LegalPay, a fintech into litigation funding started by Kundan Shahi, is his second venture after Advocate. His acquaintance with risk and insurance led to his starting up LegalPay.
In an interaction with Bfsinxt.com, he says, “In my previous work experience, I was helping an Insurance giant, and my role was to identify potential risks and ways to improve. My acquaintance with risk and insurance started from there. I thought I would set up a Legal Insurance business in India, but it’s too capital intensive and has many regulatory challenges to surpass.”
After intensive research, he learned about litigation funding, a way financial risk can be transferred, similar to insurance.
“Litigation funding works similarly without paying a premium; you reach out to a litigation funder like us, share the case details, and seek funds to pursue it. Next, we evaluate the opportunity, like the legal merit of the cases, past instances, success rate, etc. Post that, we evaluate the finance angle, see the opponent party, solvency, financial viability, etc. If a case may take more than three years, we may not fund it; it’s not a sweet spot for us. Lastly, the legal team’s capability handling the case,” Kundan said.
Kundan started exploring litigation funding in 2016 with the name of Advocate but didn’t get much response from stakeholders (primarily law firms). They thought it was illegal, mainly thinking about it as a success-based fee. Still, he says, I had done a few cases to explore how the whole process will work.
In early 2020, Supreme Court clarified that third-party funding or litigation fund was never barred in India to the extent that lawyers cannot participate.
Two important things we see are that lawyers can’t be agreed on a contingency basis, and we don’t violate the public policy, Kundan explains.
In late 2019, Kundan started up LegalPay with all his learnings of litigation funding with what to do and what not to do. Kundan explains that they have funded a few cases and have two primary products. Litigation Funding, where they do non-recourse funds where if the case is won, they only get funds back or else no funds. The second is interim finance, a lending product where they pay insolvent companies for the Corporate Insolvency Resolution Process (CIRP) process.
Litigation funding is a nascent industry, largely picked up in the USA post-2008 recession. There are two global listed players in this space, Omni Bridgeway and Burford Capital, Kundan said.
Deal Origination and Funding Process
LegalPay sources deals in three ways. One, we have been in the market for the last five years; we have seen an increase in awareness within the legal fraternity, so many reach out to us organically, Kundan said.
Second, It has done a tech play, and funds only cases in High Court, Supreme Court and Arbitration. Within High Court, we fund only commercial cases, so any case that gets listed, our system real-time tracks it and through a machine learning application, real-time preliminary analysis reveals whether it falls in our investment thesis or not, then we send an automated email either to the party or to the lawyer, Kundan explained.
Third, he added that we do outreach ourselves and seek documents to verify and evaluate.
It has a team of experienced lawyers and tech to underwrite; basis on the combination’s expertise, it decides if they can fund it or not. If we agree to fund, we look at all parameters and come at a certain percentage, depending on the case’s merits, ranging between 15-20 percent, Kundan added.
In India, the legal cost is around 4-6 percent of the claim value, whereas, in the USA, it is about 10 percent.
Disbursements happen in two ways. One is our case management fund, and the second largely depends (International players and family offices). The legal expense market in India is around Rs 1.5 lakh crore. Globally, litigation funding is a big market.
There are some cases where Indian parties are involved in the global context, international funds invest, and we co-invest too. We get this funding via family offices too.
We are exploring setting up an Alternative Investment Fund (AIF) as some cases are high ticket sizes and cross-border cases. If you see India’s UHNI and HNI base, they don’t have access to this asset class, and we are able to do that. It has to be done in a properly structured way, Kundan said.
Second, we try and ensure to be in maximum applicable compliances and regulations. We structure deals with the top three law firms in India. In SPVs, we ensure we don’t bypass any rules, he added.