Written evidence submitted by Clifford
Chance
INTRODUCTION
1. This submission is made on behalf of
Clifford Chance LLP in response to an invitation by the House
of Commons Foreign Affairs Committee to contribute to its inquiry
on South Asia. We are very grateful to the Committee for giving
us this opportunity.
2. Clifford Chance is the first fully integrated
global law firm, with 28 offices in 19 countries, and over 3,700
legal advisers, the largest number of whom are based in London.
We are regulated by the Law Society of England and Wales. According
to a report by International Financial Services London, published
in March 2005, legal services contributed £12.9 billion,
or 1.4% of the UK's GPD in 2002, net exports generated by international
law firms totalled £1,802 in 2003, and international law
firms in London generated an estimated £2.6 billion in UK
tax revenue in 2001-02.
3. We do not address all of the terms of
reference of the inquiry; in particular, we have no comment on
relations between India and Pakistan and the question of Kashmir.
Our comments focus on the UK's trade relationship with India and
the economic success which India has enjoyed in recent years.
Our submission aims to highlight the role which international
law firms could have within India in the future and the likely
impact of their introduction on the domestic legal market.
EXECUTIVE SUMMARY
4. There is no doubt that India has become
much more important recently, both politically and economically.
Companies based in the EU and the US increasingly outsource a
range of operations to India, where low wages and a high standard
of education form an irresistible attraction. Despite historical
advantages however, trade between India and the UK remains relatively
low. For UK and international law firms, the reason for this is
simple; foreign law firms are not permitted to open offices or
practise law in India.
5. Clifford Chance has close links with
India and would welcome the opportunity to strengthen these links.
We believe that liberalisation of the legal services market in
India would have significant benefits for India's economy; it
would assist in the dissemination of legal skills, provide employment
opportunities and facilitate continued economic growth. Global
corporates and financiers would be more willing to invest in a
market where they were able to rely on multi-jurisdictional and
specialised legal expertise.
THE UK'S
RELATIONSHIP WITH
INDIA
6. For historical reasons, the UK has a
relative advantage in trading with India, based on strong cultural
ties between the two nations, links to the Commonwealth and an
extensive trading history. There are currently 1.3 million Indians
residing in the UK[7]
and over 500 Indian companies have opened in London alone.[8]
Links between our economies are still developing and strengthening
in line with changing global trends. A few years ago India was
the tenth largest investor in the UK, now it is the third.
7. However, in a report published in 2006
by the House of Commons Trade and Industry Committee on trade
opportunities with India[9]
(to which Clifford Chance submitted written evidence), representatives
from the Indian Government and UK and Indian private sectors expressed
concern over the low levels of trade and investment between the
two nations.
8. According to the report, the UK is currently
operating a significant services trade deficit with India. This,
combined with a slight deficit in goods trade, has meant a deterioration
in the balance of trade, from a £186 million surplus in 1992
to a deficit of £242 million in 2004.[10]
9. The report also investigates the low
investment of UK companies in India. In 2005 90% of UK acquisitions
took place in Western Europe, with only 1% in the BRIC economies
(Brazil, Russia, India and China). Reasons for the low level of
investment in India were given as language barriers, a lack of
understanding of Indian business and a general fear of the unknown.
Another reason was the Indian Government's restrictions in certain
sectors, including the legal sector. There appear to be similar
trends in the EU. FDI rates for Europe show that India attracts
only 1% of total FDI output. While it is acknowledged that significant
potential exists, the same barriers to investment are blamed.
We believe that the presence of well-known international law firms
operating in India would help address these problems.
10. Clifford Chance has been associated
with India for more than half a century, and we represent both
Indian and foreign clients on a wide range of matters. We recruit
and train Indian graduates as English solicitors and we offer
scholarships to Indian lawyers wishing to obtain English qualifications
without leaving their existing firms in India. Greater liberalisation
would enable us to enhance this association further.
INDIA AS
AN ECONOMIC
POWER
11. India's economy is now the fourth largest
in the world (on the basis of Purchasing Power Parity), although
it ranks second in terms of economic growth rates.[11]
It has the second largest population, currently estimated at 1.1
billion,[12]
and is now one of the acknowledged nuclear powers. India's young
population also promises a profitable future. According to press
reports, about 60% of India is currently aged under 30, and a
quarter of the world's under 25s reside there. Predictions are
that by 2050 the Indian economy will be one of the world's big
five in terms of total output.
12. While many parts of South Asia have
suffered significant currency fluctuations, India's economy has
remained stable and a relatively safe haven for investors. It
has world-class expertise in the steel, pharmaceutical and IT
sectors and the manufacturing and service industries are also
becoming major contributors to the GDP.
13. Since the liberalising reforms of the
early 1990s, a number of key industries have seen substantial
growth. India has the largest mobile phone market in the world,[13]
with sales growing by 2 million per month.[14]
It is estimated there will be 250 million users by 2007. In recent
years the banking, insurance and accountancy sectors have all
modernised to encourage foreign investment, and latest figures
indicate that nearly half the Fortune 500 have set up call centres
within India.[15]
Clifford Chance has outsourced some document production services
to India and is currently reviewing opportunities to establish
our own offshore operation in Delhi to provide a range of business
services.
14. Foreign investors are said to have brought
$23 billion into India between 2002-05, and investment opportunities
are likely to continue to grow. The Indian middle class is forecast
to increase to about 250 million within the next 15 years, with
incomes set to grow eightfold over the next four decades. The
resulting consumer boom should increase the market opportunities
for UK companies to trade their products and services.
15. The market reforms are increasingly
reflected in India's national income accounts. GDP has reportedly
grown by an average of 6% for the past 23 years, a rate double
that of developed nations. However, what is crucial to India is
that growth is sustained. The World Bank reports that countries
in the top 10 growth performers in one decade have tended to decelerate
substantially in the decade following significant growth, usually
by 2 to 3 percentage points per annum. India therefore needs to
assess its strategies for maintaining this impressive level of
GDP.
NEW MARKETS
AND POTENTIAL
FOR INTERNATIONAL
FIRMS
16. The massive demands and stresses on
India's poor power networks, urban infrastructure, transport and
ports are the costs of the late economic boom, and could be the
brakes on its overall growth. In 2005 the Indian Government released
plans to increase spending on infrastructure by 67% over the following
three years[16]
though some believe that even this is insufficient.[17]
17. Rules have been relaxed recently on
the amount an Indian company can raise on the Hong Kong, London
and New York stock exchanges. International acquisitions for Indian
companies have also increased with firms such as Reliance, Infosys
and Tata reportedly on the acquisition trail in the UK, US and
across Europe.
18. The Indian market has also recently
become a target for private equity funds, with a number of global
funds establishing themselves in Mumbai. These firms have already
allocated high worth investments specifically for India.
19. These commercial organisations and financial
institutions are the clients of international law firms like ourselves,
and the transactions which they undertake, whether they are infrastructure
projects, acquisitions, business financing or the development
of capital and financial markets, require the specialised multi-jurisdictional
legal advice which large international firms like ourselves, with
global resources and expertise in these matters, are best placed
to provide. Our clients would be more reluctant to participate
in these projects without the assistance of legal advisors with
the relevant legal experience.
20. The range of legal specialisms which
India will require is simply not available in the domestic market,
with the major transactional work required to date having been
offshored. The presence of foreign lawyers competent in dealing
with these transactions on the ground will open up significant
opportunities for Indian lawyers to gain expertise in these matters.
Employment for Indian lawyers will also be created within these
global firms.
THE CURRENT
SITUATION OF
FOREIGN LAW
FIRMS WITHIN
INDIA
21. As a member of the WTO, India is a signatory
to the General Agreement on Trade in Services (GATS) which committed
the country to liberalising its services sector by 2005. It has
made no commitments, however, on legal services and foreign law
firms are not able to establish a presence in India. India's position
on legal services lags behind that of other WTO members.
22. While the interpretation of Indian law
on the establishment of foreign law firms in India remains in
dispute, local rules do not recognise the qualification of overseas
lawyers. The main reasons appear to be historical barriers and
continuing opposition from parts of the local legal profession.
23. This has far reaching implications.
Large multinational clients cannot obtain the advice they want
on the ground in India with the ease they would in other jurisdictions,
with the result that investment may be taken elsewhere. International
law firms are unable to provide a seamless service, hindered by
time zones and other barriers to communication. The Indian government
faces problems when multinational consortia and international
financing bodies on major infrastructure projects demand the involvement
of a legal team with experience in similar transactions. Indian
lawyers also lose out, not only on those transactions taken offshore,
but also on the opportunity to become part of the global legal
sector.
24. The UK government is currently engaged
in negotiations with the Indian government through the United
Kingdom-India Joint Economic and Trade Committee (JETCO). One
of the JETCO task forces, composed of members of the UK and Indian
legal professions, is looking at legal services. So far there
has been little agreement between the two sides; a report to UK
Ministers proposed a staged programme of liberalisation, beginning
with limited opening as a transition measure towards further liberalisation.
The India team favours a form of highly regulated joint ventures
with Indian firms, a proposal which is unlikely to be attractive
to international law firms. It remains unclear whether the JETCO
talks will continue in the light of the recent announcement of
negotiations for an EU-India trade agreement.
THE EFFECTS
OF LIBERALISATION
ON THE
DOMESTIC LEGAL
MARKET
25. The main concern of lawyers in India
is that, if the rules were relaxed, the international law firms
would take work away from them. However, we believe this concern
is misplaced. International law firms will not be competing with
the vast majority of the 800,000 Indian lawyers, as their role
will not include advice on matrimonial, conveyancing, wills or
criminal law. Most importantly, they will not be seeking advocacy
rights—the core area of business of most Indian lawyers.
26. For the small number of larger Indian
commercial firms who may feel the competitive impact of the introduction
of international firms, pricing differentials will limit direct
competition for some years to come. It would not be possible for
foreign firms to compete with the rates offered by Indian law
firms, with much lower employment costs. It should also be noted
that law firms are partnerships and do not have the capital raising
powers of, say banks. It is therefore likely that any Indian office
would initially be much smaller than the large Indian commercial
firms.
27. While much of the Indian legal profession
is hostile to liberalisation, there is recognition in some of
the bigger, more far-sighted firms that change is inevitable,
and many have been preparing for liberalisation for the past few
years. Cyril Shroff at Armarchand Mangaldas, was quoted in the
Financial Times in June 2005 as welcoming liberalisation,
provided "it is done in a structured way". A generation
of younger Indian lawyers also see the benefits. Ruhul Matthan,
who set up one of the new breed of commercial law firms in 2000,
was quoted stating it will "help the market mature".
It seems widely accepted that increased competition inevitably
promotes better quality and better value of work.
28. Strong support for liberalisation also
comes from top Indian companies and institutions. Bharat Vasani,
Group General Counsel at Tata, the Indian conglomerate, said,
"If India really wants to be an attractive destination for
the foreign investor, we can ill afford to say that we don't want
foreign lawyers to have offices here". As the top legal buyer
in the country, he welcomed liberalisation, claiming it will improve
the standards of Indian legal services and "eventually bring
down the cost".
THE CASE
FOR LIBERALISATION
29. We believe that liberalisation of India's
legal services market would help to speed up inward investment.
International lawyers often play a role as business advisors who
may either implicitly or explicitly help to influence their client
on where to invest. Benefits would be seen across the overall
business climate. In the league tables of the countries seen as
the best place to do business, constructed by the World Bank,
India is currently rated 134th, below Tajikistan, Gabon and Bolivia.
There is a clear correlation between those with a higher place
in the league and an open legal system.
30. A primary concern for India's sustained
growth is increased employment opportunities. In India four times
more people are unemployed (around 35 million) as employed in
the organised private sector. The arrival of international law
firms will create new employment opportunities.
31. India is currently undergoing a massive
expansion in the numbers of young people graduating from law schools.
On leaving, however, prospects within the domestic legal system
are limited; the traditional family-run law firm offers little
hope of partnership for the ambitious graduate. The most forward
thinking Indian lawyers are seeking to qualify in the UK or the
US as well as India, in anticipation of greater demand for Indian
expertise and a desire to be part of the global legal market.
Others move to in-house positions, seek opportunities abroad or
leave the profession.
32. This has become a major issue for some
Indian law firms, as young Indian lawyers increasingly see it
as part of their career development to spend time in London or
New York. Opportunities for them to return to India are currently
limited as the international firms do not have office there and
the local firms do not generally provide the same combination
of quality of work, rewards and prospects.
33. If international law firms are permitted
to practise in India, this will increase incentives for Indian
lawyers to stay in India, or to return after practice abroad,
while liberalisation will bring international Indian work back
to India and with it opportunities for employment and training
in international expertise.
CONCLUSION
34. India is an important market for UK
companies, and we believe it will continue to grow in importance.
International law firms have the expertise and resources to support
the much-needed inward investment and infrastructure development,
as well as the growing ambitions of Indian companies overseas.
We also contribute to the country's own pool of expertise through
training and technology transfer. However, these activities are
severely hampered by the local protectionist barriers which prevent
non-Indian law firms from establishing a presence in India. We
believe there would be benefits to the Indian economy, to the
Indian legal profession, and to the ability of international law
firms to provide a first-class service to their clients, if there
were to be greater liberalisation for legal services in India.
Clifford Chance
8 November 2006
7 "UK should have natural advantages trading
with India" Bryan Sanderson, Financial Times, 27 June
2006. Back
8
"Comment and Debate: we must forge a new special relationship
with India: for too long, politics in Britain has been obsessed
with Europe and the US. It is time to look to where our strategic
interests lie" The Guardian, 5 September 2006. Back
9
House of Commons Trade and Industry Committee: Trade and Investment
Opportunities with India Third report of Session 2005-06. Back
10
ONS, Pink Book, 2005, Table 9.5. Back
11
"Western firms already vying for India's Riches", The
Lawyer 2006, 20 (22, 4). Back
12
House of Commons Trade and Industry Committee: Trade and Investment
Opportunities with India Third report of Session 2005-06. Back
13
"India is ridding itself of red tape", The Financial
Times, 29 March 2005. Back
14
"India is still on a high: it's not cheap but it's cheerful.",
The Daily Telegraph, 14 January 2006. Back
15
"India's legal market on the cusp of inevitable change,
Law Service in Asia Part 1: Outsourcing and foreign investment
are forcing a closed industry to open up" Renna SenGupta,
Financial Times, 23 June 2005. Back
16
"India's young population promises a profitable future",
Mark Atherton, The Times, 7 May 2005. Back
17
A M Naik, chairman of Larsen & Toubro, a Mumbai based engineering
and construction conglomerate. Back
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