India: Modi operandi

Political chaos has deterred foreign investors, but lawyers hope new prime minister Narendra Modi can create a more business-friendly environment

With political turmoil bringing business activity in India to a virtual standstill this year, even the country’s leading firms have felt the pinch. Scandals such as the allocation of 2G spectrum licences effectively brought policy-making to a halt, while retrospective tax laws have put off all but the most committed foreign investors. As a result, India’s GDP dipped in 2013 for only the second time in a decade, from $1.87trn (£1.1trn) to $1.84trn.

Despite this, Amarchand & Mangaldas, India’s largest firm by lawyer headcount and turnover, managed to post a revenue rise.

“Given the political paralysis there was a slowdown in the market last year, but we still saw 15 per cent growth in revenue,” says partner Raghubir Menon.

Although the firm is heavily weighted towards corporate work, which accounts for 50 per cent of revenue, the introduction of a new Companies Act in 2013 helped mitigate the impact of there being almost no M&A work.

“The corporate stream has been fairly busy because we’ve had the new act – there’s been a lot of restructuring work,” explains Menon.

A positive knock-on effect of India’s political troubles has been a sharp rise in litigation work, cancelling out the lack of investment in areas such as infrastructure, energy, roads and power.

india city

Corporate powerhouse AZB & Partners also found a boom in litigation work made up for the shortfall in corporate transactions.

“Our turnover went up by about 15 per cent, mainly due to litigation,” says managing partner Zia Mody, adding that the matters the firm was instructed on related to defaults and stress in the financial system. “Litigation contributed about 22-25 per cent to the firm [in the past financial year], when it used to be about 15-18 per cent.”

Although about 50 per cent of AZB’s work originates overseas, the firm continued to get some foreign direct investment mandates from a small number of investors who already had a presence in India.

“We found that investors who already had more than a hole in the ground – like Glaxo – were happy to invest more because they’d already bought into India,” says Mody. “We also saw continued interest from private equity clients, although the cycle to close a deal was longer.”

One such deal was advising Kohlberg Kravis Roberts on its $630m acquisition of Alliance Tire Group from Warburg Pincus.


Retrospective tax changes

Aside from litigation, tax work has weathered the downturn pretty well, thanks largely to a retrospective amendment to tax laws introduced following Vodafone’s 2007 purchase of Hutchison Essar Telecom. The Vodafone case has been in the Indian courts for years, with the former government claiming the company avoided tax on the deal while the telecoms giant argues that India has no jurisdiction to earn tax on the transaction.

Luthra & Luthra has benefited from the rise in tax work is. “We’re unique because we have a large tax and indirect tax team, which many firms don’t,” says managing partner Rajiv Luthra. “That was a decision we took about six years ago. My view is that as the economy shrinks, tax work is the low-hanging fruit and we timed our move right. I tried to see where other firms weren’t, and that strategy has worked well.”

Despite this, Luthra says that last year was not great financially for the firm, due largely to the fall-off in capital markets and a general lack of appetite from clients to do business. Luthra & Luthra shifted its focus from international corporates to Indian companies in the wake of the global recession, only for those companies to shy away from investing in light of the domestic political situation.

The picture has been similar at Fox Mandal, which is still smarting from its 2011 break-up with Mumbai’s Little & Co. Having previously focused on gaining work from international clients, Fox Mandal more recently shifted its attention to Indian corporates, winning the likes of the Hinduja Group in the process. With the loss of much domestic work, the firm has suffered.

“India’s always been strong domestically, but in the past two years Indian companies didn’t invest in India and it’s been tough for the firm,” says managing partner Som Mandal. “Business has been slow in the past year, with not many major deals happening. We also lost a large chunk of people because of Little’s presence in Mumbai. We didn’t market ourselves in Mumbai so our reach has really shrunk.”


High hopes

Despite the troubles of the past couple of years, the market is hopeful that the new government, led by the BJP’s Narendra Modi, can turn things around.

“People were fed up and voted for a big change,” says Mandal. “The new prime minister is forward-thinking and proactive within the business community. This will not only help Indian investors, but also help foreign investors to have confidence in India.”

Luthra believes the new government is “making the right noises”, while Menon at Amarchand says the firm’s bureaucrat contacts in Delhi have indicated that policies aimed at attracting foreign investment will soon be drawn up.

However, positive results may not be seen in the Indian legal sector this financial year, or even next.

As AZB’s Mody says: ““My concern is that the radical change in sentiment is almost desperately clinging on to a new beginning but that it won’t give big results.”