Playing the waiting game

Despite US firm Jones Day Reavis & Pogue bid to launch its new office in Bombay, the mood among investors in India has soured after a decision by the government of Maharashtra, an Indian state, to pull the rug on the US$2.8 billion power station project to be run by US gas company Enron.

Worse still for foreign lawyers, an association of lawyers in Bombay is suing the three foreign law firms which have set up in India – White & Case and Chadbourne & Parke, of the US, and the UK's Ashurst Morris & Crisp – alleging their licences are invalid (The Lawyer 19 September).

Although the prospects for doing business in India have never looked so uncertain, some lawyers remain upbeat, warning against exaggerating the importance of the Enron situation.

Shalini Agarwal, a lawyer at the London office of Singhania & Co, a New Delhi-based law firm, believes that it was a “one off”. “It hasn't shaken investor confidence in the sense that people have pulled out of the country,” she says.

James Hurlock, managing partner of White & Case, which acted for the lenders in the Enron deal, agrees. Problems in India, he says, resemble “ebbs and flows of the tide. They have reached a high, but this will diminish.”

The Enron situation, he says, is not “unusual or insurmountable”, pointing out as evidence of continued interest in the country to the recent announcement of a DM400 million financing package for a consortium, including the UK's PowerGen and Germany's Siemens, to build a power station in the State of Gujarat.

It is not only in the project finance field where a bullish view by investors is justified. Premjit Singh, who started Baker & McKenzie's India practice 30 years ago, argues that the investment environment has never looked so good. In the past, he says, the biggest headache was winning government approvals and licences. However, with the liberalisation of foreign investment rules, fewer approvals were needed and corporate acquisitions in a range of industries have been made easier. “The government,” says Singh, “is no longer such a problem.”

But this may change. The Congress Party is far from popular and, as elections loom, investors are putting India on hold. At Linklaters & Paines, managing partner Terence Kyle reports a dropping off in capital markets deals after last year's rush which saw India emerge as the hottest market in Asia. This was partly due to changes in government rules on borrowings by Indian companies abroad. But, as Kyle notes, “investors are shying away from the equity market”.

On the project finance side, Kyle believes that while the Enron upset, in which Linklaters acted as counsel to Enron, may not necessarily stop deals, “a lot more care will be taken as to what is agreed and with whom”. As to the long-term effect, “the jury's got to be out on that”.

A cautious investment approach is likely to remain dominant thanks to, as Kyle notes, “the heightened political uncertainty” surrounding the elections. The big fear is that liberalising measures taken so far may be reversed by a new government as nationalist elements re-assert themselves. This does not bode well for the many law firms which have been busily carving out Indian practices. The reason for opening an office in India was to tap into lucrative investment deals, especially project finance deals. The power sector, which the government has been keen to open up through privatisation and liberalisation, was a popular target.

In the US, White & Case and Chadbourne & Parke are well-known for their utilities financing practices, with established credentials in other emerging markets. And it is an area that Ashurst Morris & Crisp has been aggressively pursuing, seeing India as a place to make its international mark.

At White & Case, Hurlock has not seen any diminishing interest, but other firms also involved in this practice area have refrained from opening.

It was considered by Linklaters, Kyle reports, but two factors worked against such a move. First, the economics: “When you look at the expected increased workflow as compared to the cost it just isn't worth it,” he argues. Office rents in Bombay, for example, are among the highest in Asia with New Delhi not far behind. Expatriate staff – if you can persuade them to go to a country where poverty is still endemic and health problems rife – are also expensive.

Second, the local Bar: “It is not clear that it is technically possible to open an office there. The regulatory framework is far from clear,” says Kyle.

The foreign firms which have set up a base in the country operate so-called “liaison offices”. These are akin to representative offices, licences for which are dispensed by the Reserve Bank of India in accordance with exchange control regulations.

Their activities, however, are subject to restrictions. In particular they cannot practise local law, the main obstacle to Baker & McKenzie going forward with its registration plans according to Singh. Beyond that, the practice parameters are not clear. Hurlock argues that the only restriction on foreign lawyers is contained in the Advocates Act which specifically reserves court work for Indian qualified lawyers. That apart, there are no other restrictions and no legal curbs on consulting activities.

Some Indian lawyers are happy to see foreign lawyers in the country. Agarwal believes that it is a healthy development and will raise the standards of local legal services. But she and lawyers of like mind would appear to be the exception with the main professional bodies in the country ganging up on the foreign intruders.

Did the foreign firms expect such a blatantly hostile reaction? Hurlock comments: “We anticipated that there would be a reaction just as there was when we opened in London in 1971.” And, just as the problem was overcome in London, so it will be in Bombay. The firm already has an important ally in the form of the Minister of Law, who invited it to set up an office.

The firms are fighting on, but this will continue to be a strong disincentive to others to set up. “We see no mileage in squaring up for a fight with the Bar Association,” says Kyle.

To avoid the headache, some foreign firms have preferred to enter into non-exclusive associations with local firms, such as the link between US firm Arnold & Porter and Bombay's Amarchand & Mangaldas & Hiralal Shroff & Co.

A turbulent political environment is a solid reason for adopting a low-key approach – for the time being at least.