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From start-ups to law firms: The rise of litigation financing in India

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Litigation financing is fast gaining traction in India, with start-ups, law firms, companies and investors betting big on the emerging segment. But is it really a win-win formula for everyone?

Litigation financing, as the space is referred to, is huge globally and fast gaining traction in India, with many start-ups entering the fray. The global litigation funding market was estimated at $12.2 billion in 2022 and is projected to reach $25.8 billion by 2030, with a CAGR of roughly 9 per cent between 2022 and 2030, per a report by Custom Market Insights, a market research and advisory company.

“There is tremendous scope for growth of litigation funding in India,” says Ashish Chhawchharia, Partner and Head-Restructuring Services, Grant Thornton Bharat. “With the rising legal costs in India, there are severe limitations faced by companies and litigants to continue with the litigations and [they] often end up closing [cases] prematurely.”

But what is litigation financing? Simply put, it refers to third-party entities providing funding to help companies or individuals pursue legal tussles. More importantly, these ventures also help entities choose the right legal strategy with their AI-backed analytics tools. For the Seals—or any entity in the midst of legal battles—this means pursuing only those matters that have a high probability of winning and can be resolved fast. Helping the Seals with the insights is Kolkata-based FIGHTRIGHT. “We have our own proprietary platform which helps us in mapping the entire litigation journey in terms of predictive/generative analysis. We have deep insights into what to do and how to do it,” says Founder & CEO Nitin Jain.

Besides FIGHTRIGHT, other start-ups that provide such services in India include LegalPay, LegalFund and LitiCap, among others. Globally, Parabellum Capital, Bentham Capital, Juridica Investments, Burford Capital LLC, Woodsford Litigation Funding, Apex Litigation Finance and Omni Bridgeway are the big names with proven track records in the field of litigation funding.

A Helping Hand

In India, legal battles are often looked upon as complicated, where entities need to first search for a good lawyer and follow it up with money to bear the legal costs—which could be huge, given the time taken for an average case to be resolved in courts. For instance, there were nearly 43.5 million pending cases across all courts in India as of May 1, 2023, per data from the National Judicial Data Grid.

As facilitators, the start-ups in the field knew they had to offer something more than just money: insights based on data. “We realised that you cannot map a litigation journey without technology. Data would be extremely important. Most of the research that is available currently is at the High Court- and Supreme Court levels, which are appeal courts. But we do research at the district-court level, and that is what differentiates us from the others,” says Jain, who launched his venture in September 2021 and claims to have received over 400 enquiries till date.

How does this work? When a case comes to a start-up, it starts the due diligence to study it thoroughly and, if convinced that there is potential, decides to provide the funding at a pre-decided percentage of the claim amount. While most start-ups follow this model, in some cases—depending on the potential quantum of claim—they may also seal the deal on a fixed amount. But a start-up doesn’t make any money if the claimant it is funding loses a case.

Given their area of operations, most start-ups have tie-ups with lawyers or law firms but the entity has the freedom to get their own lawyer. The start-up, apart from funding, provides strategic inputs based on its analytical tools.

Sumit Agrawal, Founder of Regstreet Law Advisors, says that even as the scope of litigation financing is limited in India as of now, it is fast emerging as a trend in the legal arena. “Litigation financing can be an alternative to litigation insurance to some extent, as both serve to mitigate the financial risk of pursuing a claim. However, litigation financing provides financing for a specific case or cases, while litigation insurance is a form of indemnity insurance that covers the cost of legal disputes in general,” explains Agrawal, a former legal officer of capital markets regulator Securities and Exchange Board of India (Sebi).

Chhawchharia says there is scope for other funding opportunities like pre-settlement financing, lawyer fees, and post-settlement funding. Incidentally, under litigation financing, lawyers are paid their regular fees by third-party entities; the lawyers do not charge a percentage of the damages as fees, as it is barred by law in India.

Follow the Money

Let’s talk money. These start-ups are funding people to fight cases, but who is funding them? In India, the investor is typically a high net-worth individual or family office from whom the start-ups raise funds to create a fund to finance litigations. The prize: a percentage of the start-up’s claims under management; for instance, the entities that have taken funding from FIGHTRIGHT have cumulatively claimed damages or compensation totalling `300 crore. The start-up makes money on every case where the party it funds wins—it takes a cut in the range of 15-25 per cent from the final claim amount. To increase its chances of winning, the start-up funds only commercial litigations involving either land, property or money—these make up almost two-thirds of all outstanding commercial disputes; plus, it is able to plot the dispute’s expected legal journey based on its AI/ML tools.

If such bets are risky, why are investors putting in money? Experts say that litigation financing is fast emerging as an alternative investment avenue as the start-ups are able to deliver an impressive return on investment (ROI)—a key metric while deciding on asset allocation. “Litigation funding is a very high-return product. International experience shows that the annualised ROIs have been in excess of 50 per cent. In India, the ROIs will be in excess of 30-35 per cent for the time being. But it is still perceived as risk capital so we stay away from tapping retail individuals and raise funds from only HNIs,” says Jain. The growing potential of the space can be gauged from the fact that FIGHTRIGHT has launched a `100-crore fund from HNIs looking for alternative investment avenues. The fund, a special purpose vehicle, will invest in 15-20 commercial cases with an average ticket size of `5-7 crore for a tenure of two to three years. This fund will allow these HNIs to invest in litigations where the annualised ROI is expected to be upwards of 30 per cent.

Chhawchharia believes the dynamics from an investor’s perspective are similar to any segment or model that attracts risk capital from the wealthy. “The model will be quite similar in my view as risk capital is always looking for attractive opportunities and returns. HNIs and family offices are likely to invest in funds that pool in investments with a similar thesis or objective rather than invest directly in this market,” he says.

What’s more, the potential is such that many global players are also actively looking at India to enhance their presence in the space. “We have seen a rise in enquiries from global players in the industry and we understand some have already started scoping opportunities in India,” says Chhawchharia.

The Legal Position

While litigation financing seems a lucrative business opportunity, there is debate around whether it is in consonance with law. Many believe that it currently operates in a grey area: nothing states that it is illegal per se but at the same time it does not have an explicit stamp of legal approval. “Litigation funding has caught the attention of regulatory bodies such as Sebi, RBI (the Reserve Bank of India), Irdai (the Insurance Regulatory and Development Authority of India) and PFRDA (the Pension Fund Regulatory and Development Authority). The regulators are monitoring this trend closely to ensure that it is properly regulated and does not lead to any financial misconduct or illegal activities,” says Agrawal of Regstreet.

Jain of FIGHTRIGHT says that there have been judgements in the past that favour litigation financing in India. For instance, the Supreme Court’s ruling in the Bar Council of India vs A.K. Balaji case in 2018 set a precedent by stating that litigation funding is not per se illegal, provided it doesn’t violate any other applicable laws. This is important as industry participants are of the view that the apex court’s rulings serve as important precedents while dealing with litigation finance.

“There is hardly a country where there are formal regulations around litigation funding. In some places, you could find associations with some amount of self-regulation. Maybe in the future there will be regulations or rulings that will benefit the industry,” says Jain. “There is money involved; there is the law itself that is involved; so there could be clearly laid down norms. The more formal it becomes, the better it is for the industry.”

In a similar context, Chhawchharia says that while there does not appear to be any “specific impediment to litigation financing in India”, one needs to remember that “contingency fee-based legal services such as class action or personal injury suits are not permissible in India”. Contingency fee-based legal services are those where a percentage of the claim is paid as fee to lawyers.

Industry watchers say that litigation financing will only grow in size as it has something to offer for all stakeholders. For litigants—especially those with limited financial resources—it is a sort of a lifeline; for lawyers, the funding ensures timely fee payments while they can focus on proper legal representation; and for investors, it means attractive returns and portfolio diversification.

Most importantly, they say, litigation financing empowers the average individual or a small company to fight against powerful adversaries and hold them responsible for their actions to create a fair and just society. “The key benefit is that litigation funding allows lawyers to provide best-in-class services to their clients,” says Chhawchharia. And it allows clients to pursue only those cases that they have a good chance of winning.