms, while some are playing the field. White & Case has taken the strategy of maintaining its relationships with a handful of the top firms in India, rather than aligning with a particular firm.

Local firms have not taken the Linklaters move lightly. Sources have said that although in the past they might have referred everything to Linklaters, they would think twice about doing so now because a quid pro quo is expected in these referrals.

As the Linklaters move suggests, the opening of the market is likely to result in a rash of mergers or alliances being established with incoming international firms.

Many firms are ambitiously looking forward to negotiating such an opportunity. Individual Indian lawyers are also likely to win out in any opening. "Some of the English firms are actively recruiting from the firms now, and for a young Indian lawyer working 18 hours a day, the compensation differential and the range of work they can get exposed to at an international firm is attractive," Peel says.

White & Case has taken the position that it will not recruit from local Indian firms, as Peel says the firm sees it as being "destructive" to established relationships. The firm has been recruiting qualified Indian associates from the London market. And in the end, the stellar Indian growth story has made most firms believe there is enough work to be shared amongst everybody, including the internationals.

LPO is all the go

Legal process outsourcing (LPO) is now widely seen as the next destination for the booming business process outsourcing (BPO) sector in India.

According to the predictions of a study by Us-based Forrester research, the current annual value of legal outsourcing in india, worth Us$80m, could rise up to Us$4bn and fetch 79,000 jobs in india by as soon as 2015.

Law firms have not been blind to the potential of this market, and a number, including FoxMandal little, Khaitan & Co, AZB & Partners and Amarchand Mangaldas & Suresh a Shroff & Co have become involved in at least some capacity in the market.

FoxMandal's entry is the most recent. early this year, it formed a three-way joint venture with Bpo provider Hinduja TMT and centric, a UK-based business consulting and outsourcing company, and has called the business centric lpo. it has ambitious plans for the business, initially hoping to staff it with 1,000 lawyers.

"We feel there is a huge contribution that law firms can make to this type of business," FoxMandal little managing partner som Mandal said. the venture is a separate arm from FoxMandal, with separate people, though it would have a back-to-back service contract with FoxMandal, the idea being the lpo would send certain types of work to the firm to be vetted for quality by US- and UK- trained lawyers.

"This will put the work at a higher standard than other lpos in the market, that are just producing the product and sending it back to the client," Mandal says. Fox does not see it as a very large source of work for the firm when compared with other booming areas of practice, but other benefits would include the firm being a shareholder of a growing business and using it to search for new, young legal talent.

Khaitan & Co is still in the lpo business, having set up a venture called Neoworth with a BPO company. However, Rabindra Jhunjhunwala says the firm is staffing the business with lawyers from the Khaitan & co stable on a needs basis, and that business has generally been slow. "Everybody is so busy doing what they do best, which is running a law firm and doing legal work. We have sort of put our fingers in it, and we haven't burnt them, nor have we tasted success, but we have sort of taken a lead in it," he says.

One area where it has been effective is in ip work, and Khaitan & Co has been using it regularly for things such as ip searches for patent drafting. it is this low-end, time consuming work IPOs target, as it can just as easily be done in a low-cost jurisdiction. one of the big hurdles that the sector has to overcome is the difficulty in outsourcing legal work to low-end providers who are not qualified in the laws of the local jurisdictions from which the legal work is coming - such as the UK and the US. perhaps FoxMandal's model will be the way the sector moves beyond this challenge.

In-house perspective: Entertainment Network India

The broadcasting and advertising sector in india, like in many other industries, is currently developing rapidly and constantly throwing up new, thorny legal issues.

But for entertainment Network (India) Ltd (ENIL) senior vice-president, legal and company secretary Anil Fernandes, this is the highlight of his in-house role. "that is what makes work interesting," Fernandes says. "those are the challenges that make you look forward to coming in to work on a Monday morning."

Fernandes leads a six-strong in-house team at ENIL, which is from the times of india stable, and is involved in a variety of businesses including radio broadcasting, events, out-of-home media, and film. the in-house team increased by two this year, which Fernandes attributes to the rapid growth that ENIL - and the indian economy - is experiencing.

Even so, and perhaps because of this growth, Fernandes says the expectations placed on general counsel and in-house teams in india are growing. "increasingly, we are having to play the role of solution providers, and deal with very complex legal problems to come up with a holistic solution that deals with the problems, including regulatory and compliance issues. companies are expecting us to add value to transactions."

Fernandes says he consciously aims to deal with these issues in-house, by building up the knowledge and skill set among his team, which he says is an asset for the company. However, where there are gaps in expertise, the firm retains outside counsel.

ENIL uses AZB & partners and Mulla & Mulla locally, and internationally the company engages clifford chance, Denton Wilde sapte as well as a Dubai-based firm, Al Tamimi & Co. However, Fernandes says this panel is not static, and he would look at engaging other firms depending on the circumstances. "I would look at a firm that is adding value to the business - I'm always happy if someone tells me there is a better way to do things because all along life is a learning process," he says.

The team has taken on significant challenges over the past two years, including bringing ENIL to its successful ipo last year. He says this involved navigating multiple, complex regulations, restructuring the business for listing and drafting the prospectus.

Fernandes also deals with many other industry-specific legal challenges. "the sector is evolving, and so it is sometimes not clear what is acceptable and not," Fernandes says. "What typically happens when an industry is growing is that there are new regulations and a learning process for companies and governments," he says. He has played a crucial part in this, having been involved in government consultations on the implementation of a 'revenue sharing' regulatory structure for the sector.

One of the businesses ENIL is heavily involved in is radio, which is strongly regulated globally. Fernandes says the boundaries have to be trodden with caution to ensure the company complies with the law. He gives the example of radio advertising, which may fall within broader advertising codes as well as product-specific codes, such as pharmaceuticals. He says it is necessary to balance revenue benefits of advertisements with additional corporate risk.

Shining India story stresses family ties

The dizzying array of transactions Indian firms are undertaking means lawyers have not been worrying too much about local competition in recent times.

"The competition is becoming intense, but if you ask anybody in the last six months they will probably tell you we haven't had time to think about it because of the amount of work that is there - they are too focused on how to complete it and manage their own bandwidth," Khaitan & Co's Rabindra Jhunjhunwala says. "Unless the market for some reason sees a downsizing, people are not going to worry about competition," he says.

However, it is this intense workload and the opportunities that it can bring to firms and individuals that are driving the trends in the market at present. One of the stand-out issues in the market has been the need to bulk up to handle bigger transactions.

"I think we have pretty much taken our stand that we need to expand," FoxMandal Little's Som Mandal says. "With the amount of foreign investment in India, unless firms increase substantially in size they won't be able to handle the client work."

Already the largest firm in India at over 260 lawyers including 50 partners, FoxMandal Little recently took on a group of six lawyers, four from Khaitan & Co and two senior in-house lawyers from industry. The firm is targeting 300 or more lawyers this year.

Mandal says firms are taking on a lot of transactions at the same time, and if they do not have enough numbers the quality of work suffers. He says Fox is also organising the firm into practice areas, unusual for the usually generalist nature of lawyers and firms in India.

Khaitan & Co is also actively recruiting due to the increase in workload. Jhunjhunwala says the firm is strict on ensuring quality and taking on too much. "We have a policy that we actually tell a client that we will not be able to do it, rather than take it up and not do it well. [It's] one thing that we believe in - that quality cannot suffer, come what may."

Prem Rajani from Rajani & Associates laments that competition is changing the nature of Indian legal market to the ways of the West, including poaching lawyers from other firms and intense marketing. He says this "dog-eat-dog" market is not what it used to be, and the best people are spending less time practising law and more time marketing and pitching to clients.

He also says the lack of corporate lawyers compared with demand is causing more firms to start up and say they can do corporate work, and this has at times resulted in botched jobs. He nominates the capital markets arena as one such area of concern.

Keeping it in the family
A modernising economy and legal market is putting pressure on firms to make the transition from being family-owned to having a Western-style equity partnership.

"I think most of the firms have grown out of family, as has our firm, and a lot of members are still there, but to grow, you can't keep it in the family," Mandal says.

FoxMandal Little has been attracting new recruits by arguing that within the firm lawyers have more freedom to grow and build a practice than in family-dominated firms. He says the respect and independence given these lawyers is missing in a family partnership.

Khaitan & Co has made the transition to an equity partnership, which includes up-and-coming younger lawyers. Jhunjhunwala says this is the only way for future growth.

"You can't expect somebody to join a firm and give his heart and soul if the firm does not reward the individual," he says. "How many of these law firms in India today have the concept of promoting their juniors to the partnership status? How many of them get them to the partnership level and actually give them equity? It is a bit of a farce."

Many local firms have been making up salaried, namesake or associate partners, rather than transferring equity out of the family from which they grew.

"If we are to welcome in the foreign law firms, we have to have the systems in place, and can't be running as a family - it has to be run professionally," Jhunjhunwala says.

However, Amarchand & Mangaldas & Suresh A. Shroff & Co is one of the most successful local firms in the market, and is still wholly family-owned. Senior partner Pallavi Shroff says the emphasis should not be on whether a firm is family owned, but rather on whether it is professionally run. She says with the right systems in place, a professional structure and an effi- cient management structure to run departments, a family-owned structure is just as effective as an equity partnership.

It is a push against family-owned structures that is causing groups of lawyers to move around the market between firms, as well as start up their own firms. Aside from this pressure, a potential international opening is causing lawyers to look at opportunities.

A recent example has been Talwar Thakore & Associates, formed by Suresh Talwar from Crawford Bailey & Co and Shobhan Thakore from AZB & Partners, which has an alliance with Linklaters. Thakore said, as the President of the Institute of Chartered Secretaries recently wrote, "one is never too old to set another goal or to dream a new dream". "Both Suresh and I felt open to a new challenge and thought it was time to branch out on our own rather than to remain with the partnerships we were respectively partners of, although we retain a great deal of affection for our old firms," Thakore says. ALB