India’s Corporate lawyers court riches

Well, I guess my last post on the topic of CAs and lawyers having a good time despite a slowdown in the economy and some job losses across the board today got support from an article in the FT which goes on to say -

While the world economy sags, India’s lawyers are enjoying a boom. Lead partners at the country’s commercial law firms are now earning over $1m a year.

“Corporate [lawyer] salaries have ex ploded. They are going up by 20 to 40 per cent,” says Anand Prasad, a partner at Trilegal, a law firm with offices in Delhi, Mumbai and Bangalore.

With rates for domestic corporate lawyers averaging $400 an hour, even junior corporate partners at top firms earn surprising sums – sometimes up to $250,000 before bonus es. Desai & Diwanji, for example, a firm with offices in Mumbai and Delhi, increased its staff remuneration this year by 200 per cent.

While liberalisation of the Indian economy began only in 1991 – making the modern practice of corporate law in India just 15 years old – the profession is already reaping huge benefits from a period of economic growth that will be slowed, but is unlikely to be halted, by the global downturn.

The shift has some painful ramifications, both for foreign law firms prevented from sharing in the bonanza locally by protectionist regulation and large corporations that are unable to use a single international law firm for all their work.

Global law firms such as Clifford Chance see India as ripe with possibility and the “missing link” in their worldwide coverage. There are clear advantages for the UK’s leading firms: India’s legal code has roots in British law, its language of business is English and its economy has been growing by 8 per cent for the past three years.

Yet for now they are shut out. Strict Bar rules prevent large international law firms opening offices or practising Indian or foreign law in the country.

As well as raising the costs of Indian legal services for incoming multinationals, this creates other problems. Lesley Jackson, chief financial officer at United Breweries in Bangalore, says she must work with foreign law firms out of hotel rooms, shuttling back and forth to sign documents in Singapore, and having two law firms (one Indian and one foreign) on every deal. “It makes it difficult not to be able to instruct legal one-stop shops, especially on global deals where it is important to have a brand name,” she says.

Indian corporate lawyers with the right skills to serve such clients are also thin on the ground. Bharat Vasani, general counsel at Tata Group, says: “Outsiders can be deceived by the overall size of Indian law firms. There are actually very few partners capable of doing top level corporate work.”

The profession faces a struggle to service India’s growing corporate sector and foreign investors. According to India Today magazine, the country requires 3,000 new corporate lawyers a year to keep pace with demand. Multinationals such as IBM and Hewlett- Packard and Indian corporations such as Infosys and Reliance have responded by expanding their in-house legal departments. Promod Rao, general counsel of ICICI Bank, says: “Our referrals to domestic firms are few. We even parachute our own guys in to do due diligence work.”

For foreign law firms that need to serve their global clients in India, the Indian Bar restrictions create tortuous logistical challenges. Ashurst, a UK law firm, has a liaison office in Delhi but the firm’s visiting partners say they are careful not to meet clients or give legal advice at these premises, which are more akin to a personal apartment than a law firm office.

Sandeep Katwala, Linklaters’ India head, spends a lot of time working out of his “house hotel”, the Oberoi in Mumbai. Various other hotel suites double up as offices, not only for lawyers but for other professional firms such as Morgan Stanley and Nomura.

Linklaters is one of the most active law firms in India and has advised underwriters on some of India’s largest public listings, such as Cairn India’s IPO and that of DLF, India’s largest real estate company. Last year it formed a referral relationship with a recently established Mumbai law firm, Talwar Thakore & Associates.

Although independent, the firms refer work to each other, share training and run secondments. Kunal Thakore, whose father Shobhan is one of TTA’s named partners, is a partner in Linklaters’ Hong Kong office. Mr Katwala says: “We probably still work as much with other Indian law firms [as with TTA]. But on the Vodafone-Essar transaction, for example, working with TTA allowed us to offer the client an integrated team approach.”

To ensure they gain access to leading domestic lawyers, multinationals and foreign law firms have similar relationships with Indian law firms, such as Amarchand & Mangaldas and AZB & Partners. However, nearly everyone wants to instruct the top partners at these firms, so availability of talent is a problem. For example, during the demerger in 2005 of Reliance Industries, one of the country’s biggest conglomerates, Amarchand & Mangaldas acted for each of the Ambani brothers and their mother.

This type of arrangement would unsettle most western lawyers. “Conflicts in India are scary,” says Mukesh Bhavani, general counsel at Essar Group, the Indian conglomerate. He feels that although the Indian legal market is maturing, it still has some way to go before lawyers can claim to have put proper Chinese walls in place.

Foreign firms, meanwhile, are beating legal restrictions by developing India practices outside the country – and picking off the brightest graduates to staff them. Rajesh Begur, managing partner at ARA Law, a Mumbai-based firm, says he is already feeling the pinch of foreign competition in graduate recruitment. “I went to Jodphur just after [UK law firm] Herbert Smith had been there and I could not recruit one law student.”

The inroads made by foreign firms, however, can spark passionate opposition. Lalit Bhasin, head of the Society for Indian Lawyers, says: “UK Magic Circle firms want to emasculate the Indian legal profession in what amounts to a hostile takeover.”

Such sentiments contributed to the Indian Bar Council’s rejection of liberalisation proposals in November 2007. Firms believe it will be anything from three to five years before India opens up its legal market. For now, international law firms must look on with envy as the country’s local lawyers enjoy the rewards of exclusivity.

Copyright The Financial Times Limited 2008

SEBI Takeover Code - creeping acquisition norms eased for persons holding 55% and above but below 75%

In a bid to help the market sentiment SEBI has eased the creeping acquisition norms so as to allow promoters to increase their holding beyond 55%, upto 75%, through creeping acquisition of upto 5% per annum. The earlier limit of 5% per annum still remains and only promoters who are currently holding more than 50% would benefit in the near term as they are the ones who will be able to increase their holding beyond 55% immediately, the others who are currently holding say, 40% or so will take at least 3 years to go beyond the 55% mark and as such their share prices, at this juncture, do not get any support because of this move.

It may be noted that Sebi has mandated that such acquisitions could be done only though open market operations and not via bulk, block deal, or through preferential offer.

Further, till now, for any increase in the holding of promoters pursuant to buy back, exemption under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations was required to be sought. SEBI has now decided to automatically exempt increase/consolidation up to 5 per cent per annum as a result of buy back by a company.

I am not sure how much of an effect this is going to have in the current tight liquidity scenario as, although the promoters have a great opportunity to increase their shareholding beyond 55%, but do they have the hard cash to do so, is the moot question.

Bar Council now amenable to Opening up of the Legal sector

The Economic Times today quotes BCI member Jagdev:

“We have told the law ministry that we would consider applications of UK-based law firms only if they allow our lawyers to practice in their country. A stricter set of reciprocity rules would be laid out before we actually set out to start operations,”

The commerce Minister, Mr Kamal Nath, had spoken of this sometime back during his parlays at the WTO, however, there was no movement forward as the Bar Council was dead against it.

A number of UK based firms have already got a tie-up with Indian firms in the form of client referral arrangements such as Allen & Overy and Linklaters which have client referral arrangements with Trilegal and Talwar, Thakore & Associates, respectively. Others like Clifford Chance have liaison offices in India.

However, for the above to actually happen on the ground, it would need a legislative change, but now, it seems, it is only a matter of time.

Finally, some movement on the Limited Liability Partnership Bill

As reported across several papers, Shri Prem Chand Gupta, Minister of Corporate Affairs, in the government on Tuesday introduced the revised Limited Liability Partnership Bill, 2008 in the Rajya Sabha. The Bill provides for the formation and regulation of limited liability partnerships and for matters connected therewith or incidental thereto.

With the imminent opening up of the accounting and legal and other professional services sectors this Bill will play an important role in creating a level playing field for the professionals of India. The Institute of Chartered Accountants of India, has already made the necessary amendments allowing its members to partner with members of other professions. The other professional bodies are also making similar amendments to facilitate the process. This will help in creating larger multi-disciplinary firms which can service clients across domains.

Limited Liability Partnership (LLP) as proposed in the Bill, 2008 is a new corporate form that enables professional expertise and entrepreneurial initiative to combine, organize and operate in an innovative and efficient manner. In India, this need has long been recognised for businesses which may require a framework that provides flexibility suited to requirements of service, knowledge and technology based enterprises.

Services sector is playing a major role in the national economy and there is a growing diversity in the range of services being offered. The services sector would also find this form very useful. The advantage of the LLP form would be that it will not impose detailed legal and procedural requirements intended for large widely held companies on such enterprises. In this way it will also be useful for small enterprises.

The need for LLP legislation has been recognized for a very long time. Various committees and Expert Groups have, from time to time, recommended introduction of LLP legislation in India.  In the last decade itself, Abid Hussain Committee (1997) had recommended this legislation in the context of SSIs. The Naresh Chandra Committee on Regulation of Private Companies and Partnerships (2003) and Dr. Irani Committee on New Company Law (2005) had also made recommendations for a separate  LLP Legislation.

However, it is the recent initiative of the Ministry of Corporate Affairs that has enabled this legislation to be finalized and tabled in the Parliament.

Government had earlier introduced the Limited Liability Partnership Bill, 2006 in the Rajya Sabha on 15^th December, 2006. It was later referred to the Department Related Parliamentary Standing Committee on Finance for examination and report. The Committee submitted its recommendations in its report to both Houses of Parliament on 27^th November, 2007. The present Bill, 2008 has taken in view the recommendations made by the Standing Committee and other relevant inputs.

The salient features of the LLP Bill, 2008 are as follows:

(i)         The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.

(ii) The Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.

(iii) While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP. Further, no partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

(iv)        LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. Indian Partnership Act, 1932 shall not be applicable to LLPs. Since LLP shall be in the form of a body corporate, it is also proposed that the relevant provisions of the Companies Act, 1956 may be made applicable to LLPs at any time in the future by Notification by Central Government, with such changes or modifications as appropriate.

(v) An LLP shall be under obligation to maintain annual accounts reflecting true and fair view of its state of affairs. Since tax matters of all entities in India are addressed in the Income Tax Act, 1961, the taxation of LLPs shall be addressed in that Act.

(vi) Provisions have been made in the Bill for corporate actions like mergers, amalgamations etc.

(vii)       While enabling provisions in respect of winding up and dissolutions of LLPs have been made in the Bill, detailed provisions in this regard would be provided by way of rules under the Act.

Prior to introducing the LLP Bill, 2008, Shri Prem Chand Gupta withdrew the earlier Limited Liability Partnership Bill, 2006.

Circumventing the Takeover Code

Kudos to the CNBC reporter, Sajeet Manghat, who has correctly analysed the scheme adopted by RIL to effectively circumvent the SEBI Takeover Code. The transcript, from the CNBC website, is as under:

“Delivery-based selling in RIL has gone up to 57.4% from 22.3% on Wednesday and there is also an increase in delivery volumes. The main reason why the stock is under pressure is because RIL has reclassified promoter shareholding ahead of warrant conversion. RIL has nearly 14% of its equity under treasury stock and classified under promoter and PAC. The treasury stock is held under petroleum trust and eight corporate bodies. RIL has converted eight corporate bodies into its subsidiaries. Subsidiaries lose promoter status and voting rights under regulations. RIL promoters converts warrants at Rs 1402 per share and infuses Rs 15141 crore. Promoter stake has fallen to 44.8% from over 51%. Post warrant conversion, RIL promoter stake has gone up to 49%. RIL promoter voting right also goes up to 52%. Warrant conversion has infused over Rs 15,100 crore into RIL funds”.

As per Section 42 of the Companies Act a subsidiary cannot hold shares in a holding company, however, a company which is not a subsidiary at the time it purchases the shares of the holding company and becomes a subsidiary later, due to the acquisition of its shares by the holding company, is exempt form the provisions of Section 42 (sub section 3). However, such a subsidiary then looses its voting rights (which in any case is irrelevant for a promoter who is already holding a high stake). Further, the subsidiary also looses its promoter tag under the Takeover Code and thus creates space for the promoter to acquire additional shares.

Would definitely like to someday connect with Sajeet and get more of these inside stories!