India all out
14 November 2011
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With outbound investment from India growing, the complex relationship between the country’s domestic firms and international practices is evolving, says Joanne Harris
The make-up of the world’s emerging economies is changing rapidly. Whereas just a few years ago they were predominantly the target for inward investment from the developed world, these days the capital flows are reversing.
India is a perfect example of this trend. In 2007-08 foreign investment flows into India amounted to some $62bn (£31bn), while outbound investment by Indian companies was just $21bn.
For the past financial year inbound investment had not changed, but outbound investment more than doubled to $44bn. That figure could well rise again this year, with the Reserve Bank of India reporting outbound investment of $19bn for the first six months of 2011-12.
For lawyers, the increasing capital flows mean that the question of how to deal with the complicated Indian legal market remains key - albeit also largely unanswered. Unlike its emerging market counterpart China, Indian firms are still generally small and mostly domestic.
There are some moves afoot to change this. In particular Amarchand & Mangaldas & Suresh A Shroff & Co announced in October that it had opened up its equity as a first step to doubling in size by 2017.
Meanwhile, ALMT Legal, after having broken off its best friends relationship with Clyde & Co, is setting its sights on becoming more international. The firm already has a London office (indeed, it was founded in the UK rather than in India), but senior partner Sameer Tapia says it is now looking at opening offices in Dubai, Singapore and the US.
The Indian octopus
“We truly want to make it a global practice,” Tapia asserts, explaining that the move is partly a response to the changing economic face of India. “India’s opened up and put out tentacles into the world at large. It’s as important as China. This isn’t going to stop here - the market’s going to open up even more. It’s only going to grow.”
At present the prospect of Indian firms opening offices in other countries still seems a lot more likely than the prospect of international firms opening offices in India.
In a visit to India at the end of September UK Secretary of State for Justice Ken Clarke raised the question of liberalisation again. “India’s an emerging economic powerhouse and a key player on the international stage,” he said in a statement. “But in my meetings with influential Indian businesspeople this week, I’ll be making the case that restrictions on international law firms and foreign lawyers are holding back inward investment and growth there. Liberalisation is a vital contributor to India’s future economic success, while an India that’s more receptive to international trade would be hugely beneficial to the UK as an exporter.”
But the liberalisation argument has been made before, and often, over many years. Although Tapia is confident that the legal market will open up to foreign firms within a couple of years, he is more optimistic than most.
“I think visits of that nature unquestionably help,” says Chris Parsons, chair of Herbert Smith’s India group, “but how close to liberalisation we are, clearly there’s a question mark there.”
As a result of the changing nature of work in and out of India the relationships between Indian and international firms are perhaps more crucial than ever. But despite the growing amount of business flowing outwards into jurisdictions where international advice is required, 2011 has seen the collapse of two significant relationships between UK and Indian allies.
On, off relationships
The first to collapse was Clifford Chance’s tie-up with AZB & Partners. It emerged in January that a lower than expected number of referrals to both firms and a scarcity of joint mandates on big deals had led the two to decide to downgrade their relationship from ’best friends’ to just ’good friends’.
Then in April the news broke of ALMT and Clydes’ split. Five partners from ALMT left the firm to establish Clasis Law, which has continued the relationship with Clydes.
Bucking the trend was Allen & Overy (A&O) and its Indian best friend Trilegal. The two firms had originally entered into a three-year alliance, but in February decided to extend it indefinitely.
A&O India group head Jonathan Brayne says the two firms continue to be pleased with the way their relationship is developing.
“We weren’t doing it for any kind of short-term referral-type reasons,” Brayne stresses. “For us it was all about building an international proposition to clients, and we’ve done that. It’s working well for us and I think for them too.”
Brayne notes that the personality fit between A&O and Trilegal is good, with the two sides bringing “different things to the relationship” at different times in the economic cycle.
“In that sense it’s perhaps puzzling that relationships have been falling apart when there’s potentially more in it for a foreign law firm than there was before,” Brayne adds.
Another relationship that continues to do well is Linklaters’ with Talwar Thakore & Associates. Both the magic circle firm’s India head Sandeep Katwala and Talwar partner Feroz Dubash say a good personality fit and an existing relationship between the Indian firm’s founding partners with Linklaters have helped the alliance prosper.
“With hindsight, because it’s gone really well, I’d love to say that this was great strategic thinking,” Katwala says, admitting that the personalities involved were as important as both firms’ need to have links to other jurisdictions. “The key of it is that you’ve got to look at what clients are asking for in terms of service delivery and what they’re not getting.” He adds that Linklaters had previously found a mixed service delivery when clients needed Indian advice and that with Talwar the firm was able to provide a more integrated service.
None of the alliances between Indian firms and their international counterpart are exclusive, and those foreign players that do have tie-ups in the Indian subcontinent turn to other large domestic firms when necessary.
However, not all local firms feel they want to forge overseas alliances. Dhaval Vussonji, a partner at Mumbai firm Kanga & Company, points to the failure of a number of alliances as a reason for being cautious on this front.
Fellow Kanga partner Chetan Thakkar reports that approaches from international firms are common, but that his firm has “never considered it, or taken it very seriously”.
“In India very few law firms have offices that go beyond where their business is,” adds Vussonji.
This is due in part to the still fragmented and federal legal system within India, which leads local firms to develop their own alliance networks within the country. Vussonji explains that if he has a piece of work in Bangalore, for example, it is still easier to seek out an expert in the local area than seek to build a true pan-Indian firm.
Nevertheless, the Indian market is changing. Amarchand is not the only firm to look for growth, with others, such as ALMT, likely to head overseas.
Dubash says Talwar is not aiming for growth for growth’s sake, although it cannot be ruled out. He thinks that there has been a slight shift in the way the market has been developing, with fewer new firms being established through breakaways and a move towards more institutionalised structures.
At Kanga, Vussonji notes that merging is still difficult in an Indian law context due to the tightly held equity in many firms. He thinks this will also make the entry of any foreign firms tricky, should the market ever actually open up.
In the absence of radical changes to the legal market itself, lawyers are focusing on the work coming in.
For domestic firms there remains plenty going on. Vussonji and Thakkar report activity in a number of sectors, including real estate, shipping and capital markets, while Tapia says ALMT is also pulling in more domestic work.
Real estate work has reportedly picked up considerably following a lull of several years, with developers opportunistically picking up land and property as prices remain attractive.
“The developers have just been acquiring land without any notion as to whether this will be a commercial or residential development,” Vussonji says.
He puts the increase in shipping work down to buyers from the Middle East and Europe seeking to take advantage of India’s workforce and engineering skills.
“The quality differs, definitely, but people do find value here,” he adds.
Small and mid-cap capital markets activity also remains reasonably buoyant, although a number of larger IPOs have stalled due to the current market uncertainty. Deregulation of new sectors, such as the beauty industry, and continued developments in the IT industry are also likely to provide work in coming months.
Foreign investors continue to put money into the Indian economy. Katwala estimates that Linklaters has had more inbound work into India than outbound work in the past six months, with a number of joint ventures in “various sectors” - notably the $7.2bn acquisition by BP of a 30 per cent stake in Indian company Reliance Industries. A&O, AZB, Linklaters, US firm Ropes & Gray and Talwar all won roles on the deal.
Luthra & Luthra managing partner Rajiv Luthra points to pharmaceuticals as another source of outside investment.
“One of the sectors where we’ve seen considerable growth and interest is the pharmaceutical sector, with a number of multinational companies showing considerable interest in the Indian market and embarking on acquisitions of Indian firms, often at a heavy premium,” Luthra says.
Acquisitions in this sector can be quite complex and challenging, since this is a highly regulated space and there are various concerns, including whether this may affect the prices of drugs.”
Katwala points out that on the outbound front the market has really been dominated by a handful of mega-deals in the past few years, from the 2007 acquisitions of Corus and Jaguar by Indian companies to the more recent acquisition of African telecoms company Zain Africa by Bharti Airtel or this year’s $350m sale of Shell’s Stanlow oil refinery in Cheshire to Essar Energy.
A lack of liquidity will hinder market activity, he adds, due to regulatory restrictions on Indian companies that mean they are reliant on debt when it comes to M&A.
Nevertheless, lawyers all agree that a distinct theme of outbound investment is emerging for one sector in particular - natural resources.
“What you’re seeing is India looking outside its shores for sources of energy,” says Parsons at Herbert Smith. “They’re looking for sources of technology that they can perhaps take back to India and develop in India, and perhaps use these more efficiently in India.”
“They’re no longer just buyers of the product themselves,” agrees Brayne, “they’re wanting to move up the chain and become owners of the mine or whatever it is that produces the product.”
Luthra suggests that problems getting business within India could also be a factor in the search elsewhere for resources.
“It could also be an indication of the frustration of Indian companies with bureaucratic and other problems in relation to natural resources concessions within India, which is forcing them to look outward,” he points out.
This focus on natural resources means Africa has become a key region for Indian companies to look at, and one where lawyers think Indian investors will do extremely well.
“Indian corporates just feel a lot more comfortable with the business environment in a place like Africa than US and European corporates,” says Brayne, citing recent research by A&O that supported this belief. “If you’ve built your business selling services or products to one billion-plus people in India with a very low mean income, then you’re familiar with an environment where you’ve got to get unit costs right down. Corporates from places like India and China will have an inbuilt competitive advantage when it comes to investment into African countries.”
Home and UK
Indian law firms remain the key point of contact for most Indian clients and this is likely to remain the case. UK lawyers believe much can be learnt from the close personal relationships Indian legal practitioners develop with their clients.
However, they also feel that, particularly if outbound work does remain strong, the historical ties between India and the UK will pay off.
“It’s provided an important source of work for the international firms because within India, clearly, largely the law that’s going to be governing is Indian law. It means we can properly add value to what corporate India’s doing mostly through English law,” Parsons explains.
The UK could also benefit if Indian corporates decide to list in any numbers on the London Stock Exchange; Katwala says this has been heralded for a little while and interest is picking up. He suggests that companies may choose to list portions of their assets in London, using the listed vehicle thereafter to invest in other countries.
Innovation is likely to be a driving factor in the future, both in terms of the law, as Indian corporates become more comfortable with new financing structures, and in terms of new sectors and industries.
While India is unlikely to compete at quite the same level as China on an international basis for the foreseeable future, and owing to the lack of deregulation of the legal market will not offer international firms the same opportunities, it is nevertheless a key jurisdiction.
“There’s a perception that foreign firms can’t do anything in India, but it’s not really true,” Katwala says. “I don’t think the best friends model gains you access to the Indian market - it’s more that the Indian market itself has changed and that Indian firms and international firms coexist on deals.”