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High yield, low risk: Why India’s litigation finance market catches the eye of global funders

High yield, low risk: Why India’s litigation finance market catches the eye of global funders

High yield, low risk: Why India’s litigation finance market catches the eye of global funders
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By Manoj K Singh   | Rajdutt Shekhar Singh  May 14, 2019 7:03:29 PM IST (Updated)

Global leaders in the field are promoting their funding to corporations as a means to shed risk from firms' balance sheets or to accelerate growth by freeing up capital tied up in ongoing cases.

Litigation finance is also known as third party litigation funding. The American Bar Association defines litigation finance as ‘the funding of litigation activities by entities other than the parties themselves, their counsel or other entities with a pre-existing contractual relationship with one of the parties, such as an indemnitor or a liability insurer’. The need for third party funding is rooted in the increasing size and complexity of litigation.

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No legal hurdles for global funders
In 1954, the Supreme Court of India observed that there is nothing morally wrong, nothing to shock the conscience, nothing against public policy and public morals in such transactions per se except in case where an advocate is involved. Recently, the apex court again held that there is no restriction on third parties (non-lawyers) funding the litigation and getting repaid after the outcome of the litigation. Therefore, there is no legal bar on global funders to invest in TPF.
Potential avenues
In the infrastructure sector, it has been seen that various infrastructure or construction companies have invoked arbitration or litigation claims against State and Central government agencies and such legal claims involve monetary claims running into several thousand crore rupees (approx. more than 100 million dollars on individual basis) and are pending at various stages. The main grievance of many infrastructure companies against government agencies is the delay in providing right of way or land handover despite explicit obligations under the relevant concession agreements. These companies claim that their assets remained idle causing dent in their balance sheets. These companies are in grave need of liquidity and to manage their balance sheet stress. Recently, in an arbitration matter, Jindal ITF Ltd won an arbitration matter against NTPC Ltd, whereby Arbitral Tribunal awarded more than Rs 2015 crore to Jindal ITF. Similarly, in another arbitration matter, Delhi Airport Metro Express Private Limited (DEMPEL) was awarded Rs 2950 crore against Delhi Metro Rail Corporation (DMRC). DMRC challenged the award before the High Court of Delhi. Though the high court’s single judge bench upheld the arbitration award, the division bench set aside the award. DEMPEL challenged the decision before the Supreme Court and the matter is pending adjudication before the top court. It is clear from these cases that infrastructure industry requires third party funding.
Recent examples
Recently, Hindustan Construction Co Ltd (HCC) transferred its beneficial interest and rights in its legal claims largely against BHAI, NHPC and NTPC Ltd., besides other State and Central government agencies to an SPV controlled by a consortium of investors including BlackRock. The litigation funding deal of HCC with a consortium of investors led by BlackRock would set a precedent for TPF in India and it would definitely boost the confidence of global funders to invest in India. Global leaders in the field are promoting their funding to corporations as a means to shed risk from their balance sheets or to accelerate growth by freeing up capital tied up in ongoing cases.
Other factors to attract global funds
Regulatory changes: The recent changes in the Arbitration and Conciliation Act of 1996 such as less interference of the courts in arbitration proceedings, pronouncement of award in a time-bound matter, fast-track arbitration and execution of interim reliefs granted by the Arbitral Tribunal would attract the attention of the third party funders.
Not affected by market conditions: It provides protection against a potential economic downturn, because litigation does not follow changes in monetary policy or the financial markets.
 High yield: For investors, third-party funding provides a hitherto untapped market for investment with returns oscillating between 10 per cent and 45 percent.   
Undoubtedly, Indian industries or corporate houses are in desperate need of third-party funding, and speedy disposal of arbitration matters would boost the confidence of global funders of TPF. However, global funders are required to be conscious of certain facts, for instance, proper legal due diligence of the claims, claim route (whether through arbitration or litigation), place of enforcement, monetary limitation on raising claims and drafting of TPF agreements.
Manoj K Singh is Founding Partner and Rajdutt Shekhar Singh is Partner of Singh and Associates.
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