Clifford Chance and leading Indian firm AZB & Partners called off their two-year-old “best friends” alliance last month. Why? Among the reasons cited were the dimming prospects for liberalization of the Indian legal market.

Just two years ago India’s market–where foreign firms are not allowed to have offices, much less practice Indian law–seemed to be on the verge of opening up. Law minister Hansraj Bhardwaj had made liberalization a priority and urged the domestic legal profession to accept its inevitability.

“We certainly thought, given all the public utterances that were coming from the government of India at the time, that liberalization was sooner rather than later,” recalls Jonathan Brayne, the London-based head of Allen & Overy‘s India group.

Not anymore. “Now it’s the opposite,” says Brayne. “Later rather than sooner.”

One of liberalization’s most vocal opponents says its supporters’ optimism was never really justified. “[Two years ago] people were ill-advised to consider that something will happen,” says Lalit Bhasin, managing partner of Delhi’s Bhasin & Co and chairman of the Society of Indian Law Firms (SILF), a group that has been strongly opposed to the entry of foreign firms.

“We were very clear [two years ago] that nothing can happen until the law changes but people had the hopes because the then law minister was favorably inclined,” says Bhasin, noting that Bhardwaj’s departure from the ministry in May 2009 was a major setback for liberalization advocates.

The law to which Bhasin refers is the Advocates Act of 1961, which currently regulates all practice of law in India. In a December 2009 ruling, the Bombay High Court upheld the Act’s restrictions on foreign lawyers.

Three months later, an organization of activist lawyers mounted a new challenge to liberalization in the Chennai High Court, charging 31 foreign law firms and one legal process outsourcing (LPO) company with continuing to work illegally in India and violating the Advocates Act by measures that included visiting clients and attending conferences in India. Most of the defendant firms have filed counter-affidavits arguing that the act does not prohibit them from traveling to India while practicing foreign law. The case is pending.

Opposition to opening the market is not universal, though. Some in Indian government and legal circles fear that India will fall behind other parts of Asia where liberalization has been progressing. Singapore opened up local practice to foreign firms a few years ago in the belief that greater competition would improve local practice and create more opportunities for local lawyers. South Korea is set to follow suit as part of recently negotiated free trade agreements with the United States and the European Union.

India’s current law minister Veerappa Moily seemed to be channeling such thoughts in an interview with Indian business newspaper Mint in late January. Raising for the first time the possibility that foreign firms in India could be good for business, Moily pointed to China, where he said lawyers initially resisted foreign competition but are now seeking to go abroad themselves.

However, Moily also warned that his comments should not be taken as a vote for liberalization. “In that case I will be inviting big agitation tomorrow,” he told the newspaper.

Indeed, the government already has its hands full with a battle with domestic lawyers over the regulatory role of the Bar Council of India. The government is looking at adding another supervisory body to oversee the legal profession as well as legal or quasi-legal work performed by accountants, consultants or other non-lawyers.

Some worry such a move could provide a backdoor approach to liberalizing the profession: If accountants and other non-lawyers were recognized as legal practitioners, foreign lawyers could potentially slip in as well. “Those are all retrograde steps which create crisis of confidence as far as legal profession is concerned in the government instead of improving concerns,” says SILF’s Bhasin.

Though the movement for liberalization is currently stymied, Chris Parsons, the head of the India Group for Herbert Smith, says that his contacts with government officials give him hope that liberalization discussions will be revived–someday.

“No, it’s not dead,” says Parsons. “It’s on the radar screen of the government and the Bar Council, and I’m sure at some stage it’s likely to happen. The question is when.”

“It’s not going to happen in the near future,” he adds.

Most firms have begun coming to terms with that reality, and many have not let it dampen their enthusiasm for opportunities in the market. While Clifford Chance and AZB saw liberalization’s fading chances as a reason to part ways, Allen & Overy and Indian firm Trilegal saw it as justification to extend indefinitely their own Anglo-Indian best-friends alliance, which initially had a three-year term.

“To be honest, I view that almost as strengthening the rationale for the A&O-Trilegal relationship,” notes Brayne. “If there’s no prospect any time soon of A&O having its presence in India, the imperative to really get close on a working basis to a firm that does have a presence there is important.”
Kian Ganz is the editor of Legally India. E-mail: kian.ganz@LegallyIndia.com