Should advisory firms take clients who dilly-dally on payments to court?

13 September, 2016

Do not bite the hand that feeds you, is a principle most in professional services industries abide by. Many a time they do so at the cost of their own good. So it came as a surprise when I learnt that Mumbai-based boutique investment advisory firm Stemade Biotech has dragged one of its clients to the courts for non-payment of dues.

In a petition filed in Mumbai High Court, the advisory, which specializes in pharmaceutical and healthcare services, alleged that Australian drug maker Generic Partners PTY Ltd didn’t pay it Rs 5 crore as success fee for helping it find a buyer

Success fee is what advisory firms get when they help a client close a mandate. In this case, Generic Partners had engaged Stemade Biotech to help it find a buyer for itself. The details of the development may be read here.

Differences over commissions or success fee are not new but an advisory firm taking one of its clients is something rare in the industry. And there are reasons for that. To begin with, it is an extremely competitive business. There are too many takers for too few opportunities and they come in all shapes and sizes. In other words, for any mandate, the boutique investment banks have to compete with not only their local peers but also with global merchant and investment banks as well as the big four advisory firms such as EY, KPMG, Deloitte and PwC. Not to forget the industry veterans who, too, many a time in the race.

In a scenario like this, taking one’s client to the courts is a dubious distinction no firm will want. It may simply frighten one’s prospective clients away and hurt the firm itself in the long run. But at the same time, what recourse does a party have in a case where its client refuses to honour the commitment it made.

We do not know about the authenticity of the claims Stemade has made in the petition. The matter is now sub-judice and for now, there is no way for us to know who actually is in the wrong. That said, there is no denying that Stemade has made an audacious move.

While gathering details on the development, I spoke with a host of investment bankers and also, lawyers specializing in facilitating transactions. To my utter surprise, I found that each one of them, at any given time, had at least one client who was delaying the payments on some pretext or the other. I also learnt of instances where “clients” would renegotiate the deal after the transaction was done.

They all agree that such attitude is unprofessional but who will bell the cat?

The marquee world of investment bankers and transaction lawyers has changed drastically after the collapse of Lehman Brothers and subsequent financial meltdown. Many big corporate houses have started to rely more on in-house lawyers and advisors for smaller transactions. They hire outsiders only for big-ticket deals.

In this scenario, it will be interesting to see which way this case moves. Whether the investment banking and legal fraternity will take cues from Stemade and will come forward to take defaulters to the courts in future or will the companies become more cautious in giving mandate to outsiders and also look for tighter contracts?

Keep watching this space for updates on the case.

(Maulik Vyas is Special Correspondent at News Corp VCCircle.)

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Should advisory firms take clients who dilly-dally on payments to court?

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