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Improving FDI into India: The Need for Regulatory Change

Clifford Chance and Indian law firm AZB have recently announced an agreement to establish a 'best friends' relationship to offer combined exposure and experience to both Indian and international clients.

The arrangement is the first of its kind between two major law firms and will set a new benchmark for the delivery of legal services on transactions involving international businesses investing in India or Indian businesses investing or raising capital or finance internationally.

In the reciprocal arrangement, Clifford Chance will refer work to be carried out in India to AZB, with AZB referring work to Clifford Chance to be handled in its international network. AZB will have access to Clifford Chance's global reach, client service standards and technical expertise, and Clifford Chance will have access to AZB's Indian expertise and experience.

Both firms have extensive experience in the real estate and construction sectors including development, project and infrastructure financing, energy processes and arbitration; AZB advise international firms on local litigation practices in the retail sector.

Cityscape Intelligence talks to Chris Wyman, Partner, Clifford Chance, about the new agreement.  He discusses the increasing focus on India from international clients as well as growing activity from investors within India.

Why have you entered into this arrangement?

This new agreement is what we have called a ‘best friends’ arrangement which means that the two firms will remain entirely separate but agree to work together. The background is that, as of today, foreign law firms are not allowed to practise in India and Indian law firms are not allowed to enter into partnerships with foreign lawyers; so you have to stop short of anything that might be seen as a partnership.  There is no financial connection between the two firms, it is just a reciprocal agreement to work together. The agreement provides for each firm to offer the other as its preferred firm in each relevant country.  This will be backed by 'know how' and training support and will hopefully lead to reciprocal referrals, where that is in the best interests of the clients.  Obviously we would have liked to try to do rather more but we have to work within the rules as they are.

Do you think those rules are likely to change or do you think they will stay as they are?

I think they will change in due course.  The Government of India has been fairly clear that it wishes the rules to change and there have been a number of steps towards change, such as the passing of the new LLP Act late last year.  However, at the same time, they want to get the Indian Bar comfortable with the idea of the foreign law firms being allowed into the country. I think they also wanted to give their lawyers time to prepare, so the process of change has been going on for some time and we expect that it will continue for another year or two.  Having said that, the present arrangements are costly and inefficient for clients and so there are economic and business reasons why the reforms should not be long delayed.

To what extent do you think arrangements such as this will be significant for cross border investment with India?

This arrangement will allow the two firms to offer clients a single team for their cross border work.  This will increase efficiency, reduce costs and, hopefully, lead to a better overall product.  However, the regulatory restrictions preventing the firms from entering into any form of partnership or even revenue sharing means that the arrangement is inevitably sub‑optimal.  The true benefits for cross border investment will have to await regulatory change.

How did the arrangement with AZB come about?

We have worked with AZB since it was formed five years ago.  We knew the firms that it was formed out of and we know the senior partners there extremely well, which tends to be the case with these types of arrangements. I think they grow out of people knowing each other and realising they have a common interest and then deciding to sit down and discuss how that might be developed.

Have you noticed an increasing interest from clients for transactions going into and coming out of India?

Yes, absolutely. Irrespective of this arrangement, we were increasingly focusing on India because our international clients were doing so and we were seeing much more activity by Indian clients investing outside India.  So the combination of increased inward investment and increased outward investment I think made it an obvious area of interest for all of the law firms.

In which sectors have you noticed a particular interest from clients?

Pretty well across the board.  It began in the early 1990’s in some of the energy and infrastructure sectors particularly the power sector. We, for example, were involved in four out of the eight fast track power projects backed by the Indian Government at that time. Over time it has moved so that there are people who are looking at a wide range of industries and of course there is a very substantial BPO business in India; a lot of international companies have offshore centres in India servicing them globally, so it is the full range of things. Real estate was very hot but the real estate sector in India is suffering in the same way as it is in other countries so the appetite for real estate has certainly declined in recent months and I suspect will remain subdued for some time. 

To what extent have offshore operations in India been affected by the global financial downturn?

Companies have been outsourcing to India over a number of years and people have mixed views on how the problems in the US and elsewhere will accelerate that.  Logically, businesses looking to cut costs will be considering accelerating their outsourcing.  However, on the other side, there are worries  that some of the companies who have centres in India may not survive.  This means that it is not entirely clear how the financial problems will affect the off-shoring business in India. 

Offshoring is not just about lower costs; a lot of organisations see value in concentrating services in a single centre so it is not so much that the costs per person is lower but you avoid having too much duplication if you have got everyone in one place.

Is the Indian Government looking at increasing to public-private partnerships for infrastructure development?

They are looking more at private-public partnerships.  I think like every country they are looking at a variety of different models to build their infrastructure. I don’t think they have a single track approach so there are traditional private sector infrastructure projects being tendered all the way through to pure public sector with PPP in the middle.

If you are not able to function in India but you represent international clients, how does that work with public-private finance?

This is one of the reasons the Indian Government wishes to see change because it is clearly inefficient for our clients. If they are India based, they don’t have direct, real time access to their international counsel unless they fly in for a visit which is costly and time consuming. For the international clients, likewise when they are in India, the only way they can have access to their normal counsel is to fly them in with them which is again costly and inefficient, so it is not an ideal scenario.  We are hoping that by having a best friend on the ground in India, we will be able to make things easier for our clients but I think we and AZB see this as an imperfect solution but all that can be done in the present regulatory environment.  It would clearly be better for our clients if the international and Indian legal advice could be given by a single team based in the country.

Would you say that Indian law firms need more exposure to the international arena?

I think the problem is not that they don’t have very good lawyers who are very switched on internationally but it is the scale.  They simply do not have enough qualified lawyers.  AZB I think has got two hundred lawyers and although it is not the largest firm in India, it is one of the Indian Magic Circle if you like. Some may have three or four hundred, but between them all there are a few thousand lawyers who are trying to service an economy which, even in these depressed times, is growing at over 5 percent; they just don’t have sufficient access to quality legal advice.  Clients tell us that this is adversely impacting the speed, volume and complexity of the transactions they do in India.

Having said this, the transformation in the country since 1991 when they started this reform process is quite extraordinary.  When I was working there in the 1990s, the weight of the government consents and the like required could really overwhelm some quite useful projects.  I think things have got a lot better, but like every country, no doubt there is more that can be done. However I think they know what they have got to achieve and over the last 16 or 17 years they have made good progress. Clearly it would be good if they carried on continuing to reduce the red tape involved in doing business there. India is certainly one of the key markets for the future and continuing reforms should help the economy carry on developing.

India is certainly its own place, the red tape is still a factor in doing business, the slow speed of enforcement of rights is another factor.  For example, we have been following one case that for nearly fourteen years without a first instance decision being made, and we expect an appeal once there is a decision. There are factors which combine to make some aspects of doing business there difficult, but on the other hand it is also a vibrant democracy which ultimately does have the concept of the rule of law and contracts are honoured or can be enforced.  So it has advantages over many countries as well.

Chris Wyman has been a partner in the London office of Clifford Chance LLP since 1986.  He joined the firm in 1979 and has specialised in energy and infrastructure related work for more than twenty-five years.  He first started working on India related projects about fifteen years ago and has been more or less continuously involved with India ever since.