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Anatomy of new disinvestment tenders: Near zero fees for lawyers or boon for competition?

Share sales
Share sales

Less than one month ago a financial daily caused a stir in the cozy Delhi capital markets world after reporting that the selection of law firms in the disinvestment of Coal India Limited and Engineers India Limited (EIL) had been discriminatory, alleging political nepotism.

However, the disinvestment ministry's selection of legal advisers has probably never before been as objectively fair as in those two pitches: India's top 15-ranked law firms were invited to pitch for advisory roles in an unprecedented and structured tendering process.

"We are drawing up a list of the top law firms based on league tables and inviting them to tender. The change we have brought about is to make the process dynamic," explained Sumit Bose, who took over as the Indian government's department of disinvestment secretary on January 22 and is tasked with raising Rs 400 billion ($8.6bn) through asset sales in 2010-11.

Luthra & Luthra was the first firm to benefit from the changes with DLA Piper on 21 May. Both firms won the EIL and Coal India mandates over duos such as Amarchand Mangaldas pitching with Jones Day and O'Melveny Myers, AZB & Partners with its best friend Clifford Chance and S&R Associates with Dorsey & Whitney.

Other Indian firms that pitched for EIL or Coal India included Crawford Bayley, Axon Partners LLP, Jurisprudent Consulting Partners and Link Legal.

Some of these in particular will be less well-known in the capital markets field, which could have been one cause for the raised eyebrows.

Quoting unnamed sources, the Indian Express on 1 June 2010 wrote: "It is learnt that the Disinvestment Ministry has received a complaint alleging that a discriminatory procedure was adopted while sending request for proposal by law firms for the disinvestment of Engineers India Ltd and Coal India Ltd. Sources said the complaints also accuse the department of trying to favour the law firm set up two years ago by the son of a politician."

The young law firm with political connections would have been intended to refer to roughly one-year-old Axon Partners LLP.

The firm was set up by former Shearman & Sterling and Cravath Swaine & Moore associate Abhimanyu Bhandari and ex-Shearman & Sterling Singapore associate and litigator Anubhav Singhvi, who is also the son of well-known Rajya Sabha member and Congress party spokesperson Abhishek Manu Singhvi.

No one will dispute that the Axon partners' connections have helped them get the foot in the door on some deals and in fact, when coupled with hard work and a good quality product this is the exactly the recipe most start-up law firms and businesses follow to success in India.

But contrary to the allegations, the reason Axon and three-year old capital markets niche player Jurisprudent Consulting Partners ended up pitching for EIL and Coal India with the established firms was a pure numbers game: in a short time they managed to muscle their way into the league tables of the ultra-competitive capital markets space that has traditionally been dominated by the big firms.

Evolved anatomy

It is somewhat ironic that allegations of impropriety were reported after the government's department of disinvestment had for arguably the first time instituted a process where transparency is hard to fault.

Previously law firms with comparatively limited capital markets experience were occasionally instructed with which the department had some prior connection or that had previously bid or done some work with the department. The reasons were not always clear to outsiders or even insiders.

"The government has itself become sensitive to that because ultimately you need to get the job done," said one lawyer closely involved in disinvestment pitches. "The persons who suffer at the end of the day [by selecting inexperienced advisers] is no one but the government."

The new process that was used in EIL and Coal India was therefore very different.

The disinvestment ministry invited 15 domestic law firms that were listed as the busiest capital markets firms in the 2009-10 financial year according to the Prime Database, which was founded in 1989 by Prithvi Haldea to track the Indian capital markets.

According to Prime, Amarchand had roles on 31.7 per cent of all tracked deals by value, with Luthra and S&R having respective market shares of 28.3 and 26 per cent.

Similarly to Legally India's 2009-10 IPO league table, Prime lists Amarchand, Luthra & Luthra, S&R Associates, Crawford & Bayley, Khaitan & Co, AZB, Wadia Gandhy, J Sagar Associates (JSA), Axon Partners, Jurisprudent Consulting Partners, Rajani Associates, Kanga & Co and Vaish Associates as the busiest capital markets firms in order.

The Prime Database, which tracked 44 completed deals including not just equity but also convertible and debt issuance, also included Link Legal and Desai & Diwanji in eighth and ninth out of top 15 Indian firms.

All of these firms are understood to have been sent requests for proposals (RFP) for EIL and Coal India by the ministry for disinvestment.

"The process in the fresh round of disinvestments for shortlisting law firms was fairly transparent and detailed," commented Luthra & Luthra capital markets head Madhurima Mukherjee. "Law firms were invited and judged on objective parameters such as the firms’ capital market experience, profiles and experience of indidivuals, after which they considered the financial bids."

Axon co-founding partner Bhandari agreed and added: "I hope that going forward niche and small law firms who make it to the league tables are also given a chance."

Respectfully requested

For EIL, each firm was understood to have been sent a 10-page letter explaining the mandate and requesting a pitch outlining:
  1. "prior experience and capability of handling public offerings",
  2. "infrastructure and manpower",
  3. "understanding of the regulatory framework" and "indicative timeline", and
  4. "strategy for the public offerings".
In EIL six Indian law firms, each selecting their own international law firm partner, responded to the above points, which were graded by the department with each accounting for 25 per cent of the firms' final quality score.

In the EIL pitch Luthra is understood to have been awarded 73 points out of 100, as against Amarchand's 76 points, and in Coal India the roles were reversed with Luthra getting 78 points and Amarchand again scoring 76 points.

S&R was the only other firm in both disinvestments to have scored in quality above 70, which was the cut-off the disinvestment ministry used.

Costing the earth

For those three firms, the department then opened the sealed bids that were submitted together with their proposals. The winning firm was selected on the basis of the lowest price in the envelope – the well-known L1 principle often used by the government in tenders.

Luthra and DLA Piper are understood to have come in with the lowest heavily discounted price in both pitches, winning with around Rs 136 lakh in EIL against Amarchand and Jones Day's price of around Rs 150 lakh, with Luthra's bid in the mammoth Coal India share sale being even lower according to sources. International firms' fees would make up the lion's share of those quotes.

One capital markets partner said that overall the new way of selecting firms broadly worked but added: "I think it's a process you're never going to get 100 per cent right."

However, Amarchand Mangaldas Delhi managing partner Shardul Shroff argued that the department should not employ the lowest financial bid as a final criteria in selecting its legal advisers. "Technical skills, depth and size of team and experience are more important criteria considering the scale of the task."

"The change in [the government's] norm has made selection somewhat arbitrary especially when public sector disinvestment is getting increasingly more complex and needs 'bodies' on the ground and very high quality technical excellence - which is negated once technical qualifications are met by firms bidding," added Shroff.

Nevertheless, for better or worse trying out the new process did at least on its face demonstrate transparency and recognises that smaller and newer firms can still break into the capital markets domain, as has happened in corporate, private equity and other specialist areas in the past years too.

And while the money the government pays will never compete with the private sector especially if L1 bidding continues, law firms will still keep pitching.

Lawyers, almost like the bankers that have pitched near-zero fees on past government work, are clearly in it for the glory.

This is an analysis of a shorter article that was first published by Bloomberg.

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