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India Inc spent 14% more on legal fees in FY19

Reasons include new laws on insolvency over past 5 years.

, ET Bureau|
Updated: Sep 15, 2019, 10.09 PM IST
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MUMBAI:The legal expenses of listed Indian companies increased 14% to over Rs 38,660 crore ($5.6 billion) during FY19 as new laws on insolvency and debt restructuring, among others, came into force over the past five years, according to data compiled by ETIG from their annual reports.

That’s a 49% increase from the Rs 25,832 crore that the companies shelled out five years ago. The legal expenses include spending on litigation and arbitration, professional fees, regulatory filings, penalties and general stamp duty.

“There is a sudden increase in regulations and companies are left with no choice but to comply with them and that translates into higher legal spend,” said Rajiv Choubey, director-legal at ACC Ltd., a LafargeHolcim subsidiary. “Several companies are going through debt restructuring – also companies are forced to recover their dues and claims through arbitration, which results in huge costs.”

Sectors such as manufacturing, mining and power are highly regulated, he said.

“Due to vexatious issues related to various clearances and approvals, it leads to litigation, thereby increasing litigation spending,” Choubey added.

According to data compiled by ETIG, the research & analysis division of ET, the legal spending of listed companies was 0.4% of their total revenue of Rs 95.7 lakh crore ($1.3 trillion) in FY19 and 0.49% of their total expenditure of Rs 78.8 lakh crore.

Over the past five years, legal changes such as the enactment of the Insolvency & Bankruptcy Code have led to litigation, restructuring and mergers and acquisitions.

The Goods and Service Tax, the Real Estate (Regulation & Development) Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, and the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act are some of the major laws that were introduced since 2014, resulting in higher legal and compliance costs for companies.

According to Hemant Kumar, group general counsel for Larsen & Toubro, litigation for Indian companies has increased not only in India but in other countries. There are very few law firms and counsels in India and abroad that understand the nuances of businesses and the applicability of law. This dearth of good advocates has resulted in increased costs for companies.

The depreciation of the rupee, too, has contributed to higher legal costs.

“If you see, the value of the rupee has decreased and when you go in other jurisdictions for litigation, disputes or even strategic M&A, you have spent more for the same,” said Kumar, a three-decade legal veteran.

Reliance Industries continues to be the biggest legal spender, with Rs 2,083 crore, followed by Sun Pharmaceuticals (Rs 1,437 crore), Infosys (Rs 1,324 crore) and Fortis Healthcare (Rs 1,081 crore). L&T is among the top five legal spenders among listed entities, with a total spend of over Rs 943 crore.

To keep legal costs in check, major companies have started ramping up their internal legal departments.

“The stakes have gone up so much, can anybody afford to take a chance?” asked Nishit Dhruva, managing partner of law firm MDP & Partners. “Take for example, a major company is admitted under the IBC. There are several stakeholders including promoters of the company, bidders, lenders and large operational creditors. Now, stakes are so high for them, they have no option but to go to the top law firms, lawyers, auditors or consultants, no matter what the costs are and this cost is likely to go up further from here.”

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