Legal: The Competition Stiffens
A small tweak in the SEZ rules will open the gates to foreign law firms in India, which some fear will threaten Indian firms in the absence of a level playing field
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In a recent development, the Indian government revoked a ban on the practice of law from special economic zones (SEZs), by issuing a notification in the Gazette of India amending the Special Economic Rules governing Special Economic Zones on 3 January 2017. Although, the change by itself neither lifts the 1961 Advocates Act restriction that law can only be practised by Indian nationals and firms, nor the Bombay and Madras High Court judgments restating that foreign law firms are not allowed to practice here, many see this amendment as a small step towards opening up India’s legal and accounting sector to foreign players.
The amendment may have found some takers, but it has irked many who feel that the government should first provide a level playing field to Indian law firms before allowing foreign firms to set up shop in the country. Under chairman Lalit Bhasin, the Society of Indian Law Firms (SILF) — the only representative body for law firms of India — has objected to the SEZ rule tweak, that may or may not by itself be enough to allow foreign firms to set up practice in SEZs. “It has to be done in a phased manner. Phase 1 can be internal reforms. In phase 2, Indian lawyers should be allowed to practice foreign law. Entry to foreign firms can be allowed in phase 3. We oppose this back door entry, it is a retrograde step,” says Bhasin.
About The Amendment
As per the notification in the Gazette of India, the Ministry of Commerce and Industry together with the Ministry of Law made a small amendment, deleting just five words — “excluding legal services and accounting” from Rule 76 of The Special Economic Zones Rules, 2006, which specifies some of the businesses that are allowed to set up in such zones. Though the rule amendment does not explicitly mention foreign law firms or permit them to advise Indian clients on local businesses and regulations; in effect, it would allow domestic law firms and possibly legal process outsourcers (LPOs) to set up shop inside SEZs. The move is aligned with the government’s intention to eventually liberalise the legal market — a subject of much debate over the last few decades.
The amendment further allows not only Indian law firms to set up base in Gujarat International Finance Tec-City (GIFT), but even multinationals can directly advise on international disputes or arbitration by setting up shop there. This will be the first FTZ (free trade zone) to allow foreign law firms, after Mumbai.
This will lead to stiff competition as both Indian and foreign firms would compete for the same clients in GIFT. “But this would take time and is a long process. This liberalisation will let foreign law firms operate on their own, bringing an end to Indian and foreign law firms’ ‘best friends alliance’,” says Sudhir Mishra, Managing Partner, Trust Legal.
Friends With Benefits
Allowing foreign firms to operate in SEZs is a small first step towards opening up the legal sector in India to international competition. Sarosh Zaiwalla, managing partner of London-based law firm Zaiwalla & Co, believes this step would benefit the country enormously. “It will give confidence to foreign direct investors who like the comfort of dealing with the same law firm in India as in their own country. Presently, a few Indian firms are monopolising the sector in India; international work and competition will also have a direct effect on the steep service costs,” says Zaiwalla.
He further points out that this development will cause Indian firms to adopt international standards which would be good for the legal profession in India; plus, it will open up opportunities for young Indian lawyers to work with overseas international firms.
At present, some overseas firms are already working in India through ‘best friends’ alliance. So far, under the alliance, both Indian and foreign law firms have been working with clients in their respective jurisdiction and conducting joint training, while hoping that the government will ease regulations. A few examples of such alliance are between Amarchand & Mangaldas & Suresh Shroff & Co (AMSS) and UK-based law firm Clifford Chance; Talwar & Thakore and UK-based Linklaters LLP; and Trilegal and US-based Allen & Ovary among others. Some have ended these alliances, while others are still going strong.
The new amendment will change the existing arrangement between Indian and international law firms. “Allowing overseas firms to operate in India from SEZs might put an end to these surreptitious practices which would be good for the Indian legal profession,” says Mishra of Trust Legal.
If the government wants to continue along its path of liberalisation — bearing in mind that it would presumably want to avoid any reform being tied up in court for years — it still has several options open to it. First, it needs to define procedures and processes for liberalisation. “The government can set rules and regulations and create a forum specifically to deal with these matters and to monitor the entry, exit and operational and legal business activities of foreign law firms. Also, it can form a separate task force to take into consideration all the aspects of liberalisation of Indian legal market by bringing various stakeholders under one umbrella,” says Mishra.
Legal analysts believe that liberalising the legal space would give the government a lot of scope to come up with a robust model of regulating foreign lawyers and maybe improve regulations for the domestic profession in the bargain. They feel that once the government comes up with a forceful model, it will have to set up proper channels and define processes to carry out registration and certification work with the Bar Council of India. They also feel that the government should issue foreign law firm entry guidelines in accordance with the ‘principle of reciprocity’ for a level playing field . There are various laws that will come into picture and in support of equity like competition laws, taxation laws.
“We need to reform the Indian Advocates Act that says that only Indian citizens can practice law in India which is recognised by the Bar Council of India (BCI), to come up to the level of what is in overseas jurisdictions,” says Bhasin.
Law of Other Lands
Entry of foreign law firms is allowed in most developed nations. UK is the world’s most open international market for legal services; there are no laws restricting foreign law firms from setting up their base there. There are around 200 foreign law firms with offices in London and other cities in the UK. To practice law in the United States, all lawyers, foreign or domestic, must be admitted to the bar association of the state where they wish to practice. Even Canada and Australia allow entry of foreign law firms; and the number of countries offering similar kind of liberties is over hundred.