M&A plus

Indian firms are busy with M&A as the government opens up to foreign investment, but legal market liberalisation remains off the agenda

In brief

Alliances between Indian firms and foreign firms look like they are becoming a thing of the past as the legal market shows no sign of opening up. But businesses and their advisers still want to get into India as it becomes more accessible to foreign investors.

After a year in which the question of how much work foreign firms can do in India was fought out bitterly in the Indian courts, it was perhaps no surprise when Allen & Overy (A&O) and its Indian best friend Trilegal announced the end of their referral agreement in September.

The firms ended the arrangement after nearly five years when it became apparent the Indian legal market was not going to open up to foreigners in the foreseeable future. The decision leaves Linklaters as the only UK magic circle firm with a referral relationship in India – it works with six-partner firm Talwar Thakore & Associates – and a handful of other international players with preferred Indian partners.

But international work has become an integral feature of the Indian market. The largest Indian firms spend the bulk of their time working on cross-border transactions. While many alliance relationships may have come to an end, the work that made the foreign firms look for best friends in India remains.

Keeping busy

Although the first half of the year saw a slight slowdown in terms of the number and value of M&A deals in India, according to a number of reports, there have been some major transactions and most law firms are happy with the way things are going.

Work is flowing both in and out of India. Big deals include the acquisition by Piramal Healthcare of US Decision Resources Group for $635m (£396m), Mitsui Sumitomo’s $535m acquisition of a stake in Max New York Life Insurance and the sale of RBS’s India assets to HSBC for $1.6bn. More recently, private equity houses Apax and Bain Capital have bought IT company Genpact for $1.4bn.

“The firm has been incredibly busy,” reports Amarchand & Mangaldas & Suresh A Shroff & Co managing partner Cyril Shroff. Shroff says M&A and corporate work has been the most active area for the firm in the past few months, with a number of significant cross-border transactions worth more than $500m.

“To be fair, some of these deals have been cooking for a while and are now coming to fruition,” Shroff adds, pointing out that the lead time for many transactions is eight to 12 months.

Trilegal managing partner Anand Prasad agrees that it has been a strong year so far.

“We’ve had a good financial year. Our practice continues to be strong and growing,” Prasad reports.

Talwar Thakore partner Feroz Dubash says that while there is less “buzz” around the market now than there was a couple of years ago “there’s still a lot of strategic M&A going on, which is frankly of benefit to us because that’s where our bread and butter work is”.

Cyril Shroff
Cyril Shroff

Prasad agrees that things have slowed a little.

“There’s been a slight slowdown in terms of strategic M&A when you look at the market generally, but you still have people looking at opportunities,” Prasad says. “When the market starts to shrink I guess the valuations look better for those with cash in their pockets. You still see people exploring M&A opportunities, although it’s not as robust as it used to be, say, a couple of years back.”

AZB & Partners’ chief executive Abhijit Joshi also says things are looking up.

“We had our bad time a few years back when it was slow, but it’s picking up now,” he reports.

Finance work is following a similar pattern, says Talwar Thakore partner Sonali Mahapatra.

“Finance has been a bit of an up and down story this financial year,” Mahapatra says. “It started out reasonably strong and then we had a couple of quiet months and now it seems to have taken off again,” she says.

Policy questions

Many blame any stagnation in work on what Prasad describes as “policy paralysis” from the Indian government. For some time there were few changes on the regulatory front, but in recent months this has begun to change.

Notable legislative developments include September’s announcement of changes to the country’s foreign investment regime, increasing the caps on foreign investment in a number of sectors including retail and aviation. The changes may encourage international companies to move into India by buying stakes in businesses such as supermarkets, airlines and TV operators.

The move is welcomed by the -legal market.

“There’s clearly more active decision-making in the government – it’s about opening up India to foreign investment a bit more,” says Prasad.

But not everyone thinks the recent changes are what has prompted a pick-up in dealflow.

“Most of the deals I’m working on right now have nothing to do with the regulatory changes – I think a wrong connection is being established,” Shroff says.

However, he does welcome the changes, predicting that they could well lead to transactions in the coming year.

The continuation of M&A activity also means that firms are looking into related areas of practice for investment, such as competition. Amarchand Mangaldas recently hired the head of Irish firm William Fry’s competition practice, John Handoll, as a senior adviser. Handoll is not the first Irish lawyer to work at the firm; Amarchand Mangaldas previously had a more junior Irish-qualified Indian lawyer working on competition issues.

Shroff says the firm feels the need to have such expertise on board because of the extent to which EU law affects Indian transactions.

Joshi agrees.

“Everybody’s investing [in competition practices] – everybody who does corporate and M&A,” he says, stressing the need to have lawyers who can respond to regulation appropriately. “It’s not only about reading the act as it is, it’s about interpreting it.”

Bust-up ‘inevitable’

Bringing in EU lawyers as consultants or advisers is one thing, but any closer relationships with firms in the EU or the US seem an unlikely step at the moment. The break-up between Trilegal and A&O is described by others in the Indian market as “inevitable”, given the lack of liberalisation.

Anand Prasad
Anand Prasad

Prasad says the two firms entered into the alliance back in 2008 confident that the market would open up in “a matter of months”. The firms wanted to ensure that, when liberalisation happened, they would be ready to enter into a closer relationship – perhaps even a full merger if regulations allowed.

But the promised liberalisation was delayed, and delayed again; a new government was elected and a new minister of justice appointed.

“Then the process started slowing down in terms of what law ministers would do to open up the market,” explains Prasad. “Every year we’d evaluate how things were going between A&O and ourselves.”

Eventually, he says, it became apparent that liberalisation was not going to happen any time soon and that it was low on the government’s priority list.

“There are many reasons why the opening up of the legal sector has been given a lower priority – this government has got more important items on its agenda,” Prasad says, pointing to the economy and dealing with other aspects of India’s business legislation as examples.

He also says the government is likely to want to avoid clashing with India’s large domestic legal market, as a large number of lawyers are still resistant to the concept of allowing foreign firms in and could well lobby against any such proposal.

With the next elections two years away Prasad estimates that it would take a new government a further two years to push legal market liberalisation through if it decided to go for it.

“The best-case scenario is four and a half to five years and the worst-case situation is 10 years or even indefinite,” he says.

This uncertainty was what prompted the end of the formal relationship with A&O, Prasad adds.

“We don’t know who will be around when the market opens,” he says. “It’s a question of spreading our options.”

Prasad believes Trilegal will continue to have a strong relationship with A&O, with work going both ways between the firms, but that both sides will be able to turn to a greater number of referral partners in the future.

Ally detectors

At AZB, Joshi says his firm retains a close relationship with erstwhile referral partner Clifford Chance. The firms split up in early 2011 after two years. The short duration of the alliance meant that AZB did not “go off the radar” for other foreign firms, according to Joshi.

According to Talwar Thakore, however, there are no plans to break up with Linklaters. “The alliance works very well for us, we have a strong relationship with Linklaters and I don’t see that changing,” says Dubash.

“The concept and objective of each alliance is specific,” adds Mahapatra. “We and Linklaters think this is the right fit for us.”

Joshi raises the point that alliances work better in India when the Indian firm is smaller, as the relationship then becomes more meaningful; although there is now a sizeable amount of foreign investment into India, one international firm is unlikely to generate enough referral work for a large Indian practice with 100 or 200 lawyers.

While the alliance model is falling out of favour, few think it is completely finished. There are always likely to be a few firms such as Talwar Thakore that believe it is possible to sustain a relationship with an international outfit and others that would prefer to spread their bets and refer work to and from a variety of firms.

The strong fundamentals of India, coupled with the government’s recent moves to keep the country attractive, should mean this remains a jurisdiction to watch.

“While there’ll always be ups and downs, there is work in this market,” concludes Mahapatra.

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