Given growing interest in legal finance in India, Quentin Pak asked a group of international lawyers from leading Indian law firms to address the legal framework regulating funding, recent monetization activity and predictions for the future of legal finance in the region. Their perspectives are collected below, with some edits for brevity.
Last year saw two notable examples of legal finance being used as a corporate finance tool in India: The monetization of arbitration awards in the Hindustan Construction Company and Patel Engineering transactions. What do these arrangements suggest about the future of legal finance in the region?
Vyapak Desai: Statistically speaking, India saw more money involved in the monetization of claims than Singapore and Hong Kong. These deals show that, in a market starved of liquidity, companies are exploring new means of raising capital—and legal finance appears to be a tool on the cusp of surging in popularity. These deals have raised awareness amongst dealmakers of alternate means of financing.
Cyril Shroff: Judgments and claims have been traded on secondary unorganized markets in India for decades. Our firm worked on the HCC transaction, enabling it to obtain funding against arbitration awards received in its favor, as well as claims pending in various fora, aggregating to over $200 million. This was a great example of the legal industry tailoring solutions to fit the need of a large construction industry player. These transactions are test cases and promote experiments in the area of legal finance.
We can look forward to further innovations on the legal finance front, in terms of the number of companies which monetize their portfolio of claims or awards, the appetite of buyers and the sophistication with which valuation of such claims is approached. Both the HCC and the Patel Engineering transactions were not vanilla legal finance structures—the various custom-made structures used for such transactions in light of the present regulatory vacuum is also exciting for the legal finance space, and indicative of its gradual sophistication.
The expected return of investment of some of these transactions is more than 200 percent, way higher than the existing rate of returns from the best investment instruments in the market. Successful realization of this potential return will further entice investors into exploring legal finance.
The Indian litigation market is characterized by very high risks, where the expected outcome and rate of return from a legal dispute may be difficult to predict. While this may mean that the legal finance market tilts towards arbitrations in the near future, one cannot discount the audacious investors who may look at very high risks as a sign, and perhaps a necessary corollary to, very high returns.
Sanjeev Kapoor: With increased financial stress especially in the infrastructure, construction and energy sectors, the Hindustan Construction Company and Patel Engineering transactions pose a very promising step towards encouraging monetization of awards in India to minimize risk and ensure greater liquidity to companies.
This becomes particularly relevant since the government and public sector companies form the bulk of disputing parties in India and largely refuse to honor arbitral awards until appealed to the highest forum, the Supreme Court of India, which is time consuming and costly. Even a party who has successfully obtained an award against such entities may face a significant enforcement resistance. I expect award monetization to be more commonly used in the future to ensure greater liquidity, especially in view of the precedent set by the above instances.
In an encouraging development, the Indian government has proposed a policy initiative for public sector entities in the event of a challenge to the award to deposit up to 75 percent of the arbitration award against the security of a bank guarantee to be issued by the award holder. This is to ensure private parties are not driven into insolvency by being deprived the award amount during the course of the challenge.
However, even this does not mean that the award holder will receive the award amount, which is likely to remain in deposit with the court. The award holder may still be subject to liquidity constraints and award monetization may provide a critical solution.
Pallavi Shroff: Although the growth of legal financing is still at a nascent stage in India, its advantages are likely to make its progress quick. The Indian infrastructure sector has been stressed for some time now. The HCC and Patel Engineering transactions are good examples of funding arrangements as corporate finance tools. They helped avoid potential bankruptcy for the companies. Given the involvement of large investment houses in both transactions, there is good reason to be optimistic about the future of legal finance in the region.
In 2019 Burford celebrated its 10th anniversary. Looking ahead to the next decade, what are your predictions for how legal finance will impact the business of law in India?
Pallavi Shroff: India’s legal sector has seen tremendous growth in the last two years, with revenues increasing by more than 62 percent. However, clients remain cost conscious. Legal finance will be, therefore, viewed very positively by clients and will have a bright future in India.
Vyapak Desai: India is unlikely to tread the same path as other jurisdictions, where growth of legal finance has also resulted in increased consideration of contingency fee arrangements. However, the practice of law will be significantly impacted as lawyers would be expected to provide legal finance as an option to their clients.
Sanjeev Kapoor: The lack of clear law and guidelines concerning third-party funding has hampered any rapid growth of this sector.
Optimistically, India will see adoption and formalization of a legal financing regime as a result of the success of legal financing in neighboring regimes as well as its aspiration to be an International Commercial Arbitration hub. Once adopted, legal finance will greatly benefit the business of law by ensuring greater flexibility to legal advisors to tailor optimal solutions for clients without cost being the primary concern. The involvement of legal financiers will also herald the growth of litigation due diligence as a key tool to avail third-party funding, and potentially result in greater involvement of legal advisors in litigation management functions to optimize time, cost and resultant outcomes.
Cyril Shroff: I see India having a thriving litigation finance market supported by a robust regulatory framework reflecting global best practices. I also anticipate that the coming decade will witness the advent of class action litigations, especially in the context of environmental, climate and natural resource-related fact scenarios, which, along with international arbitration, will be fit cases for obtaining legal finance. There will also be some fundamental shifts on how dispute resolution forums function in a post-COVID-19 situation which would provide fertile ground for legal finance to take firm root in India.
More innovative legal finance opportunities will emerge—start-ups are already beginning to innovate with tools such as online crowdfunding of disputes. We also see a more front-loaded approach being adopted in dispute resolution where a full stock of the merits of a case is taken at an early pre-funding stage. We can expect a greater role for experts and professionals from across sectors to play, leading to an overall increase in the quality of dispute resolution.
Law firms and lawyers will be forced to take on board legal financers while negotiating mandates with clients to better service their clients and compete. Specifically, in times of economic uncertainty, access to legal finance may differentiate one law firm from another.
Read more of "Legal finance in India: Lawyers weigh in."
Part I • Part II
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