Chindia – Centre of the universe

Singapore has emerged as the location of choice to serve the legal markets in China and India and is attracting waves of international firms. LB looks at the reasons why the jurisdiction is king of the so-called Chindia market

With the European Union in its spiralling debt mess and the US hugely overdrawn, global businesses are concentrating their efforts on Asia and, naturally, law firms are following. But whereas Hong Kong was traditionally the default outpost for international law firms, Singapore has emerged as the destination of choice for many newcomers. There are two main reasons for this. Firstly, the city state is ideally positioned to serve both India and China, two major economic powerhouses that form the so-called ‘Chindia’ market. Secondly, the shackles that restricted foreign firms operating in Singapore have been loosened.

The South-East Asian hub has never been an easy place for foreign law firms to practise. For a long time, Singapore was a highly restricted market, with the local Bar keen on protectionism – it only allowed foreign firms to work alongside domestic practices in extremely limited joint ventures. However, in 2008, the government granted six international firms with Qualifying Foreign Law Practice (QFLP) licences, allowing them to practise Singaporean law with certain restrictions. Allen & Overy, Clifford Chance, Herbert Smith, Latham & Watkins, Norton Rose and White & Case were assigned QFLPs.

Singapore’s process of liberalisation continued last year when the government finally ratified the Foreign Practitioner Certificate, allowing foreign lawyers to sit the Singapore Bar exams. This will allow international firms to focus on more domestic mandates. The government has also said it will accept further applications for QFLP licences from foreign firms starting 1 July 2012.

‘We don’t see foreign firms as a threat to our practice at all. We’re very happy that these international law firms are coming in.’

With the further liberalisation of the Singaporean legal market, local firms could be wary of the influx of international firms into their home market. However, for practices that don’t require a QFLP, this doesn’t appear to be the case.

‘We don’t see foreign firms as a threat to our practice at all,’ says Farhana Siddiqui, a director at Singapore firm Drew & Napier. ‘We’re very happy that these international law firms are coming in, as it strengthens Singapore’s position as an arbitration centre and increases the quality of work that we’re seeing. It means that the type and calibre of work is just going to improve.’

Siddiqui’s colleague, Julian Kwek, agrees. He sees the big international firms following their major private equity and hedge fund clients who are investing billions into the region. ‘The people they want to invest into are my Indonesian clients and my Chinese clients,’ he says.

Fierce competition

With many foreign firms already established in Singapore, and more on the way, one might expect local firms to be wary of the new entrants. While Singaporean firms are happy that the international firms are coming as it increases the prestige of the region as an international arbitration hub, the government’s move to grant more QFLPs to foreign firms could see these global behemoths getting involved in domestic Singaporean work.

‘If the intention is to bring in foreign firms to do work that the Singaporean firms already do then the government has failed,’ says Kim Huat Chia, partner at Rajah & Tann.

Sarjit Singh Gill, a senior partner at Shook Lin & Bok is also anxious over the granting of more QFLPs.

‘Foreign firms do not compete directly with Singapore firms for domestic work for clients at the moment,’ he says. ‘But that will change as the Singapore offices of foreign law firms, especially the QFLPs, acquire a licence to practise certain aspects of Singapore law or become increasingly staffed by Singaporean lawyers with local or regional networks and relationships with Singaporean clients.’

Others, like Prakash Pillai, who heads the South Asia practice at Rajah & Tann, seem to relish the challenge. ‘I do see the foreign firms as competition but that’s good competition, we’re going to compete head on for the best work,’ he says.

However, Huat believes that foreign firms won’t be able to compete effectively with their Singaporean counterparts because they don’t have the same level of human resource. ‘I don’t think the firms will be competing for the work we do because the firms that are already here are still a relatively small presence,’ he says. ‘If you do an M&A deal, for example, you need 20-30 people for due diligence alone. In other, more established markets like London, New York and Hong Kong they would be able to do that. I don’t think this is possible in Singapore.’

Local firm Oon & Bazul does view international firms as competitors, especially in the field of arbitration. However, founding partner Bazul Ashhab feels that the firm is strong enough to compete, even outside of Singapore. ‘There is a significant amount of comfort and trust that the firm enjoys with its clients,’ he says. ‘In fact, over the years, I have experienced a sharp increase in instructions where the transaction or dispute in question has no connection whatsoever with Singapore.’

However, even firms with QFLPs don’t see the point of going head-to-head with Singaporean firms. Charlie Wilson, an M&A partner at White & Case in Singapore, doesn’t see his firm becoming an active participant on Singapore transactions as there is a strong group of local law firms that service the domestic market well. ‘For fees it wouldn’t make much sense – local firms have the relationships,’ he says.

New recruits

Ashurst, DLA Piper, Eversheds, K&L Gates, Linklaters and Watson, Farley & Williams are all interested in applying for a QFLP licence. Magic Circle firm Freshfields Bruckhaus Deringer has also expressed interest in returning to Singapore after the firm closed its two-partner office and ended its association with local firm Drew & Napier in 2006.

Wilson explains the benefits of a QFLP: ‘Our Singapore practising licence that we have is really useful for cross-border deals. If there’s an M&A into Indonesia it’s not uncommon that people will invest via a Singapore holding company structure.’

However, even with a QFLP how much foreign firms can practise will still be limited, because of the fear that local lawyers could be pushed out completely if the floodgates were opened. Litigation will still be a practice
area reserved for domestic firms, as will property transfer and trust work. According to Kwek, the reason why litigation is a reserved practice area is to ensure the quality of practitioners in the domestic courts. As such, international firms will still need to rely on local expertise.

‘To get into Singapore and function you need to have senior connected Singaporean lawyers. You have to offer them a sensible secure platform but it’s the stability part that’s the most important,’ says Mark Husband, managing director of recruitment and consultancy firm Cogence Search.

There will be a demand for Singapore- qualified lawyers as the foreign firms continue to flood in. Shook Lin & Bok’s Gill is particularly concerned about this. ‘The search for talent is an issue. Although we are producing more law graduates locally and enabling more overseas graduates and foreign lawyers to practise at Singapore firms, that has been matched by increasing demand not just from local and foreign firms in Singapore but internationally for our lawyers,’ he says.

However, Julia Lee, a director at recruitment firm JLegal, says that lawyers are flocking to Singapore from most common law regions so there’ll be no shortage of talent. ‘Lawyers view Singapore as an attractive proposition and we have seen a definite increase in lawyers interested in relocating to Singapore and actively pursuing opportunities based there,’ she says.

One of the main concerns for a Singapore firm is cost. In the legal service sector, lawyer salaries are the overwhelming cost, with office rentals trailing as a distant, albeit important, second. Almost overnight, in order to attract and retain young Singapore lawyers, domestic law firms had to raise pay levels. Associates’ salaries and bonuses were forced to rise due to the presence of foreign firms.

Singapore lawyers are often dual or triple qualified. There are a significant number of Indian-trained lawyers in Singapore, with a much smaller number of Chinese-qualified professionals. Almost all local Singaporean lawyers have a major advantage in being bilingual in both Mandarin and English, making them attractive to foreign firms.

Although Shook Lin & Bok isn’t concerned with foreign firms competing with it on the domestic market, it does have some concerns about competition for talent. ‘Foreign firms are already competing with us to hire good young law graduates who have decided to make their professional home in Singapore,’ says Gill.

Arbitration wars

In particular, the Singapore government has been pushing the jurisdiction into becoming the location of choice for international arbitration in Asia. This seems justified as it settles disputes from Malaysia, Thailand, Burma, Cambodia and Vietnam. The Hong Kong International Arbitration Centre (HKIAC) is still way ahead in terms of the
sheer volume of cases it handles but the Singapore International Arbitration Centre (SIAC) thinks it has some distinct advantages over its competitor.

According to the latest available statistics on the HKIAC website, it handled 624 dispute resolution matters in 2010. These include 291 arbitrations, 107 domain name disputes and 226 mediations. Of the 291 arbitration matters, 175 were international and 116 were domestic. Of the total, 16 cases were fully administered by the HKIAC under its rules.

The SIAC’s site has the number of cases it dealt with at 198, all of which were arbitration matters in 2010.

‘Singapore is the overwhelming favourite in this part of the world for arbitration,’ says Pillai. He also views the arrival of international firms favourably, as he thinks it can only add to the prestige of Singapore as a hub for international arbitration. ‘With more firms coming here it makes the pie bigger. If all the big firms are sitting in Singapore there’s a good chance a major company abroad would think “we’re happy with Singapore because they’ve got the likes of Linklaters and the rest there”,’ he says.

He believes that his firm will one day be able to handle London clients as opposed to the Indian and Indonesian clients, which provide him with the overwhelming majority of his work at the moment.

Even practitioners based in Hong Kong acknowledge the fact that Singapore is used more for international arbitration. Rebecca Silli, who heads the Hong Kong office at French giant Gide Loyrette Nouel, says: ‘Singapore is more of an international arbitration centre than Hong Kong. Hong Kong has been developing its international arbitration practice a bit more recently but is more popular for Chinese and Hong Kong arbitration.’

The rivalry between the regions for the most part is just good-natured jostling.’

She adds that the fact that Hong Kong has less of a history of independence is also a hindrance to developing its standing for international arbitration. However, she points to the fact that the International Chamber of Commerce (ICC) opened a permanent office in Hong Kong in 1998 as opposed to Singapore as a sign that Hong Kong has enjoyed the historical international endorsement.

Mark Husband at Cogence Search sees the arbitration debate rather differently. ‘In pure numerical terms Hong Kong is outstripping Singapore by a factor of three or four to one. However, what we have seen and heard during our attendance at the recent International Council Commercial Arbitration (ICCA) conference is that Singapore will continue to flourish as a seat for international arbitration. The investment made in the facilities at Maxwell Chambers [a state-of-the-art disputes complex in Singapore] by the SIAC will pay off in the short, medium and long term,’ he says.

JLegal’s Lee thinks that the rivalry between Hong Kong and Singapore is overplayed. ‘The rivalry between the regions for the most part is just good-natured jostling. Singapore and Hong Kong have traditionally been regional powerhouses; be it in shipping and airport rankings, liveability rankings, investment rankings,’ she says.

As a QFLP is not needed to practise international arbitration because the Singapore government wants the region to become a hub for this practice area, it has resulted in a number of international firms flocking to Singapore in recent years. Olswang is a recent arrival, only setting up in February of this year. Rob Bratby, managing partner of Olswang’s Asian practice, is clear on the firm’s objectives: ‘The two most significant work types that we do are international arbitration and cross-border M&A.’

The majority of arbitration in Singapore originates in India. Clients do not want to settle their disputes in the Indian courts because, as Bratby says, ‘the courts don’t work’. Singapore is close culturally to India and an obvious alternative. There were 24 cases from India in 2011, making it the highest source for SIAC filings for the third consecutive year.

Marriage of convenience

India has a highly restrictive legal market. The Indian Bar Council rules, in conjunction with the Advocacy Act, stop foreign law firms basing themselves in India. That said, many firms operate successful Indian practices based in locations such as London. One example is Herbert Smith, which runs its India practice out of its London office headed by Chris Parsons and involves 30 of the firm’s partners. The firm’s Indian practice is held in high regard by Singaporean firms with Indian practices such as Rajah & Tann.

However, the geographical proximity of Singapore to India, as well as some cultural similarities, makes Singapore a better location to conduct Indian work. Siddiqui’s practice at Drew & Napier is partly focused on India and last year Indian work accounted for 30% of the firm’s corporate finance revenues.

‘We do M&A-related work for Singapore firms going into India. However we are increasingly seeing Indian companies wanting to come into Singapore. We’re working a lot with Indian companies to help restructure their operations with a regional focus into Singapore,’ she says.

Siddiqui’s Indian practice is mainly focused on funds investing into India. She advised Singapore IT company Frontline Technologies on the general offer by BT, structured by way of a scheme of arrangement, which triggered a downstream acquisition of its Indian entity. The deal was worth around $100m. 

The Indian high commissioner to Singapore, TCA Raghavan, estimates that there was almost $24bn of investment from India to Singapore in the last financial year. The signing of the Singapore Economic Co-operation Agreement with India in 2003 led to an increase in inbound Indian investment, although this has slowed down more recently due to a reduction of the growth rate in India. In 2012 India’s projected growth rate was 6.9%, according to the International Monetary Fund (IMF). This growth would make most western markets ecstatic, but as India’s rate is usually around 9% it signals a significant slowdown. However there is still plenty of work to be done.

‘Most of the clientele I have comes from India,’ says Pillai. ‘We do Indian outbound work. There are something like 4,000 Indian companies in Singapore.’

‘Singapore attracts investors worldwide due to its stable political and economic environment,’ says Manoj Singh, founding partner at New Delhi-based Singh & Associates. ‘Many multinational corporations route their investment through Singapore, which provides effective tax rates and asset protection. A major part of our foreign funding is routed through Singapore, so Singapore is definitely a significant partner for legal work.’

‘Many multinational corporations route their investment through Singapore, which provides effective tax rates and asset protection.’

One of the advantages of the Singapore-India relationship is tax related. Singapore has many double tax treaties (DTT) but the one with India is perhaps the most advantageous. India used to do a lot of work through Mauritius, utilising the country’s DTT, however this has come under increased scrutiny by the Indian authorities amid claims of money laundering.

Singapore has capitalised on this. ‘Our treaty is set up in a better way and it’s easier to satisfy substance requirements in Singapore than Mauritius,’ says Siddiqui.

Jai Pathak, the partner-in-charge of the Singapore practice at Gibson, Dunn & Crutcher, agrees: ‘Whenever investments come out of Singapore the investments are accepted virtually without question by the Indian regulators. It is no longer the case with Mauritius.’

Indian firms agree that taxation plays an important role in the relationship between the two countries. Manoj Singh says: ‘The DTT between India and Singapore harmonises business relations by creating a uniformity in determining the taxability on various incomes.’

There are further tax reforms in the pipeline that will help facilitate business. The recently introduced Indian Finance Act 2012 has enacted certain amendments that will be beneficial to investors. One standout change is long-term capital gains tax being reduced to 10% in the case of gains arising on the sale of shares of an unlisted Indian company, subject to certain conditions. Until now long-term capital gains realised by non-residents upon sale of unlisted shares were taxed at the rate of 20%.

However, it is not all good news. The 2012 Indian budget, announced on 16 March declared that the transfer of assets between non-residents would be included within the remit of the Income Tax Act. Therefore overseas transfers of shares of an Indian company will be taxed under the provisions of the Income Tax Act of 1961. This was a reversal of the decision in the Vodafone case in the Indian Supreme Court earlier this year, which came down on the side of the taxpayer. The case concerned the purchase of Hutchison Essar Telecom Services in 2007 and whether Indian tax was payable.

‘This has raised concerns among foreign investors as regards potential tax liabilities,’ says Rabindra Jhunjhunwala, a partner at Khaitan & Co in India. This may explain the surge of Indian companies being listed on the Singapore exchange.

New listings

Both Chinese and Indian companies are listed on the Singapore exchange. While the perception is that Hong Kong serves China while Singapore serves South-East Asia, this is not always the case according to Kwek. ‘The Chinese are coming in droves. I’ve been involved with some of the Chinese companies getting listed on the Singapore exchange,’ he says.

Huat, who heads the capital markets practice at Rajah & Tann, has been advising Chinese clients for decades. He says that Chinese companies set up offshore companies in places like Hong Kong to reinvest back into China or invest into other jurisdictions. ‘Most recently they’re doing it in Singapore. Most Chinese companies use Singapore to invest into the region. Thirty per cent of companies use Singapore to set up trading hubs,’ he says.

Charlie Wilson, who heads the Indonesia practice for White & Case out of Singapore, has also noticed more Chinese companies listing on the Singapore exchange and has seen some of them become targets for acquisitions. He advised Nestlé on the $2.1bn acquisition of a 60% stake in Chinese sweet manufacturer Hsu Fu Chi in January of this year. He also advised Chinese electronics company Haier on its multijurisdictional acquisition of Sanyo’s white goods businesses for an undisclosed sum. The deal stipulated that Haier will acquire two research and development centres, four manufacturing facilities and six sales companies.

Meanwhile, the fact a QFLP licence is needed in order to advise on most types of Singaporean capital markets work is giving international firms food for thought. Pathak says: ‘Our practice has not been focused on capital markets but the Singapore Stock Exchange is becoming more popular as we speak as a location to list. We, together with our local counsel relationships, are doing a lot more work for clients drawn to the Singapore Stock Exchange for listing shares.’

One hundred and fifty seven Chinese companies have listed on the Singapore exchange since the beginning of January 2011. Drew & Napier was also involved in the restructuring of China Energy, a People’s Republic of China (PRC) group that is listed in Singapore.

Pathak admits that going head to head with established Singaporean firms is rather daunting. ‘To try and compete with them in their own backyard could prove difficult,’ he says. This may be the reason that most foreign firms concentrate on outbound M&A work, which can be done without a QFLP licence.

Further afield

Many international law firms use Singapore to access clients in the South-East Asian markets, primarily Indonesia.

Indonesia is a resources-rich, expanding market. Some estimates by the IMF put the rate of foreign direct investment as growing at 400% in the last four years. Due to its geographical proximity, Singapore is the jurisdiction of choice for work going into Indonesia.

Kwek explains: ‘We’ve been seeing a lot of the Chinese appetite for resources from Indonesia. And the interest extends beyond Indonesia. Chinese clients are going into Malaysia, Thailand and Vietnam. Anything in the coal or iron space, or even agriculture.’

One of the reasons why Chinese clients feel comfortable using Kwek is that he speaks and writes in Mandarin. According to him, a lot of Chinese clients aren’t comfortable with English. ‘If you want to do Chinese work and can’t speak Mandarin you’re out of the game,’ he says.

Kwek is also keen to dispel the myth that Hong Kong is used for Chinese work. ‘A lot of Hong Kong firms are supporting China on domestic China work. I don’t try to do the domestic Chinese work; it makes no sense,’ he says.

Chinese outbound work represents between up to 50% of Kwek’s practice revenue with companies going into Indonesia, Vietnam and Singapore.

Although foreign firms don’t need a QFLP to perform outbound work, this doesn’t mean domestic Singaporean firms aren’t able to compete. Shook Lin & Bok expanded its China and India practice with the hire of partner Henry Tang from Beijing-headquartered Yingke Law Firm last year and by appointing Azmul Haque as the co-head of its India practice this year. It advises clients on either outbound or inbound investments.

For some firms, outbound work to jurisdictions such as Indonesia makes up a large part of the firm’s revenues in Singapore. Wilson estimates that between 40% and 60% of the firm’s work is Indonesian. He believes that the majority of work international firms are involved in concerns investment into South-East Asian countries. ‘Many international law practices in Singapore are heavily weighted towards Indonesia, with the balance of work involving India and Malaysia and to a lesser degree Thailand, Vietnam and the Philippines. For firms (like ours) that have licences to practise Singapore law in certain areas, Singapore law work is becoming more significant,’ he says.

In fact, Wilson believes that for M&A work between two Indonesian companies, clients will use international firms as opposed to domestic ones. ‘A lot of transactions in Indonesia have international aspects and thus involve international law firms. However international firms are not permitted to advise on Indonesian law,’ he says.

There are many firms with Indonesian alliances. Hogan Lovells recently joined up with Hermawan Juniarto; in March 2011 Norton Rose tied up with Jakarta’s Susandarini & Partners; Stephenson Harwood entered into an association with Christian Teo Purwono & Partners in November 2011; and Herbert Smith has a longstanding alliance with Hiswara Bunjamin & Tandjung that began over ten years ago.

White & Case had an alliance with Ali Budiardjo, Nugroho, Reksodiputro (ABNR) which ended in 2005. One reason cited for the end of the alliance was that it allowed ABNR to obtain referral work from other international law firms. Wilson sees the benefits of an alliance due to the amount of investment going into the region. However, he says there would be a problem finding the right quality of firm to partner with. ‘The number of decent lawyers has decreased because a lot of the big multinationals have moved in and brought in-house counsel with them,’ he says.

Theodoor Bakker, foreign counsel for ABNR, doesn’t see the need for an alliance with an international firm.

‘We had 20 years in exclusive alliances and we thought that gave us enough experience to be by ourselves,’ he says. ‘There are a lot of advantages to being in an alliance but there are also disadvantages as it affects your flexibility and your clients’ flexibility. You are also a bit limited because you have to charge minimum fees and conform to the requirements that large law firms have.’

Bakker explains that because his firm has been in the market for 30 years, clients are convinced that they get as good a deal if not better than they could from the international firm.

During his time at ABNR, Bakker has seen the source of inbound investment change. According to him, the bulk of investment came from the traditional European markets five years ago but there has been a shift to regional clientele. The main investors now come from India, China, Korea and Taiwan.

‘There’s been significant growth from China. The Chinese National Offshore Oil Company (CNOOC) is making massive amounts of investment here. The same is true for Samsung and LG from South Korea. Large proportions of investment into Indonesia are commodity driven and they will buy up participations in oil and gas fields, coal mining and gold mining,’ he says.

However there are some potential pitfalls for foreign firms attempting to get into the Singaporean and Indonesian markets. There are a lot of foreign firms taking an interest in Singapore but there are also some very able Singaporean firms that have been established for a long time. These firms have a well-established client base and can also serve their foreign clients well. There seems to be some doubt that the Singaporean firms are simply going to allow the foreign firms to take the market from them.

‘I wouldn’t want to be based anywhere else right now as an M&A lawyer, this is where the activity is going to be.

Kim Huat Chia is involved in establishing Chinese companies into Singapore with a view to accessing the South-East Asian markets. He acted for China’s Sinochem International when it acquired 51% of Singaporean GMG Global in 2008. ‘GMG has no business in Singapore apart from the fact that it is listed in Singapore but the company is based in Indonesia,’ he says.

One of the advantages Rajah & Tann has over international firms is that it has offices all over the region, including Laos, Thailand and Malaysia, which allows the firm to execute the transaction in the region using local law. But it is also involved in the major international transactions as well. One example was a huge multijurisdictional deal involving Singapore, Mauritius and India in 2010, where the firm acted for Fortis Global Healthcare as it acquired a 23.9% stake in Parkway Holdings for $1bn. More recently the firm was involved in hiving off the non-core assets of Fortis and listing them on the Singapore exchange. This raised $458m and involved Evelyn Wee, a corporate partner at the firm.

But would Rajah & Tann be interested in a merger? ‘We aren’t looking for an international financial merger,’ Huat says. ‘We are financially independent.’ However, he says he is not against working with international firms on an ad hoc basis.

Kwek has a similar view on alliances. Rather than having an exclusive alliance with an Indonesian firm, if Kwek is working for an Indonesian client that has a preferred firm he will work with that firm. ‘I can’t impose who I want to work with. I’ll use the client’s Indonesian law firm and we’ll do it together,’ he says.

Truly global

Singapore is able to service huge parts of South-East Asia, from the thriving economies of Indonesia to jurisdictions with potential such as Myanmar. With China hungry for resources, Singapore is ideally placed as a gateway into these markets.

As clients continue to take their disputes away from local courts, Singapore is set to grow as a hub for international arbitration but the major international corporate work is already there. As White & Case’s Wilson puts it: ‘I wouldn’t want to be based anywhere else right now as an M&A lawyer, this is where the activity is going to be.’

Predictions for the future are all positive. Gill says that the Singapore legal market will continue to remain viable and vibrant. The slowdown in western markets and the eurozone crisis has seen a lot of attention shift to Asia, which shows promise as a growth engine for the world economy in the decades to come. LB

david.stevenson@legalease.co.uk