The litigation finance industry in India faces hurdles such as delay in receiving claims and the unpredictable nature of dispute outcomes in the Indian legal system, which may impede the industry’s growth, say experts.
“Although a gradually expanding domain, litigation financing faces some key barriers in India. First and foremost, there is a general lack of awareness among the masses. People don’t even know that litigation financing is an option that can be availed. Secondly, this is a capital-intensive business. Tangible results take time, which means it requires patience — a rare commodity in today’s fast-paced world,” says Kundan Shahi, co-founder, Legalpay, a non-banking finance company.
He says a perceived barrier is also the pre-existing burden of pending cases in the judicial system. “A sense of delay in justice impedes the growth of litigation financing in India.”
LegalPay and Kolkata-based FightRight are among the notable companies that offer litigation financing services in India.
Litigation finance comes in two variations: recourse and non-recourse. Under the recourse model, a short-term loan is given to a company going through insolvency to remain operational during the corporate insolvency resolution process.
Under the non-recourse model, funding is given to the plaintiff on the agreement that a portion of the legal settlement will be paid back if the case is won. The non-recourse model is more popular as it can yield a higher return for investors.
However, this model is also riskier, say experts. Here, the investors are typically high net worth individuals and family offices, while individual investors are also known to participate in informal funding.
The average ticket size of legal expenses is 5 lakh-3 crore and the service is predominantly availed by businesses. The claim value can be as high as $10 billion.
“Our approval rate or investment rate is very low. It is still less than 5%. We actually prefer to diversify into multiple cases. If our budget is Rs 1 crore, we will not put that entirely into one case. At a portfolio level, we will actually try to diversify,” says Shahi.
The legal expense market is around $40 billion and litigation finance market is around $9 billion in the country. Globally, the litigation finance market is around $50 billion and the legal expense market is worth more than $700 billion.
Of the 15.2 million civil matters pending in Indian courts, more than 74% are disputes which involve financial considerations, according to estimates by FightRight.
Mumbai-based arbitration expert Sumit Rai says litigation finance is unlikely to ever take off in India the way it exists internationally.
“Today, what you are seeing is an off-shoot of big international arbitration funding maybe involving Indian parties. The question is, can it become a thing in India for Indian disputes. Ultimately in litigation financing, the return comes when you get the money out of the litigation where you succeed. Even if you get an award in two years through arbitration, it may take quite some time for that award to translate to money in hand, regardless of what the amendments in law are,” he says.
Unpredictability is another factor one must take into account, Rai says, as Indian courts are “not very predictable”.
“We follow precedents like any other common law system such as the United Kingdom and Singapore. But because of the time pressure and the caseload, you cannot expect our judges to apply their mind at leisure to ensure that every previous judgment has been seen, considered, and consistent view is given on every point of law. You will always find that on every point of law, there are very minor tweaks on the views that people have taken on very minor things. Ostensibly, they look contradictory,” says Rai.
Typically, underwriting in litigation funding occurs through artificial intelligence and personal assessment of legal experts who come to a conclusion on risk, expected timeline and likely return for investors. However, this is difficult to predict in the Indian context, say experts.
“In the 2018 judgment of Bar Council of India vs AK Balaji, the Supreme Court observed there appears to be no restriction under law to stop third parties from funding litigation and getting repaid after the outcome of the litigation. But according to the Bar Council of India rules, litigation professionals cannot have a stake in the outcome of the matter, which means they cannot pick up a case on the basis of the percentage of the claim to be received through them. So lawyers are out of the game already,” says Prashant Mara, managing partner, BTG Legal.
He adds that litigation is “quite unpredictable” in India. “So even if a case has a good chance of being won, the return of investment or cost benefit ratio to investors gets unpredictably delayed and is also uncertain. That has disheartened people from engaging in litigation financing.”
