Reforms in India: Govt bats for FDI in select legal services

By: and |
Updated: July 8, 2016 8:04:03 AM

A draft note to allow FDI has been floated after discussions among various government departments — including law, commerce, industry and finance — and the Bar Council of India (BCI) for comprehensive stakeholder consultations.

Draft note floated for stakeholder commentsDraft note floated for stakeholder comments

The government is moving fast in allowing foreign direct investment (FDI) in certain services in the legal sector as it ramps up efforts to align policies related to various services with best global practices and continue with reforms in the FDI space, sources told FE.

A draft note to allow FDI has been floated after discussions among various government departments — including law, commerce, industry and finance — and the Bar Council of India (BCI) for comprehensive stakeholder consultations. At the core of the efforts is the government’s intention to make India an arbitration hub, just like Singapore, said the sources.

Initially, the government will likely allow the FDI only in non-litigious areas — especially transactional legal services and international arbitration — and won’t permit foreign law firms to offer direct litigation services in Indian courts, the sources said. This is being done to balance the interest of domestic lawyers with the requirement of bringing in competition and further efficiency in the sector.

The limit of FDI will be finalised after consultations with the BCI and taking the advice of the Supreme Court where a case on whether to allow foreign firms to fly in and fly out to give advice to their clients on a temporary basis on foreign law is already pending, said a source.

If FDI is allowed up to 100%, foreign firms can set up shop here, else, they have to buy into local firms. Either way, it will offer a huge opportunity to big foreign law firms like Clifford Chance, Linklaters, Ashurst, Bird & Bird, Eversheds and Clyde & Co that have been lobbying to tap a slice of the Indian legal services market the size of which is roughly $9 billion at present. The market for legal services in corporate transactions is estimated at $1-2 billion.

Importantly, unlike in the past, BCI is considering the proposal more favourably now.

However, the Society of Indian Law Firms (SILF) wants the sector to be opened to foreign investment only in phases so that domestic firms get enough time to prepare themselves to face foreign competition, the sources said.

Currently, legal services — both national and international law — are reserved for licensed Indian lawyers and Indian nationality or citizenship is required for getting a full licence. Only fully licensed lawyers may form and own law firms. Corporations are not permitted in the sector and lawyers may not enter into partnerships or otherwise associate with other professions or foreign lawyers.

A meeting on allowing FDI was convened by law secretary on Tuesday, which was attended by senior officials with the ministries of commerce and industry, finance, home affairs and law. It also had representatives from the BCI, SILF and the Indian Corporate Counsel Association, among others.

The commerce ministry has supported the move to open up the sector and given SILF four weeks to make a detailed presentation on the way forward, the objections to the proposal, and also on the need for necessary amendments to the Advocates Act.

Lalit Bhasin, president of SILF, said: “The present draft is inconsistent with our stance that it should be allowed in a phased manner. In the first stage, the country must set its own house in order by amending certain procedures, including allowing lawyers to advertise themselves, have websites. In the second phase, foreign lawyers should be allowed on condition that they will practise law of their own jurisdiction (in India) and will not associate with Indian lawyers, as prohibited under the BCI rules. Only after that the government should open up the sector as it is proposing.”

Raian Karanjawala, founder and managing partner of Karanjawala & Co, said: “Before you allow foreign firms, domestic firms need to have similar level and standing in the field.” As of now, domestic law firms are not allowed to form limited liability partnerships, and can’t have more than 20 partners. “So competing with well-established foreign firms having huge resources is difficult. There is no level playing field now. Maybe it should happen after 10 years,” he added.

Favouring an opening up of the legal sector to FDI, the Economic Survey for 2013-14 had said legal services had been growing at a steady rate of 8.2% in each of the years from 2005-06 to 2012-13. The country’s overall services sector grew 10.3% in 2014, outpacing China’s 8% and global services leader US’ 2.3%, according to the Economic Survey for 2015-16.

The foreign firms have been arguing that neither the Advocates Act, 1961, nor the Bar Council Rules govern the practice of foreign law and that there is no statutory prohibition barring foreign lawyers from appearing in international commercial arbitration proceedings conducted in India.

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