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Will foreign law firms open first in SEZs (and GIFT)? Not yet, but gov’t paves a way with rule change

The rule change is tiny but it could be evidence of the government’s thinking of a potential way forward

Will the first foreign law firm to set up in India be coming to Gujarat?
Will the first foreign law firm to set up in India be coming to Gujarat?

As first reported by Live Law this week, the ministry of commerce and industry, which has been spearheading the government’s efforts to liberalise the legal market, alongside the law ministry, has revoked a ban on the practice of law from special economic zones (SEZs), by issuing a notification in the Gazette of India amending the Special Economic Rules governing Special Economic Zones on 3 January 2017.

LiveLaw called it a “baby step towards opening India’s legal and accounting sector to foreign players”, and indeed, the amendment is a small one, deleting just five words - “excluding legal services and accounting” - from Rule 76 of The Special Economic Zones Rules, 2006, which specifies some of the businesses that are allowed to set up in such zones.

In effect, this would allow domestic law firms and possibly legal process outsourcers (LPOs) to set up shop inside SEZs, and could be evidence of how the government will eventually intend to open up the legal market.

And interestingly, one foreign lawyer with a focus on India whom we spoke to last month, had predicted: “I suspect that GIFT (Gujarat International Financial Tec-City) will be the first FTZ (free trade zone) for foreign law firms to set up in, followed by Mumbai.”

That said, the change by itself neither lifts the 1961 Advocates Act restriction that law can only be practised by Indian nationals and firms, nor the Bombay and Madras high court judgments restating that foreign law firms are not allowed to practice here.

However, the Economic Times reported in a more upbeat fashion today:

Foreign law and accountancy firms now have a chance to operate in India on their own. On 3 January, the ministry of commerce and industry amended a rule allowing such foreign firms to set up offices and advise clients from SEZs.

The paper also quoted the head of IFSC at the GIFT, Dipesh Shah, saying: “Until now, no foreign law firm could operate in India and not even Indian firms were allowed to provide their services in any of the SEZs.

“The new amendment allows not only Indian law or accountancy firms to set up a base in GIFT, but even multinationals can directly advise upon international disputes or arbitration by setting up a base there.”

Of course, if a foreign law firm were to open up in an SEZ and advise on foreign law or arbitrations, they would still brave running a risky business since the SEZ rule amendment does not explicitly mention foreign law firms at all.

However, they may take solace and safety in the idea that despite continuing Bar Council of India (BCI) (and softer Society of Indian Law Firms (Silf)) opposition to their entry, at least the government (and presumably Narendra Modi) may have their back in an SEZ such as Gujarat’s.

The amended rule

Rule 76 of The Special Economic Zones Rules, 2006 states (emphasis added):

The “services” for the purposes of 1[clause] (z) of section 2 shall be the following, namely:— Trading, warehousing, research and development services, computer software services, including information enabled services such as back-office operations, call centers, content development or animation, data processing, engineering and design, graphic information system services, human resources services, insurance claim processing, legal data bases, medical transcription, payroll, remote maintenance, revenue accounting, support centers and web-site services, off-shore banking services, professional services (excluding legal services and accounting) rental/leasing services without operators, other business services, courier services, audio-visual services, construction and related services, distribution services (excluding retail services), educational services, environmental services, financial services, hospital services, other human health services, tourism and travel related services, recreational, cultural and sporting services, entertainment services, transport services, services auxiliary to all modes of transport, pipelines transport.

Presumably, the segment to be amended (and highlighted above) is missing a comma, and should have read “professional services (excluding legal services and accounting), rental/leasing services without operators”.

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