Introduction
Conventionally, the tangible assets are preferred as collaterals in financing businesses by the financial institutions. Over the period of time, these tangible assets’ value tends to depreciate. However, with the advancement in science and technology, intangible assets like intellectual property rights are becoming the way of financing many businesses around the world. Usually, the value of these IPRs, which includes patents, copyrights, trademarks, trade secrets, geographical indications and industrial designs, tends to appreciate over the period of time making it the valuable security for the creditors.
In India, IP financing is at its nascent stage. IP financing refers to the creation of security over IPRs, while capitalizing the innovative and creative ideas of the company. It is quite beneficial for the Micro Small and Medium Enterprises who doesn’t have many tangible assets to finance their business, so through securitization of their IPs they can bring the needed capital to expand and improve their businesses. In India, Department of Industrial Policy and Promotion has also acknowledged the need to commercialize the IP assets in objective 5 of ‘National IPR Policy 2016’.[1] As IP financing is a recent development, there are many challenges as well. This article is going to discuss the legality of IP financing in India. It will discuss the challenges of securitization of IP assets in India.
Feasibility of Securitization of IPRs in India
For creating any security, as collateral, over an asset, its feasibility has to be seen in the applicable laws. Moreover, it depends upon the bank and type of IP assets which are to be securitized as collateral. The find out the feasibility of securitization of IPRs India, the laws in this regard has to be analyzed. It includes Companies Act, 2013, Banking Regulation Act, 1949, the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, Foreign Exchange Management Act, 1999, Reserve Bank of India, 1934 and Patens Act, 1970, Trade Mark Act, 1999, Copyright Act, 1957, Design Act,2000.[2] Former laws can be collectively known as commercial laws, or general laws, while later laws are collectively known as IP acts, or special laws.
- General Laws/Commercial Laws.
Companies Act 2013: Section 77 of the act states, inter alia, that “a company can a create charge within or outside India on its property, or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India” and such charge has to be registered with the Registrar of the Companies within thirty days of its creation.[3]
Banking Regulation Act 1949: Section 6 of the act, inter alia, allows the banks to engage in any forms of business including “the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security” and “acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security”.[4]
The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002: Section 2(1) (zf)(ii) of the act sates that security interest, nter alia, includes “such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or license of intangible asset.”[5] However, under section 31 of the act there are certain exemption but it does not exempt IP assets as such.
The Foreign Exchange Management Act, 1999: Sectio 2(za) of the act does not include IP assets as security. However, section 2(ze) allows the transfer of such assets as it states that “transfer includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien”.[6] As the does not define IP assets as security and it allows the transfers only, then it will depend on the cases for securitization of IP assets and authorized dealer banks.
- IP Act/Special Laws
Patents Act, 1970: Section 68 read with section 69 of the act, it allows the creation of security by way of “mortgage, licence or the creation of any other interest wholly or partly”.[7] Such creation has to be documented and registered with the Controller General Of Patents in the prescribed manner.
Copyright Act, 1957: Copyright is not preferred as collateral, as the copyright right vest with the creators without any registration. It is silent on the creation of security for loans; however banks may allow the registered copyright as collateral on day to day basis, but it will not constitute valuable security. Section 18 and 19 of the act allows the owner of existing copyright to assign the copyright for a work wholly or partly.[8]
The Designs Act, 2000: Section 30(2) of the act allows the creation of security by way of “mortgage, license, or otherwise in registered design by making an application to Controller to register title and on proof of his satisfaction the Controller shall issue cause notice of the interest to be entered in the prescribed manner in the register of designs” for creating such security in the designs.[9]
Trade Marks Act 2000: The trade mark act does not talk about the creation of security upon the trade marks either with or without goodwill. However, trade mark can be part of the collateral if it has not been the part of loan while procuring loan, thereby trademarks cannot be assigned to a bank a borrower who has defaulted on loan.[10]
By analyzing the applicable laws in place, it is clearly discernable that there are certain legislations which allow the securitization of IP assets barring few. In addition to legal aspect, lenders face practical challenges in accepting IP assets as collateral to their credits.
Challenges in Accepting IP Assets as Collateral
While IP financing is lucrative, especially for MSMEs, yet there are certain practical obstacles which refrains lenders from accepting IP assets as collateral. These are as follow:
- Valuation: Before, accepting IP assets as collaterals, the lenders would require a thorough due-diligence, which a time consuming task, by the industry experts so as to gauge the actual value of the IP assets. It is a humongous task to do thorough research on IP assets’ market value, customer loyalty, and industry trends and so on. There are no uniform guidelines to know the valuation of an IP asset which could be used by the lending institutions.
- Validity of IP Assets: IP assets derive its valuation from the registrations. Registration of IPs is time consuming. It would be imperative for the lenders to include such issues in the securitization of such IPs so as to avoid any faulty title on part of the borrower, thereby creating obstacle in the enforcement of security against such IPs. The lenders have to look into all such encumbrances on IPs before accepting them as collateral.
- Fluctuation and Tangibility: The value of IP assets keep changing over a period of time thereby making it difficult for both the lender and borrower to actually predict the actual value of the IPs. Unlike tangible assets, it is hard to liquidate it easily or sell it off to realize its value in case of default. To secure the interest of the lenders, a mechanism needs to be carved to assess the resale value of the IPs.
- Enforcement and Monitoring: Unlike tangible assets, its enforcement becomes difficult due to risk of infringement and monitoring the value of IP assets and keeping its relevancy intact thereby making it difficult for lenders to protect their interest.
- Legal Issues: IP laws vary jurisdiction to jurisdiction leaving the scope of third-party claim, ownership issues, and other potential dispute which may tarnish the value of such IP assets.
- Lack of Liquidity: Finding suitable buyers for the IP assets is quite difficult, if such IPs require special kind of market to generate revenues.
- Dependence on IP: If an IP derives its value from other assets of the company then in case of default the company may lose out on such assets making the value of such IP of no use.
- Technological Advancement: Science and technology tends to grow. Technological related IPs may make the various IPs obsolete making such IPs prone to the degradation of value of such IPs.
Notwithstanding the challenges, there are various benefits associated with the IP financing for businesses. It provides company with additional security for loans thereby widening the scope financing to their businesses. It would be an alternative to the traditional assets like real estate, equipments as collaterals. In addition to it, intangible assets of MSMEs can be leveraged to fund their businesses.
Conclusion
IP financing eases the access to the credits for the potential businesses, especially the MSMEs. However, there are no barriers in law with respect to the IP financing or securitizing IP assets in India, yet it depends upon the discretion of the lenders to accept such collaterals.
Emerging IP backed financing could be leveraged to its full potential, if new transparent mechanism is introduced to bolster the relationship between IP holding entities and lending institutions. Moreover, it can take from the Singapore where the IP baked financing is guided by well-established mechanisms made in this regard. Considering the challenges involved in the IP backed financing, it is imperative for the lenders to assess the risk and benefits involved, to conduct due-diligence thoroughly of the IP assets which is to be securitized so to protect their interest.
[1] THE HINDU, https://www.thehindu.com/business/all-you-need-to-know-about-the-intellectual-property-rights-policy/article8600530.ece, (Last visited on Apr. 1, 2024).
[2] Nayantara Sanyal and Amishi Vira, Legal Framework : Capitalization of Intellectual Property in India, BAR & BENCH, (Aug. 25, 2023, 8:04 pm), https://www.barandbench.com/law-firms/view-point/legal-framework-capitalization-of-intellectual-property-in-india.
[3] The Companies Act, 2013, § 77, No.18, Acts of Parliament, 2013 (India).
[4] Banking Regulation Act, 1949, § 6, No. 10, Acts of Parliament, 1949 (India).
[5] The Securitisation And Reconstruction Of Financial Assets And Enforcement Of Security Interest Act, 2002, § 2(1) (zf) (ii), No. 54, Acts of Parliament, 2002 (India).
[6] The Foreign Exchange Management Act, 1999, § 2(ze), No. 42, Acts of Parliament, 1999 (India).
[7] The Patents Act, 1970, § 68 & 69, No.39, Acts of Parliament, 1970 (India).
[8] The Copyright Act, 1957, § 18 & 19, No. 14, Acts of Parliament, 1957 (India).
[9] The Designs Act, 2000, § 30(2), 16, Acts of Parliament, 2000 (India).
[10] Supra, Note 2.
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