ENTRY OF FOREIGN LAW FIRMS IN INDIA Mukul Gupta & Diljeet Titus, Advocates INTRODUCTION

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1 ENTRY OF FOREIGN LAW FIRMS IN INDIA Mukul Gupta & Diljeet Titus, Advocates INTRODUCTION A debate is ongoing for over a decade now as to whether or not foreign law firms should be allowed to provide legal consultancy services in India. Many countries such as USA, Japan, Australia, some EU member states etc, have made representations to the Government of India seeking liberalization of India s legal services sector. These representations seek market access commitments from the Government of India under the framework of the General Agreement on Trade in Services (GATS). Till now India, which is a member of the World Trade Organization (WTO) has not given any such commitment under the GATS framework. However, foreign governments through representative bodies continue to lobby for opening Indian legal services to foreign competition. Equally stiff has been the opposition of the Bar Council of India (BCI), which is opposed to the liberalization of India s legal services sector 1. This article seeks to examine as to whether or not any real need exists for the Indian legal services sector to be opened to foreign competition, either in a limited or comprehensive manner. The Advocates Act, 1961 (Advocates Act), provides that only natural persons can practice law. Thus it is not possible for a legal service provider to be an incorporated body 2. The BCI has framed the Bar Council of India Rules, 1975 (BCI Rules) to regulate the legal profession in India. The BCI Rules prohibit advocates from engaging in any form of advertising or indicating areas of specialization 3. Further the BCI Rules also prohibit advocates from entering into any remuneration sharing arrangement or partnership with any person who is not an advocate 4. Thus by virtue of this rule, advocates in India are precluded from forming any partnership with foreign lawyers 5. In India the number of partners in a partnership firm is restricted to 1 The Advocates Act, 1961 (Advocates Act) empowers the BCI to frame rules to regulate the legal profession in India. 2 As per sections 24, 29 and 33 of the Advocates Act, Rule 36, Chapter II, Part VI of the BCI Rules. 4 Rule 2, Chapter III, Part VI of the BCI Rules. 5 Section 24(1) of the Advocates Act provides that only a citizen of India can be enrolled by a state bar council as an advocate. However, proviso to section 24 (1) of the Advocates Act lays down that a foreign national may be enrolled as an advocate by a state bar council if duly qualified Indian nationals are allowed to practice law in that other country. 1

2 twenty 6. The partners of a firm have unlimited personal liability. The concept of Limited Liability Partnership (LLP) though proposed has not yet been legally recognized in India. Even though the abovementioned stipulations have placed limitations on the growth and expansion of the legal profession in India, with the advent of globalization, Indian law firms have now for over a decade been handling very sophisticated transactional legal matters and have undergone a steep learning curve providing quality legal representation to both Indian and foreign clients. NEED FOR FOREIGN LEGAL PRACTITIONERS IN INDIA The moot question that needs to be examined is that what are the benefits that may accrue to the Indian legal services sector by opening it to foreign competition. The predominant logic behind the opening up of any sector to foreign participation and investment is four fold. Firstly, foreign investment brings into India much needed capital resources. Secondly, it brings into India modern technical know how and expertise. Thirdly, it leads to the creation of new markets and expansion of existing ones. Fourthly, it leads to greater employment opportunities for people in India. Will any of the abovementioned benefits accrue to the Indian legal sector by the participation of foreign law firms? Many leading legal practitioners answer these questions in the negative. The reasons for this view are the following: firstly the legal services sector is not a capital intensive sector requiring huge capital investment for its development. Secondly, there is no scope for the acquisition of any technical know how from foreign legal practitioners to the extent they deal with issues relating to the interpretation, analysis and application of Indian laws. The requirement of interpretation and analysis of foreign laws for the purpose of any cross border deal, or even drafting requirements for any technically complex transaction, if any, can always be met by the retaining of foreign lawyers / law firms as and when required. Thirdly, the entry of foreign legal practitioners will not lead to any market expansion for the legal services sector. It is the growth of the economy and expansion of various sectors of the economy which leads to a greater demand for legal professionals, not viceversa 7. 6 Section 11 of the Companies Act, According to a report of the Ministry of Commerce, Government of India entitled Trade in Legal Services, India has over 600,000 lawyers. 2

3 It is to be noted that many foreign law firms do not have to contend with a restrictive environment in their respective home countries. Law firms in countries such as USA and UK are allowed to advertise, have brochures and have their names entered in law directories. Also, these law firms are allowed to be formed as an LLP or a Limited Liability Corporation (LLC). This flexibility to function with limited liability is of immense significance. It is one of the factors which has significantly contributed to the growth of many foreign law firms into huge, multinational entities functioning with hundreds of partners and thousands of lawyers. If foreign law firms are allowed to immediately enter India, it will result in a situation of skewed and unfair competition, placing Indian law firms at a great disadvantage. Foreign law firms will be able to aggressively advertise and market their India related competencies in countries outside India. Also the wide disparity between Indian law firms and many dominant foreign law firms in terms of financial strength and sheer size will preclude Indian law firms from ever achieving a level playing field. Thus there is a view that there is no compelling economic or efficiency based argument for the opening up of the legal services sector to foreign participation. Further it is argued that the need of the hour is for the Government of India to take steps to strengthen and professionalize India s legal services sector. This can be done by putting in place a requirement of passing of a bar examination for the purpose of ensuring uniformly high standards and limiting the number of professionals entering the profession, providing better facilities and incentives to law colleges and universities, liberalizing of the laws relating to partnerships, allowing the formation of LLPs, allowing the advertising of legal services etc. Such measures will help to further raise the standards of the profession as a whole and will also enable legal practitioners to be able to form efficient organizational structures to deliver their services. Even though the above mentioned stance has been taken by many leading legal practitioners, there is another emerging point of view which is more flexible and accommodating. The Society of Indian Law Firms (SILF) is an association of many leading Indian law firms. SILF is not averse to the entry of foreign law firms in India. However, SILF has taken a view that the entry of foreign law firms in India must be preceded by certain specific measures which will allow Indian law firms to achieve a level playing field vis-à-vis their foreign competitors. In particular, SILF wants BCI 3

4 to allow Indian law firms to advertise, have brochures and websites, have more than twenty partners and to ensure reciprocity in the matters of right to practice and recognition of law degrees. SILF essentially advocates a gradual and phased liberalization of India s legal services sector. Another issue fuelling the debate on the liberalization of the Indian legal services sector is that relating to the obligations imposed by GATS, by virtue of India being a WTO member. GATS is a multilateral agreement which aims at the progressive liberalization of international trade in services. As a general rule, GATS obligates the signatories to follow the principles of Most Favoured Nation (MFN) and National Treatment (NT). Thus member states are required to enter into negotiations aimed at progressive liberalization of trade in services. However, article XIX (2) of the GATS provides a degree of flexibility to member states in this regard. While article XIX (1) requires member states to enter into negotiations aimed at liberalization of trade in services; clause 2 of the same article lays down the following: The process of liberalization shall take place with due respect for national policy objectives and the level of development of individual Members, both overall and in individual sectors. There shall be appropriate flexibility for individual developing country Members for opening fewer sectors, liberalizing fewer types of transactions, progressively extending market access in line with their development situation and, when making access to their markets available to foreign suppliers (emphasis supplied). Thus there is enough flexibility in the provisions of GATS which allow a member state to determine for itself both the extent and pace of liberalization to be undertaken in the services sector. With the increase in globalization and an exponential rise in the number of cross border transactions taking place in India, the need for advisory services with regard to the foreign law component of such transactions is rising equally fast. The availability of quick and high quality legal service undoubtedly adds to the vitality and efficiency of the economy. The Government of India can consider liberalization of the domestic legal services sector to a limited extent, i.e. allowing foreign law firms to set up legal practice in India and limiting their activities to the providing of consultancy services with regard to the laws of their home country or any country other than India. Apart form keeping the interests of Indian legal professionals secure, 4

5 such a move may also have the effect of affording legal advisory services on matters relating to foreign law to Indian law firms and corporations at more economical rates. This kind of a limited liberalization of India s legal services sector can be undertaken immediately and most importantly without any adverse impact on the Indian legal sector 8. CONCLUSION The liberalization of India s legal sector is a delicate issue. Any decision on this issue must be taken with due regard towards the sensitivities of all the parties involved. However, it is imperative that a pragmatic view of the whole issue is taken. The phenomenon of globalization and integration of world economies is here to stay. An overly insular or closed door approach always proves to be detrimental in the long run. The Government of India must take a policy decision geared towards capacity building and strengthening of the domestic legal sector. As discussed above the opening up of the Indian legal sector must happen in a carefully calibrated manner ensuring a fair and level playing field for all the parties involved. However, as an immediate step, the Government of India may consider allowing foreign law firms to set up legal practice in India only for the limited purpose of providing consultancy services with regard to the laws of their home country or any country other than India. The SILF proposals should be given careful consideration by the government before this sector is opened to foreign lawyers. Diljeet Titus is Senior Partner at Titus & Co., Advocates, and may be contacted at: dtitus@titus-india.com 8 Such an approach is not without precedent. In Indonesia and Japan the activities of foreign lawyers is restricted to the practice of laws of their home country. In Singapore foreign lawyers can practice only specified areas of Singapore law such as banking, and that too only after forming a specified joint venture like alliance with a Singapore law firm. 5