Reducing Red Tape in India's Courts

Which emerging Asian economic power has the more open legal system, China or India? China is a Communist Party dictatorship where laws are drafted in secret by party cadres and the courts were largely destroyed during the Cultural Revolution. India, by contrast, has a thriving democracy, a dynamic legislature, and a common-law system inherited from the British.

Indian courts, however, are anything but dynamic. "It's well-known that litigation in India is a no-go zone for companies because of how long it takes," says Gautam Battacharyya, a partner at Pittsburgh-based law firm Reed Smith who has his office in London and often works in India. The sentencing last month of seven former Union Carbide executives to jail terms for their role in the Bhopal gas leak—25 years after the disaster that killed more than 22,000 people—is an egregious example, though even lower-profile cases can easily drag on for more than a dozen years (the convicted Carbide executives can still appeal). Lawyers, regardless of which side they're on, are adept at seeking long adjournments. Judges, in short supply to begin with, often lack critical knowledge about topics such as infrastructure that bedevil foreign and local companies. The system is vulnerable to corruption, too: "Our judges are paid abysmal amounts," says Cyril Shroff, managing partner at Amar-chand & Mangaldas, India's largest law firm. "Both the average businessman and corporations have little faith in the legal system."

Last month, Law & Justice Minister Veerappa Moily unveiled a package of reforms to slash the average duration of court cases to 3 years from 15. The Attorney General's office will scrutinize all suits brought by and against the government—some 70 percent of cases—to throw out the frivolous ones and keep only those with merit. Government attorneys and judges will have a better shot at promotions that would boost their salaries. The reforms will likely go into effect before the end of July.

Prime Minister Manmohan Singh's government also wants to improve legal education, appoint more judges, and set up specialized courts to handle complex cases. Pramod Rao, general counsel for ICICI Bank (IBN), the No. 2 lender, figures it will take two to three years for the changes to make a real difference.

Even if these reforms improve the courts' efficiency, the Indian legal system will remain more closed in some ways than China's, which has developed significantly in recent years. While U.S. and other foreign law firms are allowed to have multiple Chinese offices, India prohibits foreign lawyers from having permanent offices or advising clients on Indian law. In December the Bombay High Court reaffirmed a 1995 decision keeping non-Indian companies from opening local offices. To get a piece of the booming market, foreign law firms have set up alliances with Indian firms or flown in partners from Singapore and Hong Kong for short stints.

Some Indian attorneys want to restrict foreign law firms even more. A court in the southern city of Chennai is considering a suit brought by a local group of lawyers to ban 31 foreign firms, including White & Case and Clifford Chance. If the foreign defendants lose, "It could mean that top Indian companies doing deals overseas won't be able to get international advice in their own offices," says Jeffrey A. Blount, head of the Asia Pacific practice in Hong Kong for Houston-based Fulbright & Jaworski.

Until the scope of the reforms becomes clear, multinationals looking to invest in India are likely to avoid its legal system as much as possible by opting for third-party arbitration outside the country. Yet arbitration leads back to the same problems that keep companies away from the courts, says Rajesh Narain Gupta, managing partner of S.N. Gupta & Co., a Mumbai-based law firm. "Foreign investors are conscious of delays in Indian courts, so they prefer dispute resolution overseas," he says. "But even if they are awarded settlements abroad, they need to be enforced in India—and that process is again subjected to many delays."

The bottom line: India's Justice Ministry has launched reforms to speed up the resolution of cases; foreign attorneys will still face restrictions.

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