Home / Industry / Complex rules, rise in white-collar crimes drive up legal expenses

Mumbai: A rapidly changing regulatory environment marked by more complex rules, coupled with increasing incidence of fraud and white-collar crime, are driving up legal expenses at Indian companies, making it a particularly lucrative time for the practice of law. And an economic revival that’s underway is expected to drive up demand for lawyers’ services—and fees.

Legal expenses increased 22.15% to 16,592 crore in 2013-14 at 312 firms in the BSE 500 index for which data is available. The increase, driven by a mix of both litigation and consultancy fees, far outpaced a 12.4% rise in total expenses and 12.3% rise in sales at these companies.

“It’s a great time to be a lawyer in India. For companies, stakes have increased tremendously in the last few years due to increased scrutiny," said Chandu Mehta, managing partner at law firm Dhruve Liladhar & Co. “There is a huge spurt in litigation and consultancy work. As a result we have seen a 40% increase in legal fees in the last two years."

With a new company law and corporate governance norms in place, more complex rules are open to legal interpretation, prompting companies to retain a higher number of lawyers. The new rules have tightened the regulatory framework for related-party transactions—dealings between affiliate companies—and spelt out tougher standards for independent directors.

“Companies are treading carefully and are retaining lawyers for more mundane tasks like preparing for a shareholders meeting under the new laws," said Sandeep Parekh, founder of Finsec Law Advisors, a corporate law firm.

To be sure, one reason for the steep increase in lawyers’ fees is a shortage of legal talent, according to Mehta. India has less than one licensed lawyer per 1,000 people, compared with 3.5 each in the US and Brazil, according to a 2011 Harvard University report.

At the same time, there has been a rise in high-value litigation as well, such as the cases involving Vodafone Group Plc. and Royal Dutch Shell Plc. in which the Indian tax department has claimed 15,000 crore that it says the two companies owe it.

Vodafone alone is engaged in a legal tussle with the tax department over 11,200 crore the latter has claimed from it on its 2007 acquisition of Honk Kong-based Hutchison Whampoa Ltd ’s stake in Hutchison Essar Ltd.

Similarly, government action or inaction, as the case may be, is also leading to legal headaches for Indian companies.

Some of the companies that have seen a big jump in their legal expenses include Ranbaxy Laboratories Ltd, Tech Mahindra Ltd, Sun TV Network Ltd and its group firm SpiceJet Ltd, among others.

The legal expenses of Ranbaxy increased 102.80% to 844.54 crore in fiscal 2014 from a year ago. Tech Mahindra saw its legal expenses jump 117.53% to 158.8 crore. Sun TV Network’s legal spending jumped 453.76% to 55.21 crore in fiscal 2014 and SpiceJet’s increased 64.71%.

Sun Pharmaceutical Industries Ltd, which agreed to acquire Ranbaxy earlier this year for $3.2 billion, declined to comment for this story.

Email queries sent to Tech Mahindra, Sun TV Network and SpiceJet on Monday did not elicit any response.

Cases stemming from scandals such as the allocation of 2G spectrum and licences in 2008 and the allotment of coal blocks, both involving big business groups and senior management, are being heard in the courts.

The Supreme Court last month declared all 194 coal block allocations made between 1993 and 2010 illegal.

Demand for legal services and lawyers’ fees has also gone up because of the detection of a number of cases of white collar crime.

For instance, entrepreneur Jignesh Shah’s Financial Technologies (India) Ltd (FTIL) is under the scanner of several investigating agencies over a 5574.35 crore fraud at its subsidiary National Spot Exchange Ltd (NSEL) that surfaced at the end of July 2013.

As a result, FTIL is fighting more than two dozen civil and criminal cases at various courts across the country. FTIL’s legal expenses jumped 81.36% in 2013-14 to 40.08 crore from a year ago.

An email sent to FTIL remained unanswered as of press time.

According to a 2013 study by Thought Arbitrage Research Institute, an independent think-tank, the average size of frauds has risen by more than 80% to 502 crore over the past 15 years as a result of several high-profile and large frauds detected between 2009 and 2012.

“This is an interesting time for being a lawyer. Lawyers are seeing a lot of action defending their clients’ allegedly crooked actions," said Finsec’s Parekh.

Most of these litigations have a tendency to be long-drawn, given the inadequate judicial infrastructure in the country.

According to the Supreme Court website, as of September 2013, at least 54,156 civil cases were pending with the apex court, up 24.80% since 2010.

At the level of high courts, 3.59 million civil cases were pending, compared with 3.33 million cases three years ago.

Once the economy recovers from a slump that drove growth to less than 5% in each of the previous two financial years, demand for legal services is expected to rise as companies seek to raise funds and scout for potential merger and acquisition transactions.

According to Dealogic, a deal tracker, since January till 4 September, India has seen 855 deals worth $42.5 billion, compared with 755 deals worth $28.4 billion a year ago. A stable government has also led to improvement in investor sentiment and liquidity in the equity markets.

If the markets hold up to current levels, having risen 28.25% in the year to date, nearly 20,000 crore worth of private sector initial public offerings (IPOs) are expected to hit the market, according to Satyen Shah, executive vice-president at Edelweiss Financial Services Ltd.

Several firms that were unable to raise money through equity markets during the economic slump are now lining up to go public.

“Regulations have come become tougher, leading to greater involvement of lawyers in the entire IPO, including being a part of the back-up processes. As a result there has been some increase in the fee earned by law firms," said Sandip Bhagat, managing partner at S&R Associates, a Mumbai-based law firm.

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