Liberalization of Legal Services: An Important Reform for Attracting Investment in India

By Amy Hariani — 

The Supreme Court of India, shown here, issued a landmark decision in 2018 which reaffirmed a lower court decision which held that FIFO practice is permitted under Indian law, but more progress is needed to enhance India’s attractiveness for investment. Source: Wikimedia user Pinakpani, used under a creative commons license.

  • Status: Incomplete – Prime Minister Modi had reportedly requested the Ministry of Law and Justice to prepare a draft regulation that would open India’s legal market to foreign lawyers. However, no steps have been taken since.
  • Difficulty: High – Moving forward on such a reform would be politically tricky, as it would attract protests from a politically-connected class of domestic lawyers, as well as attract the criticism that Indian jobs would be uprooted.

This is the fourteenth installment in a series of articles on the Modi Reforms Scorecard by the staff and experts at the Wadhwani Chair in U.S.-India Policy. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and what impact such reforms could have on specific sectors or the economy at large.

The legal services industry is not traditionally viewed as a significant driver of foreign direct investment (FDI) flows, but perhaps it should be. Not for the scale of law firms’ capital investments, but for what it represents: open markets. Law firms and lawyers are often at the forefront of mergers & acquisitions, greenfield investments, and deal making. Typically, markets with a positive trend of FDI growth also see significant economic activity generated by law firms and lawyers.

As a growing number of companies around the globe reconsider their footprint in China and evaluate if and where to re-route global manufacturing supply chains, lawyers play an important role in the planning and execution of these multi-million dollar decisions. Ensuring that companies can access their preferred legal counsel is critical in moving investment forward when legal issues arise. As India looks to take advantage of this dynamic, liberalizing legal services could help facilitate and expedite decision-making by making it easier for legal advisors to corporate decision-makers get to “yes” on India.

Given the global weight of India’s economy, it is somewhat of an anomaly that foreign law firms are still excluded from the market. India is one of the few, and perhaps the only, large economies that continues to prevent foreign investment in the legal services sector. Countries like China, South Korea, Singapore, Brazil, Mexico and Russia and others allow foreign law firms to set up local offices, which are subject to local rules and restrictions. These restrictions, designed to manage the entry of foreign law firms and protect developing domestic legal markets, include limiting foreign lawyers to practicing foreign law only (as opposed to local law) and restrictions on the number of local lawyers a foreign firm can hire in-country.

Of course, it is important to recognize the progress India has made towards legal services liberalization. Foreign lawyers can travel to India to advise clients on foreign legal issues and close deals, a practice known as “fly in, fly out” (FIFO). The FIFO practice is a good first step and allows international lawyers to travel to India to finalize investment decisions with their clients. In a landmark decision last year, the Supreme Court of India in Bar Council of India v. A.K. Balaji and Ors. (“A.K. Balaji”), reaffirmed a lower court decision which held that the FIFO practice is permitted under Indian law. The court also instructed the Ministry of Law and Justice and the Bar Council of India to frame rules on the practice, establishing stronger guidance and providing a prudent and reasonable outcome.

Still, given the restrictions outlined above, there are no international law firms with a permanent presence or offices in India. The government of India appears to have recognized the importance of the issue, testifying in the A.K. Balaji case that closing the liberalization issue at the “earliest possible [is of] utmost importance.” However, that statement, made in 2012, is now several years old, and our conversations with the Government of India suggest that the issue is not on the new government’s list of high-priority reforms.

Despite this, the Modi government’s desire to improve India’s Ease of Doing Business ranking may prompt some short-term action. Several parameters on the World Bank’s annual “Ease of Doing Business” ranking are directly tied to accessibility of legal counsel, which goes hand-in-hand with legal services sector liberalization. Specifically, the “enforcing contracts” and “resolving insolvency” evaluations, where India ranks #163 and #108 respectively, will in almost all cases involve legal services as well.

Even the use of FIFO, despite the reaffirmation of the supreme court, is hampered by a lack of clarify surrounding applicable rules and regulations, which leads many attorneys to provide extremely conservative advice to clients. The government of India – primarily embodied by the Ministry of Law and Justice and the Bar Council of India – would be well served by providing additional guidance on FIFO rules quickly, in line with international best practices and in consultation with the foreign and domestic legal services industries. Clear guidelines will provide the certainty that lawyers and their investors demand when making investment decisions.

As a longer-term and more sweeping next step, the government of India should consider legislation amending the Advocates Act of 1961. Tabling this legislation would create a pathway and regulatory structure for the entry of foreign law firms into India. If Prime Minister Nardendra Modi and the new Indian government can deliver on this bold reform, it would send a major signal to the global business community that India is serious about attracting global investment.

Ms. Amy Hariani is Vice President and Legal Counsel at the U.S.-India Business Council.


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