Is ordinance route the only way forward due to unclear stakeholders interest?
Manoj Kumar | July 27, 2015
The story of India’s reversed economic fortunes since it instituted liberalization of its regulatory systems in 1991 is famous, and one that can be used to illustrate the extent to which a growth oriented policy approach can turn around the circumstances of developing countries. Amongst the industries that have grown exponentially since the reforms were initiated is the service sector, which now constitutes a cornerstone of India’s GDP; in the wake of these developments, it is interesting to note that the legal services market in India remains extremely reluctant to adapt to the changing world.
The intransigent attitude of regulating authorities about opening the legal sector to foreign investment is particularly inscrutable and ironic because of the demand for India’s legal services growing as rapidly as it is. An increasing number of foreign and multinational companies are entering the market here, with many Indian companies entering into cross-border transactions with them. Consequently, the pressure on the Indian government to open its lucrative legal services market to foreign law firms has mounted, but no significant changes to the rules for the latter’s entry have as yet been attempted.
Paramount among the barriers to entry of foreign practice establishments in the country is the Advocates Act of 1961, a statute that governs the practice of law in India. The key provision of the Act is Section 29, which states that only “advocates” are entitled to practice law in India. To be an advocate, one must also be an Indian citizen. This is subject to two narrow exceptions:
While restricting the legal profession to Indian advocates only, the Act and other domestic regulations - including BCI Rules, the Partnership Act of 1932 and the Companies Act of 1956 - also impose some other regulatory restrictions on practicing the profession. These might be summed up as restrictions on advertisement, partnership and fee-sharing, employment in a foreign law firms, and capital-raising power to lawyers/ law firms – apart from the obvious matter of restriction on entry of foreign firms in the domestic market.
India’s stance is also puzzling in that it became a signatory of the GATS (The General Agreement on Trade in Services) in 1995 when it first came into operation after the Uruguay round of trade negotiations (1986–1994). These rules govern the conduct of world trade in services and cover within their scope a 161 services divided under 12 core service sectors, including the legal services sector. Although India is an active member of the WTO and has entered specific commitments with respect to a number of service sectors including financial (particularly with regard to banking, insurance and insurance), engineering, computer-related and communication services, it is noteworthy that India has not yet undertaken any such commitment with respect to Indian legal services. In comparison, China, its direct competitor in the modern global economy, and which is one of the most closed markets, has liberalised its legal services as a part of their conditions for accession to the WTO in 2001. Many other countries that have not undertaken such commitments previously (such as Korea, Guatemala and Fiji), too, have offered to liberalise their legal services for the first time, whereas 11 other existing members have offered to improve their current commitments in the recent Doha Round of Negotiations.
The question then arises – why is it that India’s regulatory bodies oppose the liberalisation of its domestic market to allow the entry of foreign organisations? The BCI rests its argument on the grounds mainly on the following issues:
These issues are not entirely without merit. There is precedent set by a few Asian countries which have opened their legal services to foreign lawyers have in fact entered into such reciprocity arrangements with partner countries, for example, those between Singapore and Hong Kong, and the Law Society of England and Wales. In this case, the SILF (Society for Indian Law firms) which was until recently on the same page as the BCI in negating foreign entry, has in the light of, firstly, a report claiming that the commerce ministry was finalising a proposal to allow phased entry of foreign law firms, and secondly, the judgment of the Madras High Court in the case of A. K. Balaji v. Government of India and Others, reversed its stand and now appears to be in favour of liberalising the profession, according to statements by its chairman Mr Lalit Bhasin.
Until 2012, India barred foreign lawyers from formally practicing law in the country. On February 21, 2012, however, the Madras high court, in A.K. Balaji v. GoI, handed a victory to international law firms keen on entering the Indian market along with their global clients. The court held that there is no bar under the Advocates Act, 1961, or the BCI Rules, for foreign lawyers or law firms to visit India for temporary periods on a "fly in and fly out" basis to advise their clients on foreign law and diverse international legal issues; they are, however, not permitted to practice Indian law, either in relation to litigation or advisory matters, unless they qualify and enroll as advocates and fulfill the requirements of the Act and Rules.
The judgment also clarifies that activities performed by BPOs and LPOs do not constitute practice of law and hence do not conflict with the Act. The Madras HC also noted that the Bar Council of India may take necessary steps in relation to the practice of law by chartered accountants and management firms, which is contrary to the Act. The Balaji decision marked the Indian judiciary’s first concerted effort to carve back the blanket prohibition by permitting foreign lawyers to enter India on a temporary basis to conduct arbitrations, or advise clients on matters of foreign and international law. Although many practitioners and scholars alike applaud the Madras high court’s decision, the case also exposes numerous regulations governing India’s legal profession, thus raising concerns about domestic lawyers’ ability to compete in a now increasingly global market.
The case for liberalisation
The opening up of legal services in India would first of all facilitate the one stop/direct access and provision of cross border transactional legal services by international law firms to their existing global and corporate clients who wish to enter and trade in India, without the current need in having to instruct intermediary Indian law firms under the guise of best friend relationships, or to arrange meetings to advise Indian lawyers in places such as Dubai or Singapore to avoid criminal sanctions on Indian soil. Their business clients often prefer to instruct international law firms of their choice, due to their past track record in cross-border transactional legal work, the confidence of regulation by recognised legal regulatory bodies, and legal advice being covered by professional indemnity insurance.
Further, at present there is little choice for international law firms or their corporate clients who wish to purchase the provision of legal services to conduct trade in India without duplication of professional fees in both jurisdictions and the resultant additional costs, together with the inherent delay in having to instruct firstly, a domestic based law firm who in turn has to negotiate with and instruct a domestic based law firm in India, with the added complication of not being able to go to India to advise on any law directly. Whatever the current position or quality of the provision of international legal services in India, there is no doubt that global corporates have a gen¬eral reluctance to instruct Indian law firms directly which may also have an indirect effect in these corporates stalling to enter and invest in the Indian economy to the detri¬ment of India and prospective investors.
In the long run, with liberalisation, Indian lawyers recruited both new and experi¬enced will gain niche expertise in new areas of developing law by working closely with established international law practices. The opening of such new and additional legal services in India will not only be to mutual benefit of the Indian and other legal professions, but also to their corporate clients based in India and abroad. Although it cannot be denied that their interest in the Indian legal market is economically motivated, the arguments they make based on knowledge sharing, enhanced employment opportunities, and more sophisticated and quality services to clients cannot be overlooked.
It could be argued further that if India was to liberalise its legal services, much of the work that is taken up by foreign law firms based in other jurisdictions such as Singapore and Hong Kong will return back to the country, resulting in a significant economic benefit. The aforementioned countries have benefitted in a significant manner by the liberalisation of their own legal services while generating huge amounts of revenues in the sector; this could become a reality for India, too.
Finally, there can be no proper solution to this issue without considering the position of law students and newly-qualified Indian lawyers, apart from the usual stakeholders - foreign law firms, international organisations and foreign countries’ government bodies. This group argues that the opening up of the market would be a win-win situation not only for foreign lawyers but also for the Indian legal profession, as it will improve the overall productivity and work ethic of the domestic legal market, result in a free transfer of skills and knowledge between foreign law firms and domestic firms and provide excellent employment opportunities to law graduates with wide expertise, and clients would have a wider choice of services at competitive rates.
Past few weeks have seen very hectic deliberations on the issue by the government of India in a bid to enroll all affected stakeholders including the Bar Council of India, SILF and INBA (Indian National Bar Association) amongst many representing the legal profession and a multitude of other stakeholders including the academia, legal eagles etc. The very diversity of the stakeholders has obviously left the government of India perplexed about the next steps forward. Apart from the bar councils at the national and state levels, the widely spread bar associations of different compositions and shades have set fourth equally diverse views on the issue. Not surprised then with the grape-wine which says that the government is all set to soon come out with an appropriate ordinance to set the process rolling for liberalisation of the legal services in India which could be followed by appropriate amendments in the Advocates Act.
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