More players, more sophistication
The business traveller to India is confronted with a situation not unlike that seen in other parts of Asia. Rather run-down neighbourhoods that are fast encroaching on the city centres in Mumbai, Delhi, Chennai and Bangalore; dilapidated roads and public infrastructure and inexplicable blackouts that strike with clockwork regularity every hour, in even the most upscale of buildings.
But even in the midst of the pollution and poverty the average business-person will see a few things in India that one is unlikely to encounter elsewhere in the region. Take the drive from Mumbai’s Chhatrapati Shivaji International Airport to the city’s central business district hub at Nariman Point, or journey down one of Delhi’s national highways from Indira Gandhi Airport to Connaught Place. You will encounter plenty of billboards featuring celebrities, sport stars and business leaders hocking everything from soda to cement – perhaps not so out of the ordinary.
Somewhat less common is that scattered among them are posters advertising capital raisings, IPOs, and bond and share issuances. One such issuance, L&T, just raised US$600m through a dual QIP/CB issue and another – Welspun – increased its CB by US$150m. This is a strong signifier that both the corporate sector and the middle class’s thirst for capital, and the ‘India story’ — that narrative started by traders along the Silk Road some thousand years ago – is quickly reaching its final stanza.
Billions of dollars have already been spent by both public and private investors over the last two years (estimated between US$4–US$5.1trn), yet this is set to be exceeded by a government elected on a mandate to improve vital infrastructure. Targeted spending of US$10trn over five years, a corporate sector with the means available to construct it and a fast-emerging class of wealth generators with the eagerness and risk appetite to invest all assist.
Infrastructure is only part of the story, albeit a big part. Outbound investment remains on the radar of cash-rich Indian corporates like Tata, ICICI and Reliance, as well as a whole host of smaller ones. FDI guidelines have been relaxed to encourage foreign investment and the innovation seen on the nation’s capital markets has played a hand in leading an unmistakable recovery over the past three months.
Just as the vital signs for the Indian economy are good, so too are those of the nation’s law firms, who have themselves long hedged their own domestic and international growth against the rising stocks of India’s economy. Never have so many law firms – and so many from different segments of the market – been involved.
It’s now not only names like Amarchand & Mangaldas, AZB and J Sagar & Associates that one is likely to encounter on the opposite side of the boardroom table. Mid-tier and boutique law firms are claiming headlines of their own for their counsel on the largest, most innovative and complex of Indian and international transactions – and often without the assistance of international law firms. The legal services market continues to stride towards a level of sophistication that many outside India contend (rightly or wrongly) is beyond expectations.
Clifford Chance – AZB & Partners
Linklaters – Talwar, Thakore & Associates
Allen & Overy – Trilegal
Jones Day – P&A Law Offices
Clyde & Company – ALMT Legal
Dacheng Central Chambers – Vaish Associates Advocates
Kelley Drye – Whakariya & Whakariya
Kennedys – Tuli & Co
Jacopo Gaspari – Titus & Co
The 60:40 rule
Never before have India’s law firms been claiming so many headlines, with roles on some of the country’s most significant transactions over the past 12 months. Deals such as Nomura’s acquisition of Lehman’s Asian assets, the proposed MTN Bharti Airtel merger, and Adani Power’s IPO come to mind, landing firms spots atop legal advisory leaderboards in each quarter this year.
In private equity, M&A and project finance, Indian law firms all figured prominently. One key to understanding this rise – and why many believe Indian law firms will continue to assert their growing clout in the years ahead – is recognising that Indian law firms serve not only local clients but international ones as well.
A 60:40 split between serving international and domestic clients is most common, according to ALB’s research, something that may appear a little odd when compared with the heavy domestic-oriented client portfolios of local law firms seen elsewhere in Asia. This split is something that Abhishek Saxena, co-founding partner of Phoenix Legal, attributes to how the Indian economy has developed since it was liberalised some two decades ago. “The real watershed moment for Indian business, and Indian law firms, was the opening up of the economy in the 1990s,” he says. “Indian law firms really grew up alongside this as international investors started to pour in. The influx of FDI that has been occurring since then accounts for why most Indian law firms will have close to the same amount of international clients as local clients.”
How has the unmistakable drop-off in India-related international investment affected this balance? Vendana Shroff, a partner with Amarchand & Mangaldas, says that while the financial crisis has brought about a slow-down in certain areas – capital markets and large scale M&A are two examples – the impact this has had on overall workflow has been minimal. “The GFC god has been kind to us,” Shroff says. “There were a few bleak days, just as there is in good times, but what you would expect to see in a downturn [happened]: capital markets work dropped off, M&A went from big deals to smaller ones … but we haven’t been forced into any strategic adjustments, whether in terms of staffing or direction, by the crisis.”
Not everyone shares Shroff’s optimistic assessment. One firm that hasn’t been as lucky is FoxMandal Little. The drop-off in work from its international company-dominated client portfolio has created a number of headaches for the firm, most notoriously the difficulty in paying salaries of its staff earlier this year. According to Som Mandal, a partner at the firm, the result is the “challenging” process of refocusing the firm’s client base. “The financial crisis has hit some of our international clients hard and some of that has been passed onto us,” he says. “What we are doing now is revisiting Indian clients and trying to build up this segment to let them know we have the resources, through our network of offices in India and our presence in London, to assist them both at home and abroad.”
Likewise, a number of other Indian firms who have not been as candid about their GFC-related troubles will be banking on a flurry of outbound activity from Indian companies to reverse their fortunes. But when, and if, this will occur is still anyone’s guess. “There have been outbound deals, but there hasn’t been a flood – it’s been much quieter than in previous years,” says Abhijit Joshi, a co-founding partner of AZB & Partners. “At the moment Indian companies are struggling to raise the capital needed for acquisitions abroad and most are in a stage of consolidation,” he says, singling out the IT sector as possibly the only exception to this trend. “We do foresee an increase in outbound activity but exactly when this will happen is still uncertain … there are too many pieces of the puzzle that need to fall into place first.”
Capital markets
One vital piece of this puzzle seems to have already fallen into place: over the last three months alone, the country’s companies have raised over US$6bn on the nation’s capital markets (and more than US$16bn through other measures). There is the promise of more to come as the country fully shakes off the effects of the financial crisis. “The listings and capital market activity that is taking place at the moment is promising,” Joshi says. “Products like QIPs and IDR, when they eventually hit the market, are opening up new segments to investors and companies… it is indicative of the sophistication and innovation happening there.” The qualified institutional placements, for example, are private placements of equity shares or securities, convertible into equity shares by a listed company to qualified institutional buyers under provisions outlined in the SEBI regulations.
In order to make a QIP, members of the issuer are required to approve the placement by way of a special resolution highlighting that the securities offered in a QIP are of the same class as the securities of the issuer. These need to be listed for one year before service of notice of the shareholder’s resolution.
The innovation, says Rabindra Jhunjhunwala, a partner with Khaitan & Co, has to do with the short timeframe required to get a QIP off the ground. “The processes can all be completed within a couple of months,” he says. “There is next to no involvement of SEBI with the process, except for filings which are done post-listing.”
It helps that the pool of investors being targeted are seasoned as well. “The investors – qualified institutional buyers – are extremely savvy,” says Jhunjhunwala. “More often than not, they will be sitting on some cash and will be looking for the right opportunity to quickly deploy it.” Amarchand & Mangaldas has been the busiest law firm on the QIP front over the last six months, having landed lead roles on Cipla’s US$145m QIP, Unitech’s US$325m offering and HDIL’s US$600m placement, among others.
NEXT: Top pedigree
Top pedigree
Just as the Indian economy is leaping towards sophistication, so too is the legal community which derives sustenance from it. The country’s largest firms have proven their credentials by playing lead roles in some of India’s seminal transactions, but never before have the high number of mid-tier firms and the wealth of smaller players also played such an important role.
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Just as the Indian economy is leaping towards sophistication, so too is the legal community which derives sustenance from it. The country’s largest firms have proven their credentials by playing lead roles in some of India’s seminal transactions, but never before have the high number of mid-tier firms and the wealth of smaller players also played such an important role.One need only look at some of the largest transactions of the last 12–18 months to see that local firms are just as capable of executing big deals as are firms like Amarchand, JSA and others. But how have these firms – many of which have been in existence for less than five years – lured multi-billion dollar international and domestic clients away? “Most invest more time in client care and relationship building,” says the general counsel for one of India’s five largest companies. “It has not traditionally been an area where your Amarchands, FoxMandal’s or Crawford Bayley’s have excelled … I think it is fair to say that these firms have depended on their brand – or certain individuals – to bring business through the door.”
According to this general counsel, the irony is that the gains made by the smaller firms are forcing the larger firms to rethink and redouble their client care strategies. For their part, the big firms deny that their client care skills are anything but finely honed and cite numerous studies to substantiate these assertions. “We have always considered our closeness to our clients as a pillar of the firm,” said Amarchand’s Shroff. “We have been noted by a number of independent studies – like that recently done by RSG – as the leading firm in India in these areas.” Despite the conjecture, one cannot deny that the cache of specialist and boutique firms now operating in India is fast eroding a market share that was hitherto considered the exclusive domain of the top-tier firms. Another explanation may also be found by looking at the pedigree of these firms’ proprietors.
For example, Saxena co-founded Phoenix Legal after time spent at Trilegal, Bijesh Thakker founded Thakker & Thakker after a stint with Denton Wilde Sapte in London, and the Baruchas left Amarchand to start their own firm (Barucha & Partners). The founding partners of ALMT all worked in the London office of Singhania & Partners, while Zia Mody traces her roots back to Baker & McKenzie in the US. “Coming from a well-established and well-credentialed law firm certainly helps in picking up new instructions, giving you enough work to get by when you are in the process of building your new firm,” Saxena says. But he is quick to point out that, pedigree or reputation notwithstanding, there is no substitute for “blood, sweat and [a] few tears.”
All this raises a valid question: why would one want to branch away from the seemingly nurturing bosom of the larger law firms in India? “It is purely about independence,” he says. “There is ability in a smaller firm – in a start-up – to build your own business free of the hurdles one faces in the family-run shops … we don’t have to deal with the politics – we can just be lawyers. We wanted to build a firm that was more democratic. We didn’t want it to be just rhetoric but show a real commitment to it by giving our lawyers equity in the practice and power in the decision making process… we feel the best way to do this is to model ourselves on the international firm model.”
Independence and democracy aside, there is a sense of entrepreneurship among the mid-tier law firms in India that is tangible. Many, if not most, harbour ambitions of turning their law firm into India’s next legal leviathan. “We don’t want to be thought of as a mid-tier firm,” says Bijesh Thakker, the founding partner of Thakker & Thakker. “The work we do is top-tier and the clients we act for are top-tier.” He makes reference to the firm’s location in one of Mumbai’s most upscale corporate locations: Express Towers in Nariman Point. DSK Legal and ALMT (both also located in Express Towers) also cite their locations as evidence of their firm’s higher ambitions.
Consolidate and prosper
Putting aside the claims of DSK, Thakker, ALMT and others, there is a perception that now has never been a better time for smaller law firms in the market to make a name for themselves. This is especially as the Indian legal services market seems to have entered into a phase of consolidation. Earlier this year, AZB & Partners subsumed the Bangalore boutique firm of Anup S Shah, after acquiring the Dehli-based practice of Ajay Bahl. In June M&C Partners, another Bangalore-based outfit, was acquired by JSA, and there are more rumoured to be on the cusp of taking up similar opportunities.
PwC executive director Ketan Dalal says that the consolidation witnessed over the past six months is driven by a number of factors, including the desire to increase one’s geographical reach, bring in additional skillsets and leverage existing clientele for more work. These drivers may actually work in favour of start-ups and mid-tier firms, who could find themselves either filling a niche created by these mergers or becoming the target of a lucrative merger themselves. “A larger firm would usually have the infrastructure and capability to provide increased services to existing clients of a smaller firm,” Delal says. “Hence, mining the revenue potential from the same pool of clients increases. It also increases the potential for well-credentialed and experienced smaller law firms to become potential targets, or if not, reap windfalls that arise from matters where the newly-merged firm is conflicted out.”
Sudhir Kapadia, head of tax with Ernst & Young, says that the rush to consolidation is evidence that the Indian legal services market is still in a nascent stage of development. The market still has some way to go in terms of achieving critical mass. “Consolidation will only grow as law firms try to keep pace with clients,” he notes. “To keep larger clients, law firms will need to build multiple skillsets … we would expect this process to increase in the years ahead.”
NEXT: International law liberalises
International law liberalises
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David Jacobs “We will open in India when the regulations change to permit us to do. This is really the only hurdle for us. We would likely enter in one of two ways: invite an excellent Indian law firm to join us if appropriate, or seek out the best and the brightest in India and have them anchor an office.” |
Beyond the top end of the market, however, few Indian law firms have sought to bed down with international law firms – and with good reason, according to lawyers ALB spoke to. Many are prepared to remain polygamous rather than submitting to would what appear to be an unequal legal marriage. “We don’t want a ‘best-friends’ relationship because we believe that they are probably more trouble than they are worth,” says Khaitan’s Jhunjhunwala. “For one, we don’t want to lose our referrals and I think more importantly, we don’t think our clients are best served by us aligning with one international firm… all of our clients are 100 billion dollar clients. For the smaller clients, costs may unnecessarily be driven up.”
Partners at Indian law firms with ‘best-friends’ agreements disagree, saying that costs are actually minimised. “When you have two firms in such an arrangement working on a deal together, [then] each can bring to bear their knowledge gained from similar transactions,” says AZB’s Joshi. “In our experience the ‘best-friends’ agreement has helped us circumvent the – sometimes high – costs associated with engaging international counsel late in a deal.”
While it is clear such arrangements may in fact minimise some costs for clients, they are also reducing the referral work that many Indian law firms who are tied up with an international partner were previously receiving. “Yes, we have [seen] this side of the business drop-off,” says the partner of an Indian law firm currently in such an agreement. “But contrary to what others say, the work we were getting from referrals was not that steady to begin with. Now I think our agreement is producing this steady stream of work through our ‘best-friend’ as well as other international law firms and other Indian firms.”
The regulations pertaining to these agreements prohibit any financial integration between international and domestic law firms. But in almost every other aspect of their businesses, both types of firms are almost always inextricably intertwined. Secondees move to and fro and everything is shared – marketing, back office, IT systems, work – and, of course, clients.
The ultimate question is, how close is too close? What impact are such agreements having on the ability of the Indian surrogates to develop and grow their own practice, independent of the international host? “The back office and management systems that we have been introduced to via Clifford Chance have helped us to grow, but it’s growth of a more guided kind,” says Joshi. “We have been able to benchmark our development against their best practices and set ourselves a clear growth trajectory.”
Does this dilute the Indian firm’s brand? When a client comes to AZB, Talwar, Thakore & Associates or ALMT, are they coming to that firm or simply to Clifford Chance, Linklaters or Clyde & Co? To many the distinction may appear rather clear-cut, but in the eyes of clients, and for that matter, other international law firms, it’s still a bit of a grey area.
"While we know that when we outsource work to an Indian firm in a ‘best-friends’ relationship we will always get high-calibre, high-value work, we are always on the look out for double-up,” says a local general counsel at a US-based investment bank. “Some international firms are notorious for featherbedding, and if you look at bills submitted by an independent firm and non-independent firm you may find differences.”
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Lalit Bhasin “I don’t see the logic as to why foreign law firms are needed in India but if the debate is required, it’s surely one that should not involve international lawyers, law ministers and bar councils. It is a decision that the consumers should make” |
It’s here the virtues of remaining independent become clear. “We have said before that we are – and will remain – independent no matter what happens in relation to liberalisation,” says Amarchand’s Shroff. “We’ve had interest, and plenty of it, but for us independence is the key to surviving in India when foreign firms enter.” ALB