Laborers walk on a section of the Bandra-Worli sea link in Mumbai, India built by HCC Ltd. in 2009. (Photographer: Adeel Halim/Bloomberg News)

Litigation Finance To The Rescue Of Infrastructure Companies 

Last week lenders to engineering and construction company Hindustan Construction Company Ltd. approved a resolution plan that restructures over Rs 4,000 crore of its total debt. Some portion of that debt will be converted into long term equity-like instruments leaving the company with a serviceable amount of loans.

More interesting though is a new feature in the resolution plan. HCC has over Rs 10,000 crore in claims that are currently in arbitration. These are claims for project work undertaken but not paid for, mostly by central or state government agencies that commission infrastructure projects. Contractual disputes or project delays are often at the center of such claims.

HCC’s resolution plan involves the sale of claims worth nearly Rs 10,000 crore to an investor, said three people involved in the process. They spoke under the condition of anonymity. According to its annual report for the financial year ended March 2018, HCC had secured arbitration awards of Rs 4,823 crore, of which, the company had already collected Rs 1,416 crore. Further, about Rs 4,915 crore worth claims were in various stages of arbitration.

As per the plan HCC will hive off the claims into a separate entity. According to the three people cited above, bidders may choose to bid for the entire portfolio of claims or select the claims they want to buy. This will allow HCC to monetise pending claims, reduce debt and focus on its core business.

HCC didn't respond to an email sent by BloombergQuint on Monday.

Litigation Funding: A Way Out For Infrastructure Developers?

Litigation financing - in which a third party/investor finances a litigation in exchange for a portion of the settlement or monetary award - is a common practice in developed markets. Investors hire lawyers who assess the legal viability of the case/claim and accordingly arrive at a funding agreement with the litigant.

New in India, it is now becoming a preferred route for tackling stress in engineering and construction companies burdened by such claims. With capital tied up in such claims infrastructure developers often have to resort to additional debt to work on new projects. Many in the road, power and port sectors are burdened by thousands of crore rupees in claims, some even driven to insolvency on account of unending arbitrations.

Investors interested in buying such claims range from distressed asset funds to private equity investors. Depending on the claim the rate of return could be as high as 20-25 percent, one of the people cited above said.

"There is considerable interest from international funds for such opportunities in India, especially in cases where the litigation is in advanced stages,” said Babu Sivaprakasam, partner at the law firm Economic Laws Practice. "However, getting the right kind of opportunities and coming to a consensus on pricing is always a challenge."

HCC isn't the first local company to experiment with litigation funding.

In November 2017, stressed construction company Patel Engineering Ltd. transferred or assigned such claims and real estate rights of about Rs 2,000 crore to a special purpose vehicle. It sold 51 percent of the SPV to private equity firm Eight Capital, according to the company’s annual report. In exchange, the private equity firm issued non-convertible debentures to Patel Engineering’s lenders, with a repayment period of six years and an annual return of 0.01 percent, according to one person close to the deal. The debentures would be redeemed once the claims were paid.

According to Ravi Chachra, chief investment officer and managing director, Eight Capital, funds typically prefer claims where the counterparty is the central government or companies promoted by it, since there is certainty that the claims would be honoured at the end of the legal process.

Chachra did not confirm the financing structure in the Patel Engineering deal, citing proprietary formulas. Each fund creates its own structure when purchasing the claims, he said.

In the case of Era Infra Engineering Ltd., currently under insolvency resolution process, the committee of creditors is considering resolution plans that involve monetisation of arbitration claims, as recommended by the resolution professional Rajeev Chakraborty. Era Infra is one of the 12 large corporate accounts which were referred to the insolvency and bankruptcy process in June 2017.

Litigation Funding: Potential?

As mentioned, several engineering and construction companies and infrastructure developers have thousands of crores stuck in arbitration claims, often against state and central government or their agencies. In 2016, the union government’s Cabinet Committee on Economic Affairs estimated Rs 70,000 crore tied up in arbitration.

“The average settlement time for claims is estimated at more than seven years,” the CCEA statement said.

Often arbitration awards in favour of the companies are contested in courts, leading the CCEA to mandate that once a claim under arbitration is awarded to a company, where the government is counterparty, it must pay at least 75 percent of the claim, even if it intends to challenge the award in higher courts.

But that hasn’t been fully implemented say several companies. And the claims have only mounted.

For instance, the National Highways Authority of India stated in its FY2017 annual report that 125 arbitration and 100 court cases, with claims over Rs 42,000 crore and 2.6 million euros were pending against the authority. Similarly, NTPC Ltd. reported Rs 12,533 crore worth claims pending to be paid to companies that have raised them, as on March 31, 2018.

"There is a need for such litigation financing structures for infrastructure companies which are dependent heavily on payments from counterparties such as the government and PSUs, to run their operations,” said Sivaprakasam of Economic Laws Practice. “Litigation takes up a lot of their resources and time, so if a strategic investor comes and takes it off their plate, they can focus on their core construction business."

Also read: Third-Party Funding Of Litigation In India: An Asset Class In Waiting