A regulatory change lands in one jurisdiction and is reported as being about a second. Law firms in both then assume the work is theirs, and frequently neither is right. The party who has to do something about it sits somewhere else again.
A surprisingly common error, it is not inexpensive. A practice reads a development, produces analysis addressed to the market the rule appears to concern, receives no instructions, and concludes that the corridor is dry. The corridor was not dry. The mandate was three links away from where all the discourse was aimed at.
Four positions, usually four different people
Any cross-border regulatory change creates a short chain, and it is worth separating the positions on it before deciding whose problem it is.
There is the party the rule addresses. There is the party on whom an obligation actually falls, which is often not the same, because obligations tend to attach to the stakeholder inside the regulating jurisdiction rather than to the stakeholder the rule is aimed at.
There is the party who can cure the problem, which is usually the one who controls the documentation part, for example a shareholders agreement, a fund’s constitutional papers or a supply contract.
And there is the party who pays for the failure, which is usually holding the asset when the position is discovered.
Any cross-border regulatory shift splits responsibility across four distinct roles: the target of the rule, the entity legally required to report, the party holding the pen to fix the contracts, and the stakeholder carrying the financial loss if a breach occurs. Where all four sit in one jurisdiction, the analysis is trivial.
When these roles span multiple jurisdictions, the most lucrative legal mandates rarely go to the law firm advising the target of the rule. They go to counsel representing the parties who control the documentation and bear the financial risk.
A worked example
India amended Press Note 3 in March. Investments carrying non-controlling land-border beneficial ownership of up to ten per cent may now use the automatic route.
The rule is addressed to capital from India’s land-border neighbours, so the natural assumption is that the mandate sits with firms serving that capital. It does not, for two reasons:
- The Department for Promotion of Industry and Internal Trade clarified the following day that entities registered in those countries, and their citizens, still require approval without exception. So the entities the rule is ostensibly about are outside the relaxation entirely. Nothing changed for them.
- What changed is the position of offshore vehicles in Singapore, Mauritius and Cayman Islands carrying a minority of that beneficial ownership. They have gained access to the automatic route, and with it a condition that has to remain satisfied for as long as the investment is held, on two limbs, one of which is a legal characterisation rather than a percentage.
Now place the four positions. The rule addresses land-border capital. The reporting obligation falls on the Indian investee company. The party who can cure a drift is whoever controls the fund and shareholder documentation, which is the general partner acting through its offshore counsel. And the party who pays is whoever is holding the investment when a buyer’s counsel or an underwriter’s counsel finds the position in diligence.
Three of the four are offshore fund counsel and their clients. One is Indian. None is in the jurisdiction the rule is named after.
The diagnostic
Three questions, asked of any regulatory change before deciding whether to write about it or to whom:
- Who is bound, as distinct from who is discussed. Rules are reported by reference to their target and drafted by reference to whoever the regulator can reach.
- Who holds the document that would have to change. That party is the one who receives the instruction, because curing the problem means amending something.
- Who is exposed at the point of discovery. That party is the one who pays, and is usually the one who moves first once they understand the position.
Where the answers point to a jurisdiction the firm has no relationships in, the honest conclusion is that this particular change belongs to someone else.
Which says nothing about the next one
That conclusion is about the change, not about the market. That is a relevant distinction for the reason that law firms routinely draw the wrong inference from it.
The same jurisdiction that holds no mandate under one regulatory development will hold it directly under the next. India’s trade remedy caseload is the obvious counterpart to the example above: anti-dumping and safeguard investigations run on published timetables, they impose response obligations directly on the exporter, and the exporter’s own counsel is instructed. Every position on the chain sits in one place, and it is not the same place as the example above.
So the useful discipline is not to decide which corridors are worth attention. It is to run the three questions each time and accept that the answer moves. A practice that concluded a corridor was unproductive because one thesis pointed elsewhere has generalised from a single data point, and will miss the development where every position on the chain sits on its own desk.
What this costs when it goes wrong
Not so much in fees as in inference.
The firm publishes into the wrong audience, sees no conversion, and forms a view about the market rather than about its own targeting. That view then survives for years, because nothing subsequently disproves it. The firm has stopped looking.
The three questions take much shorter a duration than the subsistence of the conclusion they overturn.
Lawfinity Solutions advises international law firms on cross-border legal market positioning. If the India corridor is a live question for your firm, we would be interested in a conversation. Lawfinity works with one firm per jurisdiction. Engagements begin with a single conversation about your firm’s current position and where the corridor question is live for you. Write to Prachi Shrivastava
