How Litigation Funding Works as an Alternative Investment

What if you could make money through lawsuits without ever having to fight yourself in court? Litigation funding, as an alternative investment option, allows investors to do just that.

Litigation funding has only recently been made available to retail investors in India by a tech startup LegalPay through two methods: Interim funding under the Insolvency and Bankruptcy Code (IBC) and litigation funding.

Interim finance under the IBC is a short-term loan provided to a business in insolvency to support it with capital to enable it to remain operational while undergoing the business insolvency resolution process (CIRP). “We provide working capital for the company to go through the governance process (CIRP),” said Kundan Shahi, Founder and CEO of LegalPay.

Shahi said repayment under Bridge Funding is super priority under CBI. “When it comes to repayment, once the business is back to health, lenders under interim financing have priority over banks or other lenders from whom the business had borrowed prior to insolvency.” To guarantee repayment, only companies that have assets to liquidate or those that have a chance of being acquired or restructured are financed.

“The loan term is 12-18 months and investors can earn 18-25% (pre-tax) interest on their investment,” said Kashish Grover, chief investment officer at LegalPay.

The second litigation funding option is much more risky, but can also offer higher returns. Under this, the capital, raised from a consortium of investors, is given to a claimant under the agreement that part of the legal settlement will be refunded if the case is won.

LegalPay has a team of legal experts who pre-screen funding cases based on their chances of winning. The capital raised is allocated to these pre-selected files.

Take note that since this is a non-recourse investment, the company, and in turn the investors, will get nothing if the deal is lost.

“We have spread the capital over several files to diversify the risks. Globally, the success rate is around 90% and we have maintained a modest expectation of a 50% success rate,” Shahi said.

It should be noted that the company signs a non-disclosure agreement with the plaintiffs, so investors do not receive any information about the funded cases. “Investors should trust our underwriting as we have matched a basket of cases for them that holds a high probability of winning. Also, we only review commercial cases as they have shorter timelines,” Shahi said.

Payments under this product occur as cases are won. Earnings are in the form of success reduction, which are agreed with the applicant in advance and may vary from case to case. Investors can expect to earn between 2x and 4x on total capital, Shahi said.

Gains from this product are taxed as a business or professional profit. Investors should note that this is a nascent investment avenue that has yet to be tested over the long term in India and therefore carries a high level of risk.

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