As the head of the highly experienced India practice at White & Case, Nandan Nelivigi enjoys walking a tightrope. As a dual-qualified India-US lawyer intimately familiar with the Indian legal system and equally expert at executing transactions in a sophisticated Wall Street style, Nelivigi is acutely sensitive to the dynamic tension between constructing deals that are perfect for New York vs. constructing cross-border deals that are perfect for an emerging market, where risk and potential ROI are highly accentuated and need to be delicately balanced.
To mitigate risk exposure in India for foreign investors such as private equity funds, hedge funds, investment banks, and commercial lenders, Nelivigi excels at fine-tuning his energy and infrastructure project deals to protect his clients against unfamiliar hazards such as fraud, corruption, “creeping expropriation,” retroactive taxation, unstable political commitment, and massive infrastructure failure. Nelivigi also represents banks, export credit agencies, and underwriters in the financing of conventional and renewable energy projects in other parts of the world, including the United States, the Middle East, East Asia, and Latin America. His deals have involved some of the world’s largest wind energy farms and conventional power plants.
Nelivigi earned his BA/LLB with honors from the National Law School of India University, Bangalore, and his LLM from Harvard Law School. He is a member of the New York State Bar and the Bar Council of Karnataka, India. He is a member of the adjunct faculty of Columbia Law School.
Clare Cosslett: Where did you grow up?
Nandan Nelivigi: I grew up in South India in a small town about two hundred miles north of Bangalore. Bangalore is the Silicon Valley of India and is where the Indian IT industry originated and is presently located. Bangalore is home to Infosys, one of the biggest outsourcing companies in India.
Cosslett: What is the school structure in India ?
Nelivigi: I went through twelve years of schooling and then went directly to law school for five years. No college in between. My law school was the first to implement a five-year program and I enrolled in the first group of students. We graduated in 1993. Since then, a number of law schools have implemented five-year programs. There is also a parallel system in which students go through twelve years of schooling, three years of undergraduate, and then three years of law school.
Cosslett: You can opt for either system?
Nelivigi: You can but the five-year course has more credibility these days. Medicine and engineering are both five-year programs. Many students who were rejected from these more popular professions would go to law school as a fallback. It was decided that if they made students choose law school right out of high school, they would get students who were more seriously inclined towards the law, and ultimately better lawyers.
The practice of law was once very prestigious in India. The first prime minister of the country, Jawaharlal Nehru, was a lawyer. Mahatma Gandhi was also a lawyer. It is beginning to regain some of that prestige now, although there is a divide between corporate lawyers and the cadre of solo practitioners who go to courts.
Cosslett: In 1961, the India’s Advocates Act banned foreign law firms from practicing law in India.
Nelivigi: To fully articulate their outward position, many Indian lawyers say law is a noble profession in India, whereas law is a business in countries like the United States. They say, “we don’t want to pollute the noble profession with business practitioners.” I do not subscribe to this view. There is some element of protectionism. India will need to decide what is best for its legal system as a whole.
Cosslett: Are there well-trained corporate attorneys in India who represent the other side of the transactions that you are on?
Nelivigi: There are. A number of lawyers have gone back to India after having been trained in the US or UK. There are also very good lawyers graduating from the better law schools in India, and they now have fifteen to twenty years of experience. Other than a handful of lawyers, they do not have many thirty- or forty-year veterans in this business yet, because corporate law practice itself is still very new in India. India only opened up in 1993, so many of the most senior and experienced lawyers are relatively young.
Cosslett: Do you expect that India will open its doors to foreign lawyers in the foreseeable future?
Nelivigi: Early on, many people hoped that the market in India would open up but that hope has been completely destroyed. There is so much internal Indian opposition that the probability of the market opening up to foreign lawyers is quite far away.
Cosslett: There were three international firms that had liaison offices in India: White & Case, Ashurt, and Chadbourne Parke?
Nelivigi: Yes, in 1994 we were granted permission by India’s central bank, called the Reserve Bank of India, to open up a liaison office. The Bank regulates the entry of any foreign company into India, because it regulates the inflow and outflow of foreign exchange. The Reserve Bank was not the regulator of the legal profession, and the courts have now ruled that it didn’t have the power to give these kinds of licenses to legal professionals. It’s only the Bar Council of India which has that power.
Cosslett: Why did you decide to go to law school ?
Nelivigi: I grew up thinking and reading about public figures who were also lawyers. Also, my father is a leading trial lawyer in India.
I also looked up to a number of “senior advocates.” While India is supposed to have a single class of lawyers called “advocates,” in practice, there are various distinctions among lawyers. High courts, the highest courts in each state, and the Supreme Court of India, designate certain advocates as “senior advocates.” Like barristers in England, senior advocates are not allowed to interact directly with clients. Clients brief solicitors. Solicitors brief the senior advocates. Some lawyers designated as senior advocates hold very senior positions in the government. I looked at them, and I said, “I want to be one of those senior lawyers” and a litigator.
I also knew that having a legal education was going to be useful on several different levels. Most of the people who were in senior political positions were lawyers, and I had an interest in politics as well as law. That is why I went to law school. I also got into engineering and medical school. Law was not a fallback profession for me.
Cosslett: The National Law School of India University at Bangalore. Is this the Harvard of India?
Nelivigi: They think of themselves that way. And, in fact, when we started, they sold us the school by saying, “This is going to be the Harvard of the East.” Not just of India … the entire Eastern world. And the school is highly regarded by many South Asian countries: Sri Lanka, Bangladesh, Pakistan, Nepal, Bhutan.
Cosslett: How big is the law school?
Nelivigi: When I started, I was one of fifty-five students, so there were about two hundred seventy-five to three hundred students in the whole school at the end of the fifth year. Tiny. I’ve heard they’ve increased class size to about eighty or ninety students every year, so there are about four hundred and fifty students now. It’s still very small.
It was supposed to be a model school for the other law schools in India. There are about ten schools like it now, which is good news, but they are still an oasis in the middle of a large number of very mediocre law schools in the country. Ten schools make very little difference. I am glad though that there are good schools in India like Jindal Global Law School, a pioneering law school with whom White & Case has a cooperation agreement. We are doing our part to support and promote legal education in India.
Cosslett: Why did you decide to go to Harvard for your LLM ?
Nelivigi: India just started opening up when I was graduating in ’93. Many leaders of the independence movement in India had gone overseas and studied. I’m not one of the elites at all, but a lot of the political elites went overseas and came back. A lot of the senior advocates had gone overseas, to Cambridge and Oxford mostly, and come back to India. And the people with high standing were those people. Of course there were others who had not gone overseas.
Cosslett: There was not a history of Indian intellectuals coming to the United States to be educated.
Nelivigi: It has changed quite a bit in the last twenty years or so, especially with the information technology revolution. That’s really being driven by the US. We’ve suddenly discovered each other.
My thinking was twofold: “If I want to model myself after some of these more respected lawyers, then I need training at an international school, Oxford or Cambridge.” And then the Indian economy started opening up and I said, “Well, if I come back, I’ll at least have learned the tricks of the new trade that is going to take root in India going forward.” We had no idea what corporate finance was in India at that point in time. The stock market was nonexistent in any meaningful way.
I wanted to learn, “What does all this mean? How do you finance a big infrastructure project? What does it mean to do an M&A deal or an IPO?” All of these things were just words that I didn’t really understand. I hadn’t studied them in law school, even though I supposedly went to the best school. Law wasn’t taught in that fashion. So I planned to get that experience and then go back to India.
Cosslett: And why did you go to America and not to England?
Nelivigi: I applied to both US and UK schools, and I was admitted in both places. I chose to go to Harvard. I thought that the way law was taught in the US was more progressive and probably comparable to the way I had studied in National Law School. We had a number of professors from the US, one of whom was from Berkeley. He offered me a fellowship in the US after I finished my LLM. I figured it was easier to do my LLM in the US and then do the fellowship for three months in California
Cosslett: What did your dad say about it?
Nelivigi: He really pushed me to go overseas. He had wanted to go to Harvard himself but never had the opportunity. I was born to my father when he was much older. He’s eighty-three years old now, and he’s still practicing. He goes to court every day. He modeled himself after the old-time lawyers with high ethical standards. He came to visit me when I was at Harvard . He loved it and was living vicariously through me when I was there. He was very proud.
Cosslett: When did you decide not to go back to India?
Nelivigi: At the end of doing the LLM program, I thought, “Wouldn’t it be nice to gain some experience in a law firm?” I had decided that I wanted to do corporate law more than litigation, as it was more relevant to what was going on in India. I thought, “I’ve got to work in a corporate law firm.” I planned to learn whatever I could in one year and then go back to India.
I got a job with White & Case for nine months in an international lawyers’ program that the firm used to have then. It was for foreign lawyers who were going to be at the firm for a few months and then go back to their home jurisdiction.
White & Case said, “We’re going to be opening an office in India very soon, so you can go back and join our office there.” But that didn’t happen.
Cosslett: White & Case at one point did a lot of domestic law work. They exploded internationally in the mid-eighties.
Nelivigi: Under the leadership of Jim Hurlock, the firm dramatically expanded its overseas practice by doing a lot of sovereign debt restructuring. By the time I joined, it was one of the few international law firms that we heard of in law school. And for me, it was an obvious choice, with my international background and my desire to go back to India. White & Case was one of the pioneers in doing deals in India. It was a natural fit for me.
Cosslett: What happened at the end of nine months?
Nelivigi: At the end of nine months, they hadn’t yet opened their office in India, and they said, “Maybe it will take one more year. Why don’t you stay another year?” The other thing that happened that was life-changing was that on the first day I walked into the office, White & Case was working on the biggest foreign investment in India at that time: the Dabhol Power Project . The Dabhol Power Project was one hundred–percent owned by Enron, GE, and Bechtel. These three were the flag-bearers of the US independent power sector at that point in time. They had gone to India to set up this massive power project when India was opening up the economy and the market for it. And White & Case had been hired to represent all the lenders for that project, both Indian and international.
I walked in and was staffed on that transaction. This was the most high-profile deal in India in the nineties. And people still talk about it.
Ultimately, the project didn’t go well. It was built. And then there was a change of government and the new government cancelled it. The new government said, “We’ll throw the Dabhol Project into the Arabian Sea.” There were allegations of corruption in the award of the project and when it was cancelled, India became a pariah for international investors during the mid-nineties.
An arbitration petition was filed in London. The state government came back to the negotiating table and the project got renegotiated. Concessions were made on the electricity price, and the project got back on track and was expanded from approximately fourteen hundred megawatts to about twenty five hundred megawatts. In 1999, there was another change of government followed by another cancellation of the project. There was another big international outcry and another international arbitration. Around 2001, Enron collapsed and went into bankruptcy. Then the deal collapsed. Yet another restructuring followed. The international investors got out. They sold their stake to Indian lenders. Finally in 2004, the project was transferred to Indian lenders.
Unfortunately, the power problems haven’t been solved, but this is a gold-plated twenty five hundred megawatt power-project sitting in India that was built by international developers. The government kept cancelling it because it didn’t make sense economically.
Cosslett: Was this the first big foray of foreign investment into the country?
Nelivigi: The first of the first. It’s unfortunate that we’re talking about the Dabhol Power Project 15 years later when this project is not running up to its full capacity, and the country is having a ten-percent shortfall in power.
Cosslett: Why is Dabhol not running at capacity?
Nelivigi: The fuel needed to run the plant is not easily available. The plant is capable of operating on natural gas, naphtha, and diesel. And prices of each of those fuel sources keep varying. Enron had negotiated twenty-year supply contracts with Oman and Abu Dhabi, where natural gas was going to be liquefied and shipped to India from there, re-gasified, and put into the power plant to run the turbines. When they cancelled the project, they cancelled those twenty-year contracts too. And when they all woke up and tried to find gas around the world, there was not enough gas available.
Ten years ago, when this was being restructured, 1999 through 2002, gas prices were very high. There was not enough capacity in any of the gas terminals around the world, even in Qatar or Australia. Everybody was in need of gas, and India just couldn’t find the gas to supply it on a reliable basis. It’s a tragedy.
Cosslett: How long were you involved in this transaction?
Nelivigi: With some interruptions in between for a period spanning about ten years. I worked on it the very first year and I was flying in and out of India. The deal was setting precedents and was on the front pages of all the newspapers. I said, “Wow! This is fascinating. Why would I want to go back to India? I’m dealing with India. I’m looking at it from the perspective of an outsider, but I’m still an insider.” I was able to make a unique contribution when it came to dealing with issues from both perspectives.
Cosslett: The best first-year associate they ever had.
Nelivigi: It was perfect for me. In the mid-nineties, we did about twenty power project financings in India. We were representing all the big international financing corporations, Asian Development Bank, International Finance Corporation, all the commercial banks, and some Indian and international developers as well. It was very exciting. I had some good mentors. And so I changed my mind about going back to India.
Cosslett: It sounds like you walked into the firm and hit the ground running. You didn’t go through the normal transition of junior associate to mid-level associate.
Nelivigi: I hit the ground running and I got a lot of responsibility very quickly. And, as luck would have it, the first time the project was cancelled, it was reconfigured and expanded into Phase 2. I was the senior associate running Phase 2 when I was in my fourth or fifth year. Pretty soon, I was the associate with the longest history in the transaction.
Cosslett: Was there a designated India practice at the firm?
Nelivigi: There was a thriving India practice out of the Singapore office at that point in time with about five to eight lawyers. I wasn’t part of the core India practice group then. I was part of the project finance group. The only reason I was doing the Dabhol deal was that I thought it was the largest project finance deal the New York office was handling at that time. It was a classic international emerging market project financing. It was one of the best runs we have had because the infrastructure practice was so big in India. And that dried up when Dabhol collapsed. International lenders exited the Indian power sector.
They said, “Forget it!” to India. “There is too much political risk.” And so that work collapsed. In between the restructurings, I was doing a bunch of non-Indian deals, and in the late nineties when the Indian infrastructure scene collapsed, I started doing US project financing.
Cosslett: Project financing isn’t always just in the energy sector.
Nelivigi: You can build a sports stadium on a project-financing basis. You could build toll roads or telecom networks, but the power sector is particularly well suited for project financing because of long-term contracts for sale of power on a fixed-price basis. That makes it ideal for project financing.
Cosslett: Because you have a stream of revenue to show the investors?
Nelivigi: Fixed streams of revenues—that’s what the lenders in project financing want: stability of the stream of revenues. And long-term fixed-price contracts are the most financeable contracts.
Cosslett: I know I’m going to be sorry I asked this question. Will the firm create a structured security based on a stream of revenue from a project finance deal?
Nelivigi: Some firms do it. The principles are similar, but in project financing, you usually have a single asset. Or, if you have multiple projects in one company, it’s a single portfolio financing. Lenders have much more direct linkage to the security—to the asset—when the lenders are financing it. In a collateralized finance, lenders take security a couple of levels up.
Cosslett: Corporate America has created a seamless web of product that doesn’t appear to have a beginning or end.
Nelivigi: That’s what makes the capital markets efficient.
Cosslett: Until they go awry.
Nelivigi: The fact that everything is very interlinked also makes them very risk-prone.
Cosslett: What firms do you see on the other side of the table in project finance deals?
Nelivigi: We see Milbank Tweed, Latham & Watkins, Sherman & Sterling and a few others. When we were growing internationally, we reduced our involvement in the US project finance market for a few years. And so the major players in the US market were Milbank, Latham and Shearman & Sterling—not White & Case. We have now gone back in the US market in a big way and are on par with those firms on domestic project financings.
Cosslett: You were an associate at the firm for nine years and were made partner in January of 2004. Did you ever have doubts that you were going to make partner? Did you have a Plan B?
Nelivigi: I thought about a Plan B frequently . We’ve all been there.
Cosslett: A lot of people don’t make it, but some people do. I think everyone has that moment of panic because so much is out of your control. You could have done the best work ever for nine years, and the firm could decide they don’t want to take the practice that way.
Nelivigi: If Dabhol had not been cancelled, if Enron hadn’t gone bankrupt, if the Indian infrastructure story hadn’t gone down, I might have become a partner several years earlier purely on the back of India practice. But that was not the case, and the India practice had pretty much receded into the background by the time I was up for partnership. So I became a partner as a member of our global project financing practice.
Cosslett: I hope your recruiter didn’t say this, but the market for people with your expertise is not huge. Project finance is a practice that is fairly unique to sophisticated law firms. You can’t really go to Dunkin Donuts with that background.
Nelivigi: You’re absolutely right. You can’t go in-house. Most of the project finance work gets done by outside counsel. In-house lawyers don’t specialize in project finance. They oversee it. A lot of the big corporate firms don’t even do project financing or do very little of it. Now it’s become a little bit more fashionable.
Cosslett: And specialty area is something to think about when you plan a career path. You might be putting all your eggs into one basket. Obviously, for you, it was an excellent choice. But certain practices can limit your mobility.
Nelivigi: As a junior lawyer, project financing is very sexy. You’re dealing with emerging markets, political risk, economic risk. You are not just dealing with the documents. You’re dealing with macro political and economic factors. You’ve got to look at the big picture. The project finance practice in White & Case is the most sought-after practice by the summer associates and first-year associates. They don’t realize what is in store for them. Lawyers in other practice groups, like M&A, are much more transportable.
Most students understand what M&A is. Most students don’t fully understand what project finance is. People who have an analytical aptitude and some interest in public policy and international relations tend to get drawn towards this specialty.
Cosslett: Your practice falls into three areas: representing lenders and developers in complex energy infrastructure, real estate, and project finance transactions around the world. Advising Indian companies in connection with their investments and capital-raising activities outside of India. And, advising foreign investors and commercial lenders in connection with their investments in India and loans to companies in India.
What sort of project finance work are you doing in the United States?
Nelivigi: With regard to US project financings, one of my favorite transactions was the financing of wind farms. In 2003 and 2004 we represented the initial purchasers—the underwriters—who financed wind farms by selling bonds issued by these wind farms. We helped to finance two groups of ten separate wind farms that were developed by one of the world’s largest developers of wind farms. The wind farms were located all over the country, in some seventeen states.
Last year I worked on a solar project in Austin, Texas . I also took the lead on two natural gas-fired power projects in California. These projects were all very exciting. Many renewable energy projects were being done largely because of the incentives that were being provided by the federal government. There was a cash grant of thirty percent of the value of the project being given by the federal government.
Cosslett: And, at the end of the day, we got wind farms , which is excellent.
Nelivigi: In the last two or three years, most of our project financing activity in the United States has been around renewable energy. Last year the cash-grant program expired for most projects and there is something called the Production Tax Credit. For every kilowatt-hour of power that you generate, you get a credit in your tax obligations of about 2.2 cents per each kilowatt-hour of electricity in 2012. So if you have taxable income, you can reduce your tax liability by generating wind or solar power. Big corporations do it. Farmers do it and bring a wind turbine onto the farm, onto their house, at the top of a hill, or they create a solar farm.
A lot of the projects in the United States now have become quite standardized, so the work doesn’t always have the kind of complexities that international projects have—although we did have big political risks in California in the early 2000s when California had a power crisis. A big electric utility in California went bankrupt and was restructured. The Department of Water Resources cancelled a whole host of power purchase agreements [PPAs] from independent power suppliers, because they were too expensive.
Déjà vu for me. California was cancelling PPAs. We restructured and refinanced a lot of the projects.
Cosslett: Let’s talk about the second part of your practice: Indian investment out of the country.
Nelivigi: There were a number of Indian companies that went overseas and started buying up companies. For example, the Tata company out of India bought Jaguar Motors. They also bought Corus Steel, which was the biggest European steel company. Now I understand the biggest employer in the United Kingdom is Tata. This is something of a role reversal.
Cosslett: Is there any industry segment that’s particularly interesting to India in terms of financing?
Nelivigi: Natural resources, mines and metals, oil and gas. A lot of Indian companies have been going overseas trying to buy up natural resources. For example, we represented a client in India that bought a stake in a Canadian publicly traded company that had coal mines in South Africa. We represented a company that bought a fifty-percent stake in an international power generating company, which had assets in the US, Mexico, Philippines, Australia, United Kingdom, and the Netherlands. The stake cost in excess of $1.3 billion.
That was one of the deals I led. It was perfect for us, perfect for the firm, perfect for my power background, perfect for India. All things came together for that deal. And then the client turned around and sold it to a Chinese state-owned buyer. It was fascinating. The management of the target was in Boston. It was incorporated in the Netherlands. The assets were all over the world. The seller was Indian. The buyer was Chinese. And most of the negotiations were happening in Hong Kong.
We also represented an Indian company that was buying oil and gas assets in Brazil and Argentina that were owned by an Italian company. We looked at those assets and did a lot of diligence. Ultimately, the client decided not to go forward with it because the Chinese companies came in and bid more. There is a lot of international competition in this area.
Cosslett: Were you working 24/7 during these deals?
Nelivigi: I was in Hong Kong every other week. The trend I was trying to ride was this wave of Indian companies going overseas and buying. Of course, the bigger trend is the Chinese companies going overseas and buying, which is unfortunately not part of my practice.
Cosslett: Your practice seems to blend private and public international law.
Nelivigi: The Dabhol project illustrates how a private international transaction can involve public international law. When the project was cancelled and the disputes arose, the government started cancelling licenses. The investors made the argument that this was essentially expropriation—not a classic expropriation, but a constructive expropriation, also called a “creeping expropriation.”
Cosslett: Did they make that up?
Nelivigi: It’s become a term of art. And there was a political risk insurance policy that was obtained by the equity investors from the Overseas Private Investment Corporation [OPIC ]. A political risk insurance policy says essentially, “If there is an expropriation, the insurance company will pay the insured.” And OPIC said, “This is not expropriation.” The definition of what constitutes an insurable claim in connection with expropriation depended on whether the relevant government action was in violation of public international law.
The parties went into arbitration, and the arbitration panel had to consider whether this was a violation of public international law. So this transaction transitioned from private international law to public international law.
It happens all the time, especially when the bilateral investment treaty claims come up
Cosslett: Let’s talk about the third part of your practice: international companies investing in India.
Nelivigi: In 2005, India opened up its real estate sector to foreign investment in a limited way, and now I have significant experience advising investors in that sector. A lot of the real estate private equity investors entered the Indian real estate market at that point of time. And I rode that wave.
Cosslett: What sort of real estate were your clients investing in?
Nelivigi: All types. Residential, office, malls, storage, warehouses, logistics. Any type of real estate you can turn into a rental stream or sale proceeds. Hotels, tourism facilities, convention centers. We advised clients on a lot of those transactions with help from Indian counsel.
In areas other than real estate, we represented a number of US corporations buying stakes in India. We represented a large Internet company when they bought a stake in one of the Internet companies in India. We represented a big pharmaceutical company when they did a joint venture with a company in India. We had a client who was looking to invest in the oil and gas and power sectors in India. So I have worked with a lot of inbound investors going into India.
Cosslett: How do you best protect the interests of your clients when they are investing in an emerging market?
Nelivigi: The law is always changing and evolving. Recently, there was a big controversy in India when legislation was enacted that imposed taxes retrospectively on deals that were done ten years ago. That’s the kind of stuff our clients worry about all the time. Now, you can’t protect them against arbitrary changes in law. But what you need to do is think about the possibility of things like that happening, and see if you can mitigate the risk by passing it onto the right party. You can’t always do that, and quite often the answer remains only in a risk-and-reward analysis. If people are investing in India, they have to be prepared for that risk, but they do count on a much higher reward than in a more developed market.
I think about my role here as being a lawyer who is intimately familiar with the Indian legal system : knowing what can work and what can go wrong, and bringing that knowledge into the mix of doing deals in a sophisticated New York Wall Street style. But, at the same time, not always trying to prescribe the Wall Street model for an emerging market. It’s a constant struggle to balance the two: having a perfect deal versus a deal that works for the situation, for the reality that we’re dealing with. The tendency for a lot of people is to go one way or the other, and my role is to be able to balance, by having that perspective from both sides.
And how do you best protect your client? Quite often, there are unique areas in which things do go wrong, and you’ve got to have your finger on those and figure out the right clauses to put in your documents. Let me give you an example. In these investment deals, we always insist on offshore arbitration provisions: if there’s a dispute, we don’t go to Indian courts.
Cosslett: If you sue or are sued, will you ever find a remedy in the Indian courts ?
Nelivigi: Indian courts are very, very slow so you don’t have much of a remedy if things go wrong. The laws generally exist on the books, but it’s very hard to enforce them because nobody has the time, patience, or resources to go through the process.
We would rather not be in that situation, so quite often we insist on offshore arbitration. We also build provisions into our documents, which disincentivize parties from getting into a litigation. Certain contracts provide for change of economic control if certain bad things happen. Then they never do the bad things.
Having started off wanting to be a litigator, I do everything possible to avoid Indian courts now.
Cosslett: What you’re saying is that there are certain things that you can protect against—there are certain ways to draft documents to minimize exposure—but, in the long run, you can’t protect against everything because India is an emerging market. Your role is to advise the client as to the risk and allow them to decide if it’s worth the ultimate reward.
Nelivigi: We tell them to avoid litigation. They can’t always do that, so that’s why we put in the arbitration language. We tell them to avoid expropriation. That’s not in their control, but that’s why we tell them to choose the right jurisdiction from which to make the investment: a jurisdiction where you have the protection of a bilateral investment treaty.
Cosslett: Does a fraudulent business in India look like a fraudulent business in the US?
Nelivigi: It takes an emerging markets lawyer to really worry about fraud. We really don’t worry too much about corruption in the vast majority of our deals here in the US—not in corporate deals. When you do deals in India, your first thought is, “Where can risks arise if, for example, some rogue employee is caught in a bribery scandal?” What if we get caught up in the Foreign Corrupt Practices Act? These sorts of issues are common in the emerging markets practice.
Cosslett: There are requirements in India that foreign investments in certain industry sectors involve a significant portion of local manufacturers. What effect do these requirements have on foreign investments?
Nelivigi: There is a trend all over the world these days to try to promote local goods and local employment. And it’s true for the US as well. In India, you see this in the retail sales sector. There is a lot of opposition to foreigners setting up stores in India—like by Walmart, for example. The government is saying that they will allow a limited number of foreign retailers into India, provided they procure thirty percent of what they sell from within India. So, for example, when IKEA comes into India, they have to indigenize thirty percent of the products they sell in India.
There are some sectors that are just not open to foreign investors, like casinos or any other form of gambling. The insurance sector, for example, is one where there are limits on how much foreign investors can own. You can’t have more than twenty-six-percent foreign ownership. In real estate, a foreign investor just can’t go and buy a built-up office space. They can only invest in a new construction. The government wants new capital. They don’t want people coming in and speculating.
Cosslett: Let’s talk about what’s been going on in India with 9.5 percent of the world’s population without power for three full days. Six hundred and seventy million people. How will the inadequacy and unreliability of the public power grid affect foreign and domestic investment, and will it hobble growth prospects?
Nelivigi: One of the biggest constraints for India’s growth is lack of adequate infrastructure of all types: whether it is adequate roads for transporting goods and people, whether it’s railway lines or airports or seaports. But the most critical of these issues is the power. There is not enough power. And this has been a problem that was identified a long time ago, and they’ve tried to solve it for the last twenty years. Unfortunately, they have taken one step forward and two steps backwards every time they’ve tried to solve this. And I think what has happened recently—the national blackout—simply reflects the lack of any serious efforts to solve the fundamental problems.
Growth has already been affected in India. The growth projections have come down from eight and nine percent to five and six percent. The US would love to have five-percent growth, but the US is starting from a much higher base. It’s not really comparing apples to apples. In terms of how it affects international investment, it’s not like the problem is unknown. Everybody knows the problems with the Indian power sector. But it is not good to see them on the front page of The New York Times.
If somebody is looking to make investments in India, it’s going to be very difficult to defend that in a board meeting if someone asks “Why are we putting $100 million in this country, where you have these big risks?” But if you’re going to invest in the power sector in India, maybe they’ll stand up and say, “Hey, there’s an opportunity there.”
Cosslett: The power sector has been privatized in India?
Nelivigi: Oh, definitely—but when you’re trying to restructure and reform a sector like the power sector, it cannot be done overnight. It’s a big problem because you can’t turn the switch on and say, “We’ve privatized it.” What the government really needs to do is dismantle these state-owned distribution companies and make them healthy, or sell them off to the private sector and put regulations in place to ensure that the private sector does not overcharge people. You’ve got to transition properly and India hasn’t been doing it. The policy objective has already been set but getting there in a chaotic democracy like India’s is going to take a while.
Cosslett: Looking at your crystal ball, when do you think they’ll have a completely reliable power supply in India?
Nelivigi: I think it will take at least fifteen to twenty years. If I’m wearing my optimistic hat, I would say ten years. Pessimistic hat, thirty years or more.
Cosslett: The other big issue for foreign investors in India is corruption. Can you talk about that?
Nelivigi: It’s a pervasive problem in India. But the good news is that there is a lot more awareness of the fact that it is bad. For a long time, it was simply accepted as a way of life, of doing business in India. A positive side effect of globalization and economic reform and growth is that it has turned the growing middle class into a constituency for good governance and for continuing economic reforms.
As part of that, many people in the middle class are not willing to tolerate some of the older problems, such as the electricity supply issues and corruption issues. They are coming to the surface. There is a lot of internal strife, opposition, and pressure being brought to bear on the government to recognize and solve the corruption issues. But it’s a big structural problem. And a lot of people who are benefiting from and dependent on corruption on a day-to-day basis are those who have been charged with eradicating it. It becomes a big problem for India to attract foreign investors who do not want to have to deal with these kinds of issues.
Cosslett: Foreign investors who don’t want to deal with them? Or don’t know how to deal with them?
Nelivigi: There are some companies that will say, “We know that the problem exists, but we are not going to get involved in it. So we’ll go in and invest. We have a very strong compliance culture, and we’ll deal with it. We’re going to turn away some types of businesses where we are being asked to bribe people.” There are other companies that go in there and say, “Well, this is part of life. We are generally clean, but sometimes we have to compromise.” And then there are other people who will say, “There is no way to do this business, and we are just not going to enter this country because of this problem.”
I think India is losing a lot of investments because of that third class of people, who are not going in there. And US businesses are not as competitive as they could be, because they don’t have a level playing field. There are a number of the players who are taking advantage of the broken system, which US companies, rightly, are not taking advantage of. We would advocate that they not try to take advantage of it. But until India fixes the problem, we will continue to be on a weak footing. Not only is India losing people who don’t want to enter the country because of its problems, but those who don’t have the same competitive footing are not doing as much business as they could be doing otherwise in India.
Cosslett: How has your practice been affected by the recent economic downturn and by the current economic situation in Europe ?
Nelivigi: For a period of time, India was seemingly immune from it. When everything was falling apart, India seemed to be standing upright, in large part because it is very underleveraged. Most of Europe’s problems are due to it being overleveraged. Most of the problem in the US was overleverage.
The Indian mentality is very conservative when it comes to borrowing money. Most people don’t want to borrow money. Indian regulators are very conservative. India’s central bank didn’t allow banks to lend to certain types of borrowers and certain types of assets. So Indian regulators have been patting their own backs. But the reality is: yes, they’re conservative. Yes, India’s financial problems were not as bad as Europe’s—but it’s like being proud that your son, whom you have never let out of your house, has never had an injury.
I’m not a big fan of that regulatory model but at the end of the day in bad times like we had in 2008 and 2009, India looked great. Deals were happening. We were busy. But now it has caught up. A lot of the growth in India in the last five years was foreign investment-driven. And as the European and US investors had problems at home, they’ve pulled back from emerging markets. As risk aversion to emerging markets has increased, they have pulled back from India, and therefore new investment has gone down. Private equity investors, in particular, who are looking at a four- to six-year horizon for exit from a business, have stepped back big-time because that time frame for exit is no longer realistic in India.
Generally speaking, people are getting out. Therefore, the prices are coming down. There are some people with more risk appetite still going in—but not in a big way and certainly not at the levels that we saw before 2009. There are a few of them, sophisticated ones, who are getting in now. If the problems get solved in the next three years and the prices start going up, that would be great for them.
Cosslett: What secular trends d o you perceive as being the most important, worrisome, or promising when projected to the future of your practice area?
Nelivigi: India is going to be a growth economy no matter what. It’s going to be an emerging market with ups and downs. The way I look at it—and what I tell my clients—is: when times were good, the good things were being exaggerated. When times are bad, the bad things are being exaggerated. To my mind, the secular trend is a growth trend. And so this practice, in the long run, can only grow. There may be another year of slow down, or another year of extraordinary growth. But when you average it all out, it’s a healthy growth trend.
Indian companies also have become a lot more sophisticated. They have international ambitions. And while the macro-growth rates have fallen, there is still a tremendous domestic demand in India. There’s a growing middle-class population. The cultural norms are changing dramatically. The joint Hindu family structure where uncles, aunts, nephews, nieces, fathers, and grandfathers all lived under one roof, is breaking up. The family unit is becoming more nuclear. In many households both husband and wife are now working, so income levels are rising. Consumer demands are also rising because of this change in the extended family structure. People need their own apartments, and their consumption has gone up. That’s a huge social and economic shift and that trend will continue.
There are a number of companies that are still growing at an enormous pace in India—especially those that are driven by consumption such as restaurants and businesses specializing in consumer goods such as textiles, clothing, and jewelry. Construction, infrastructure, and cement. Wood, coal, and fuel. All these sorts of things. There is a tremendous demand that will continue to grow. And so these companies will continue to do their international deals and will need to continue to raise capital internationally. All of those trends only help my practice.
Cosslett: Are there issues of professional responsibility that come up specific to an India practice?
Nelivigi: As we discussed, India now prohibits foreign lawyers from practicing in India. The contours of what is permitted and what is prohibited are still being defined and remain very unclear.
A recent dispute has arisen about whether flying in and out of India on a temporary basis as we do for meetings—where we don’t advise on Indian law, but advise only on New York law—constitutes practicing law in India. The Indian government, when it is selling off its stakes in government companies to foreign investors, needs advice on US securities laws. They invite us to visit India. Certain Indian lawyers are arguing that this is practicing law in India in violation of the Indian law. If you step foot in India and practice any form of law, they’re saying that. So you’ve got to really be conscious about the boundaries of what you can and cannot do generally in an international practice, and certainly in India.
Cosslett: In terms of your US practice, are there any professional responsibility issues that come up?
Nelivigi: A US attorney needs to be conscious about not practicing the law of states in which he or she is not admitted. If you are not admitted in California, for example, it is not appropriate to advise on California law. In the US, issues about ethical behavior in a corporate practice generally revolve around conflicts and issues of good faith. Are you fully disclosing everything when you have a hard-fought negotiation? Is this fair play or not? The line between negotiations and ethics sometimes raises issues, but those are generally gray areas.
The lines are sometimes starker in an international context because different legal cultures view ethics differently. The enforcement of ethics in India is not at the level it should be. Ethics rules are certainly on the books. The rules are there but the enforcement is not there, and therefore there is a tendency and temptation for lawyers to take advantage of the lack of supervision. There are a lot of good ethical lawyers, but you can’t assume they are all above reproach. So, unfortunately, you always start from a position of figuring out the bona fides of the person on the other side of the table. This can be a real obstacle in establishing relationships and doing business. Thankfully, we don’t worry about it too much with most of the lawyers we deal with.
Cosslett: Isn’t it a good thing for a lawyer to have that degree of skepticism?
Nelivigi: Sometimes, in an emerging market like India, we come across as being naïve. When I say “we,” I’m wearing my New York lawyer hat. Indian lawyers are so savvy, they will always figure out the angle. New York lawyers are savvy—too, in a different way. We assume some basic canvas that we’re playing on. But in India, there is no canvas. It’s a rough turf.
Cosslett: What advice can you give law students or practicing lawyers considering a career change about how to best position themselves for practicing as an international lawyer?
Nelivigi: I think you need to start by being a good lawyer. Period. You can’t start out by being an international lawyer. All good international lawyers are first and foremost good, basic commercial lawyers. I have had the best training by learning to be a good New York lawyer. And then add on to that the international component. My advice to law students and anybody else starting out in this career is that you’ve got to master the fundamental technical skills—the basic analytical, writing, drafting, negotiating, and presentation skills. It’s easy to add the building blocks on top of that foundation.
I also think you have to have the aptitude. You have to have that interest in looking at diverse cultures. You can’t get too spoiled by growing up in the New York culture. That’s the only caveat. First, go be a good New York lawyer, but don’t get too comfortable in how well the system works. You’ve got to have the ability to really appreciate the imperfect systems—and actually enjoy them. I thoroughly enjoy how challenging some of these systems are, because quite often the New York practice becomes standardized. Everyone in our practice knows what everyone else is talking about.
Cosslett: Everyone is sophisticated.
Nelivigi: Everyone is sophisticated. There are no unexpected issues. There are difficult negotiations, yes, but the same issues comes up. In an emerging markets practice, we’re talking about, “Are they going to expropriate?” You’ve got to be alert for really crazy problems—even for just outright fraud. How do you deal with it? And you have to factor all of that into your documents. When you come back to your New York practice from that angle, you’ll be that much better prepared to think about how things could really go wrong in a bad situation. No matter how good the New York practice is, things still go wrong. There is fraud here. Remember Madoff?
Being an international lawyer has helped me become a better New York lawyer, and being a good New York lawyer helped me become a good international lawyer. So, hopefully it makes for an all-around good lawyer!
Cosslett: A perfect conclusion.