Expensive legal case? No problem, says litigation financing startup LegalPay
Delhi-based LegalPay is a legaltech and fintech startup that funds commercial cases and provides loans to companies that file for bankruptcy. It also allows investors to invest in these cases, promising them an IRR of up to 30 percent.
There’s a famous joke about lawyers that goes: What’s the difference between a lawyer and a herd of buffalos?
The lawyer charges more.
Lawyers and their infamous high fees have been the subject of one too many jokes since the profession probably came into existence — and it isn’t without its reasons.
Fighting legal cases in India is not cheap. On average, litigants incur Rs 1,093, excluding lawyer fees, per day, in India, according to DAKSH, a civil society organisation that undertakes research to promote better governance in India. And legal cases tend to go on for months and months, at least in India.
On top of that, lawyers typically charge around Rs 3 lakh to Rs 6 lakh, per hearing, for cases in High Court, and up to Rs 25 lakh if they have to travel to other High Courts, according to iPleaders, an edtech startup that specialises in legal education.
For a vast majority of the country, these exorbitant legal fees make it difficult to pursue legal remedies.
That didn’t sit well with Kundan Shahi, who, after working with NASDAQ-listed EXL’s insurance department, realised the problem of expensive litigation could be solved easily if people could transfer their costs and expenses related to potential litigation to a third-party, which is what insurance companies do.
He left EXL to explore the idea further and started Advok8, a legal SaaS products startup. But he ran into problems when, after conversations with experts in the field, he realised that setting up an insurance company in India was not only expensive, but also demanded a lot of regulatory legwork.
He decided to then explore litigation finance, and set up LegalPay in 2019.
(Image credit: LegalPay)
What it does
Delhi-based does a lot of things and offers a lot of products, but, at the very core of it, it funds legal cases in India, i.e., provides financing to plaintiffs to fight court cases, hire lawyers, experts, etc. Cases it picks to fund are usually referred to the startup by lawyers, or the plaintiffs themselves.
Every inbound request and the case itself are put through the paces — in-house lawyers and legal experts vet the case, after signing a non-disclosure agreement, of course, and it is then run through a software that assigns it a rating on a 15-point scale, to basically determine its merits and if it is “winnable”.
“Our approval rate for cases we finally fund is less than 5 percent. A lot of research, sifting through precedents and judgements from similar, previous cases, expert evaluations, etc., happens in the background, and the final decision is made after we look at hundreds of different data points,” Kundan tells YourStory.
The ticket size for funding these cases is typically Rs 25 lakh to Rs 50 lakh, per case. LegalPay says it mostly picks commercial cases to fund since the turnaround time for those is shorter.
The second product from LegalPay’s stables is interim financing, where the startup provides loans to corporate debtors and companies that have filed for insolvency. Kundan says he aims to develop this offering into a full-fledged lending product in the future considering laws to protect debt financiers are stringent and therefore less risky.
The money LegalPay invests in litigation cases and lends to corporate debtors come from a pool of investors, which forms the startup’s third offering. Positioned as an alternative investment, it enables investors, retail and institutional, to pool in their money together and fund various cases.
Kundan estimates this investment offers 25 percent to 30 percent internal rate of return to investors, which is higher than most traditional market instruments such as fixed deposits, mutual funds, and bonds. Anyone can start investing in these funds for as little as Rs 25,000, which makes it easier for retail investors to partake too.
But the fund does not come under the purview of any financial authorities such as the RBI, SEBI, PFRDA, IRDAI, MCA, AMFI, etc. Kundan says this is because of a couple of reasons:
- Nothing like this exists in the Indian market before.
- Financial regulators usually don’t regulate alternative investment assets in India because it isn’t a big-enough industry yet.
“Our hope is that financial regulators do put systems and oversights in place to regulate this growing industry which is especially finding a lot of takers in the retail segment,” he adds.
Revenue model
The startup earns revenue in different ways from all three of its products:
- From litigation financing: LegalPay takes a cut from the settlement or monetary award of the litigation from the plaintiff, if they do indeed win the case. The cut is agreed upon before the startup releases funds or signs the final agreement.
- From interim financing: It earns an interest on the amount it lends.
- From the alternative investment product: LegalPay charges investors a 2 percent annual management fee on the capital it manages — but only after investors make 14 percent IRR or more. In the event LegalPay is not able to return at least 14 percent IRR to investors, it forfeits the management fee. But Kundan says chances of that happening are few and far between.
LegalPay uses the corpus from the pool to invest in multiple cases, thereby spreading its risk.
“Typically, even a single win can help recoup the investors’ investment because settlements and winnings in commercial cases, which is where we usually invest, are huge. Even if we win one or two cases out of eight, for example, those are good odds in terms of returns,” he adds.
Currently, the startup has around 200 cases in the later stages of evaluation, and it typically sees at least 15-20 requests per day. It aims to raise over Rs 200 crore in assets under management by the end of the current financial year, which will be distributed evenly between litigation funding and interim financing.
It has raised two rounds of institutional funding so far, from investors including 9Unicorns, LetsVenture, Knowlarity founder Ambarish Gupta who now runs a PE firm out of New York, and Ashwini Kakkar, ex-chair of Via.com and current chair of Bombay Chambers of Commerce. The startup says it plans to raise more funding very soon.
In a country that spent Rs 36,973.75 crore in legal expenses in financial year ended March 31, 2021, third party funding — another name for litigation financing — presents a lucrative opportunity, especially for startups since the market is underpenetrated. LegalPay’s competitors include international and India companies such as Omni Bridgeway, Phoenix Advisors, Profile Investments, and others.
Law firms such as Advani & Co, CAM, Nishith Desai Associates, and a handful others also have their own litigation finance arm, or collaborate with international players to enable litigation financing for potential clients.
As per a Zion Market Research study, the litigation funding investment industry gathered a revenue of about $11.51 billion during 2019, and is expected to hit $20.55 billion by 2026 — and with very less competition in the segment in India, new entrants stand a good chance of ruling the roost.
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Edited by Saheli Sen Gupta