When Lawsuits Become Investable Assets: Regulating Litigation Finance in India [Part II]
[Manav and Huzaifa are students at NALSAR University of Law. This is Part II of the two-part article. Part I is available here.]
Navigating the Global Approaches to Litigation Finance
A comparative analysis of various jurisdictions would throw light on how the international experience has resulted in demonstrating the potential of institutionalising the practice of TPF.
Singapore has adopted a specific statutory approach to TPF. The Civil Law (Amendment) Act 2017 and the accompanying Civil Law (Third-Party Funding) Regulations 2017 permit funding only for international arbitration and related court and mediation proceedings, with additional qualifications prescribed for the funders. This is also in part due to Singapore’s reputation as a major international arbitration hub. In 2021, Singapore extended the framework through the Civil Law (Third-Party Funding) (Amendment) Regulations 2021, to cover domestic arbitration and certain Singapore International Commercial Court proceedings, but litigation funding outside these prescribed categories still remains against public policy and unenforceable. The Singaporean approach remains particularly relevant for India as it demonstrates that funding can be, in a way, legalised incrementally, for defined categories without opening ordinary civil litigation to commercial funding, and thereby preventing unrestricted commercialisation of every form of litigation.
The experience of the UK was historically one of self-regulation, wherein the UK’s Association of Litigation Funders devised a system of voluntary self-regulation via a code of conduct, self-certification, and sanctions for non-compliance, among other things. This was an industry-led alternative to statutory regulation. However, this changed overnight when the UK Supreme Court, in the case of R (PACCAR Inc) v. Competition Appeal Tribunal, held that a litigation funding agreement that calculates a funder’s return as a percentage of the overall damages would fall within the statutory definition of a ‘damages-based agreement’ under Section 58AA of the Courts and Legal Services Act 1990. This, in turn, resulted in rendering most TPF agreements unenforceable unless they complied additionally with the Damages-Based Agreements Regulations 2013. A legislative response to this followed with a bill to undo the effects of the judgment, but the same has still been stuck in limbo. The UK experience, therefore, throws light on a jurisdiction trying to reconcile industry autonomy with legal certainty.
Australia has, on the other hand, seen its TPF market become highly developed but not without its fair share of concerns regarding funder control and claimant returns, which have, in turn, generated sustained demands for stronger licensing and disclosure norms. In 2022, the Federal Court of Australia, through the ruling in LCM Funding v. Stanwell Corporation, held that litigation funding would operate outside regulatory oversight and would instead be subject to general court supervision. The oscillation between regulation and exemption has lessons for India insofar as it attempts to regulate the practice in the future through legislation or developing sound jurisprudence around the practice.
It is the USA, lastly, which remains the most permissive market when it comes to TPF. There is, as of now, no federal regulator for litigation funding and disclosure obligations exist only at the state and individual-court level. In fact, several states had enacted funding specific statutes, typically combining mandatory disclosure with restrictions on funder control over litigation or settlement decisions. On the federal level, the Litigation Funding Transparency Act of 2026 remains pending in Congress. This has resulted in the market’s growth into a multi-billion dollar industry anchored by publicly listed funders such as Burford Capital, which runs a USD 7.5 billion portfolio of legal claims and claims a 26% IRR on concluded cases over the course of 15 years.
India today resembles the USA in its permissiveness but falls short when it comes to the USA market’s scale, the state-level judicial infrastructure which has been built there for TPF, and the disclosure norms guiding the practice.
Practical Viability: Does the Model Actually Work?
On paper, litigation funding solves a genuine access-to-justice problem and offers investors a return stream genuinely uncorrelated with public markets. This is beneficial because a case’s outcome depends on facts and law and not interest rates or Nifty sentiments. However, in practice, several frictions complicate this process. These are in addition to the ones explored earlier such as unpredictability of outcome, length of litigation and enforcement risks.
First, litigation funding has a governance conflict baked into the model. Generally, funders prefer having influence over the litigation and settlement strategy to protect their investment. However, in this model, autonomy of the Claimant and lawyer-client privilege take precedence. In the absence of clear disclosure rules or standards of conduct, this governance tension is negotiated privately in funding agreements with courts only overseeing if a dispute over the agreement itself arises. Additionally, since there is no statutory funder-conduct code, as seen in the UK's Association of Litigation Funders Code, discussed earlier, the entire governance architecture has to be built from scratch in each agreement.
Second, from the perspective of investors, the decision to invest in a fund is a tricky one because litigation funding is currently a market with no rating agency, no standardised claim-valuation methodology, and no public track record of fund performance. There is no equivalent of a net asset value disclosure regime, as seen in the case of mutual funds or alternative investment funds. This subjects the investors to a heightened risk of miscalculation and consequent loss of investment. In the absence of a standard methodology, funders often tend to underwrite in tranches tied to litigation milestones (including admission, evidence, first appeal, and so on), rather than a single upfront commitment. This closely resembles a portfolio-construction discipline borrowed directly from venture and structured credit, where the focus is on an event-driven payout.
Third, court records in India are largely public, which militates against confidentiality that funders in other markets rely on to avoid tipping off or hinting opposing counsel about a well-capitalised backer. In practice, a funder’s informational edge is an integral part of their economic edge. The defendant’s knowledge that a claimant is adequately backed financially, changes settlement dynamics. This is because a defendant who would otherwise rely on attrition against an under-resourced claimant would, in the absence of confidentiality, realise that the case will be fought all the way through, including any appeals. This would bring about a strategic change wherein the defendant would avoid resorting to the traditional pressure tactics such as trying to prolong proceedings and would possibly resort to a different pressure tactic to lure the claimant to agree to a cheaper settlement.
Fourth, in spite of litigation funding being a contractual negotiation-heavy practice with no limit on the terms of return, there is a genuine drafting risk. Courts retain the power, at their discretion, to strike down terms that are found unconscionable. For example, in the Nuthaki Veukataswami v. Katta Nagireddy case, a 75% funder share was held extortionate, and the Court refused to grant specific performance. This ties into the enforceability risk discussed earlier and practically implies that in spite of detailed negotiations with considerable time and money spent and a favourable litigation outcome, realisation of the agreed upon sum isn’t guaranteed, particularly if the contractual clause itself is challenged.
However, none of these drawbacks makes the model unviable as a whole. This is because every investment class has its advantages and disadvantages and litigation funding is a gradually developing alternative asset class with results that have not yet been conclusively proven, at least in India.
Proposed Solutions: Conceptualisation of Model Guidelines
The absence of a dedicated regulation in India or specific provisions governing litigation funding might initially appear beneficial because it reduces the barriers to entry. However, in practice, it increases transaction costs because an institutional investor considering an Indian litigation-finance portfolio currently faces uncertainty regarding the norms governing its investment, which includes disclosure, enforceability, control, conflicts of interest, security for costs, capital adequacy, and confidentiality, among others. Each uncertainty ultimately translates into a risk premium, which is bound to disincentivise investments into litigation financing in the long run. This produces a paradox, according to which, the less India regulates litigation finance, the more expensive sophisticated litigation finance may become. A better approach would be to create a balanced regulatory framework which neither posits an entirely laissez-faire outlook nor imposes a heavy-financial-services regime that could potentially suffocate a nascent market. A prudent approach to achieve this objective would be to introduce a Litigation Finance Regulation Act (LFRA), administered by a specialised regulatory cell within the Securities and Exchange Board of India, to govern all the investment-facing activities, while preserving the current procedural jurisdiction of courts and tribunals.
The following guidelines should be taken into consideration while framing such a legislation, which can also guide judicial determination until a concrete legislation is in place. These include:
Guideline 1: Mandatory registration
All professional third-party litigation funders should be registered with the designated regulator and meet the prescribed capital and liquidity requirements.
Guideline 2: Mandatory disclosure
Parties should disclose the existence of third-party funding to the court or tribunal, while the funding agreement itself should remain confidential unless disclosure is specifically ordered.
Guideline 3: Independence of the funder
Funders should have the right to monitor financial and procedural developments but should not control the litigation strategy, choice of counsel or settlement decisions.
Guideline 4: Transparent returns
Funding agreements must clearly specify the funder’s investment, return mechanism, percentage or multiple, and the circumstances governing its entitlement.
Guideline 5: Conflict-of-interest controls
Funders should disclose and appropriately manage conflicts, with a prohibition on funding where a material conflict could compromise the integrity of proceedings.
Guideline 6: Security for costs
Courts and tribunals should have power to require funders to provide security for adverse costs where the claimant may otherwise be unable to satisfy a costs order.
Guideline 7: Investor protection
Retail participation should initially be restricted, with litigation-finance investments offered primarily through regulated vehicles to institutional and sophisticated investors.
Guideline 8: Protection of confidentiality and privilege
Information shared with funders for due diligence or case management should remain subject to strict confidentiality and should not, merely by disclosure, waive the applicable legal privilege.
Conclusion
The overall opportunity in the litigation funding market is substantial. This is because of the multiple advantages to the various stakeholders involved. Businesses gain liquidity, investors get exposure to an alternative return stream, law firms get access to clients capable of pursuing high-value claims, and courts also benefit because financially constrained claimants can properly litigate meritorious disputes. However, on the downside, capital also changes incentives. For example, if returns depend upon prolonged litigation, the incentives of the funders might become inconsistent with rapid settlement. Similarly, if underwriting becomes excessively aggressive, even weak claims might receive financing. Additionally, if wealthy investors can systematically finance claims against listed companies, litigation might itself be reduced to a strategic corporate weapon.
Therefore, the regulatory objective should be neither to maximise litigation nor minimise it. It should instead be to ensure that access to capital is facilitated for meritorious claims while also preventing capital from distorting the administration of justice. India is already moving from an era in which litigation was simply an expense to one in which legal claims can be viewed as contingent financial assets. Although, the law has permitted the underlying activity for years, what it has not yet developed is the institutional infrastructure required to support and govern that activity once it becomes an investable market.
Therefore, the next phase should not be about asking whether lawsuits can be an asset class because the answer is in the affirmative. Instead, the more important question is whether India can build a regulatory architecture in which lawsuits become a viable asset class without merely reducing it to a market for speculative litigation.
A well-designed LFRA would make this objective possible and it is hoped that the suggested guidelines are incorporated at the earliest to imbibe litigation finance as a credible component of India’s alternative-investment ecosystem.