Regulatory Framework

Legal, professional costs outpace net revenues for corporate India

At a time when India Inc is trying hard to curtail cash outflows, legal and professional expenses of firms continue to grow at a faster pace than net revenues.

At a time when India Inc is trying hard to curtail cash outflows, legal and professional expenses of firms continue to grow at a faster pace than net revenues. In FY15, the overhead expenses, which generally comprise fees paid to lawyers, consulting accountants and business consultants, grew 11.7% to reach R18,720 crore for the BSE 500 universe.

In fact, the combined legal expenses of 415 companies from the BSE 500 universe for which comparable data are available has been increasing at a faster pace than both the topline and net earnings in the last five years. While the total legal expenses grew 18.5% CAGR between FY11 and FY15, aggregate revenue and net profit grew at a lower rate of 14.7% and 4.6%, respectively, during the same period.

Interestingly, sectors such as pharmaceuticals, refineries, banking & finance, infrastructure developers and information technology account for more than half of the total legal spends in FY15. Experts say the reasons for large legal and professional expenses would normally be company specific, though for certain industries reasons could be linked to the nature of their business.

According to Ashish Gupta, partner, Walker Chandiok & Co LLP, being a regulated sector pharma spends heavily on legal consultants for regulatory filings/defending patents, responding to litigations from innovators (for generic companies). “Companies from IT and finance space may hire professionals as retainers and their costs may be classified as legal and ‘professional’ expenses as well”, added Gupta.

The legal and professional fee of Cipla and Aurobindo Pharma grew over 40% since FY11 to R259.32 crore and R221.73 crore, respectively, whereas the spend by Lupin rose 30% to R311.5 crore. Though Software firms TCS and Infosys reduced their legal spending by 3% and 16.5% respectively in FY15, these firms still feature among the biggest spenders in terms of legal charges. The legal and professional fee of Larsen & Toubro and GMR Infra has trebled during the last five years, putting the infra sectors as the fastest growing among the six sectors with a CAGR of 27.8%. In fact L&T is the third largest spender in the universe with an outgo of R599.89 crore in FY15.

The largest private sector firm Reliance Industries that is under arbitration with the government over the pricing of gas it produces, continued to be the biggest spender in legal charges. The oil & gas major has spent R1,242 crore in FY15 against R1,184 crore last year. Lawyers point out that in last two years law firms have increased their fees. Also unlike in the past where legal help was sought only at the time of litigations, now the services of legal firms start from the initial stages, including drafting agreements.

“Also we can see a noteworthy increase in arbitration and penalties imposed by both domestic and foreign authorities” said a corporate lawyer.

Fortis Healthcare, which incurred R767 crore as legal charges, became the second biggest spender. Other companies with high spend on legal matters include Wipro (R368 crore), GMR Infra (R356 crore) Dr Reddy’s Labs (R347 crore) and Motherson Sumi (R331 crore).

In several cases, where companies undertook some merger or acquisition activity, such costs have also gone up. For example, legal expenses for Kotak Mahindra Bank, which acquired ING Vysya Bank at the end of the last year, rose by 28% to R395.41 crore.

Only those costs directly relating to investments that may be capitalised as cost of investments do not get accounted as legal and professional expense. “Industry practice has been to classify expenses relating to M&As as legal and professional expenses, if charged to profit and loss account,” said Gupta.

The article appeared in the Financial Express. The article can be found here.