IP-Backed Financing In Times of COVID-19: The Path Forward

Posted on May 28, 2021

Co-authored by Naintara Bipin Balakrishnan and Tanya Garg*

Knowing the difference between intellectual property, copyright and  trademark - Lifestyle - The Jakarta Post
Image Source: The Jakarta Post

This article is the second part of the two-part series analysing the significance of Intellectual Property (“IP”) as a strategic asset, the various types of IP-backed financing, and finally, the approach taken by India vis-a-vis other countries. In the first part, the authors explored how widening the scope of IP would change the traditional business set up and potentially inject innovation and creation into the economy. To supplement the first part of this series, this article dwells into the various advantages of IP-backed financing and sheds light on the different ways in which various jurisdictions have developed their legal framework to support this untapped area of financing.

 Advantages

The advantages of employing IP in order to raise finances are manifold. By allowing IP to be leveraged, immediate cash flow necessities are taken care of. If leveraging IP is incentivised, an entire untapped market is opened, which in turn helps in the advancement of the Indian economy. The advantages of leveraging IP assets are as mentioned below:

Boosting the Economy

As the world comes face to face with the global COVID-19 pandemic, the need to encourage IP innovation arises to promote and protect creativity and to ensure financial stability. Financial stability of a company will ensure its success in the long run. Economic growth, especially long term has been driven by improved productivity. In developing countries, IP can play a pivotal role in stimulating financial health and economic certainty. A large portion of productivity growth and job creation has been credited to innovation, primarily by small and young firms. Given its powerful effect in the global marketplace, encouraging innovation and IP is essential, specifically in research-intensive sectors including health and safety and biopharmaceuticals.  These industries are bearing the brunt of the pandemic in the forefront and therefore, research and development must be nurtured and promoted.  In order to facilitate this, it is evident that IP professionals and experts play an indispensable role in tackling COVID-19.

Creation of a New Market Place

Leveraging IP will create a new marketplace which traditional asset-based lenders have not tapped into as there are a lot of restrictions when it comes to traditional asset-based lending.[1] Tapping into that will help the sector grow exponentially.

Stronger Repayment Incentives

Since intangible assets are fundamental and invaluable to business activity, it provides a greater incentive for borrowers to fulfil their loan commitments and obligations. This results in a more favourable environment for lending entities as the repayment will be prompt and the rate of default will be low. Therefore, this environment serves as a conductive platform for lenders and encourages banks and financial institutions to grant more loans. 

Wider Pool of Assets

One of the problems lenders often face is where existing clients want to borrow over the prescribed lending ratios. Intangible assets contain more value, which in turn provides a means to lend more, with the addition of increased security.

Value Appreciation

The IP of a well-run business will appreciate over time, whereas most of their tangible assets will depreciate over time. IPR allows protection of the innovation making it impossible to replicate without an agreement with the owner. Additionally, being the first to introduce an innovation in the market, adds a higher value to the IP and gives firms a competitive advantage.[2]

 An Alternative to Personal Guarantees (PGs)

Personal guarantees are associated with an individual whereas leveraging IP provides a sense of comfort, as it is associated directly with the business and not with the individual.

Improved Security

Nowadays, floating charges are placed on a business’s IP and intangible assets which in turn weakens its effect if the business gets into difficulties. IP is considered to have a greater security blanket as when defined as part of a lending agreement, the position of the bank is much greater with the administrator.

Sole assets

New-age companies and start-ups lean towards having a greater number of intangible assets than tangible. With shortages in cash flow in COVID-19 times, if companies are allowed to leverage IP it will help cover the immediate cash flow requirement and not end up shutting shop.

Advantage to MSMEs

It is common knowledge that large, well established companies tend to protect their IP as trade secrets. Additionally, due to the abundance of other assets, larger companies have an advantage to easily secure funds from mainstream financing options.

However, the option of IP-backed financing will prove to be extremely beneficial for MSMEs, especially in the economic slowdown the world finds itself in due to COVID-19. Up and coming IP-rich companies, which may not have the same repute as bigger companies, would find the option of leveraging certain IP assets to raise funds in order to invest in expansion projects. Therefore, if successfully recognised and employed, IP-backed financing transactions will allow smaller firms to raise sufficient funds and have an equal opportunity for growth in the marketplace. Consequently, such actions will propel economic development and act as a catalyst for healthy competition in the marketplace. 

 India’s approach to IP-backed financing

India has undertaken several proactive measures when it comes to the commercialisation of IP by way of its policies and initiatives. Although India ranks forty-four out of fifty-three countries, there has been significant improvement in its innovation. Since the release of the IPR Policy in 2016, the Government of India has made a focused effort to support investments in innovation and creativity through increasingly robust IP protection and enforcement.

Some of these initiatives taken by India in spreading awareness of IPR include:  The Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”); Cell for IPR Promotion and Management (“CIPAM”); and the IPR Policy. 

Trade-Related Aspects of Intellectual Property Rights

In India, all IPR related laws are compatible with the Agreement on TRIPS. The 2005 Amendment to the Patents Act, ensured India’s compliance with the TRIPS agreement. The Department of Industrial Policy & Promotion (“DIPP”) drafted an IPR policy for India which was then adopted by the Union Cabinet in 2016.  This Policy complies with the World Trade Organization’s agreement on TRIPS with the aim to encourage innovation and creativity across sectors and provide a strong vision vis-à-vis IPR issues.

Cell for IPR Promotion and Management

CIPAM was introduced by DIPP for the further promotion and management of IP issues. Streamlining and simplification of IP processes in addition to creating awareness and promoting commercialisation of IP are some of its main goals.

National IPR Policy

The IPR Policy encouraged IP to be used as collateral to raise funds for their commercial development, it is India’s first IP focused policy which specifically aims at securitisation of IPR. Furthermore, the policy suggests financial assistance to encourage the development of IP through various routes such as venture capitalists, banks, crowdfunding mechanisms and angel funds.  The policy also suggests setting up an IP exchange to bring investors and IP owners together on one platform. The Hong Kong Trade Development Council developed a free online platform called Asia IP Exchange which connects players in the IP industry. Currently there are approximately 25,000 tradable IP listings and 20 countries connected through this database. The government aims to extend financial support and easily accessible loans to farmers, weavers and artisans through rural and cooperative banks under the policy.

The objective of the IPR Policy is to promote and outline IPR awareness. This is done through outreach and promotions schemes, generation of IPRs, developing legal and legislative framework, administration and management; commercialisation of IPR and enforcement and adjudication.

Commercialisation

Commercialisation is the key to unlocking the maximum economic value of IP; it will further inject innovation in India and aid its economic growth. With the securitisation of IP, a company is able to generate more income. Following the introduction of the IPR Policy, there has been a significant rise in IP registrations. The government has made efforts to encourage IP innovation by reducing fees and providing rebates for MSME’s which has also aided to the rise in IP registrations. The ‘Digital India’, ‘Make in India’ and ‘Startup India’ initiatives have been introduced to commercialise IP and pave way for monetisation of these assets for business in India. 

The report published by Confederation of Indian Industry (“CII”) emphasises the use of IP as collateral for financing. Transactions where IP has been used as collateral has declined over the last five years globally but transaction financing where IP is the primary collateral which is monetised under a ‘distress situation’ have gained a lot of traction. 

The entire world is facing a pandemic; economies are crashing, and unemployment is at an all-time high.  The need for loans has also increased tenfold. Companies need to be given the option to leverage their IP in order to stay afloat. Since India is the third largest economy for start-ups in IP-intensive industries, the report by the CII highlights that India is standing on the cusp of an IP revolution.

Contrary to the Hon’ble Supreme Court’s decision in Canara Bank v. N.G. Subbaraya Shetty[3] there are multiple statutes in Indian law that provide for the securitisation of IP assets. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  defines the expression property and specifically includes intangible assets being knowhow, trademark, copyright, licence or franchise. Further “security interest” is defined as a right, title or interest of any kind upon property created in favour of a secured creditor and includes such right title or interest in intangible assets. Additionally, a “secured creditor” is defined to encompass any bank or financial institution holding any right, title or interest upon any tangible asset or intangible asset. Based on this understanding, any bank or designated financial institution which accepts the assignment of any IP as the security for an outstanding loan is the secured creditor. Therefore, such an entity has security interest over the IP and is entitled to sell or assign it for a royalty and recover the defaulted loan. The principles followed in respect of IPRs must be treated as equivalent to sale of secured assets to recover loans. Furthermore, section 6(1)(f) and (g) of the Banking Regulation Act, 1949 clearly provides for dealing with any property or any right, title or interest in such property which forms the security for the loan.

The Indian government needs to take proactive steps to promote the leveraging of IP, especially when the economy is crashing, and companies are struggling to stay in business. By doing so, several companies will be able to avail economic relief, survive and therefore, boost the economic growth of the country.

 Around the Globe: An overview of IP-backed financing

United States of America

USA is considered the hub of innovation. Their thorough laws protect IPR holders and promote commercialisation. It was only a few years ago in the USA that the practise of using IP as collateral and their potential financing and leveraging options were discussed. These new avenues of financing enable access to credit facilities by optimal utilisation of both tangible and intangible assets. Asset-based lending has increasingly become a more commonly accepted practice. IP has only come into play over the last few years. There is an emerging consensus amongst academicians and experts that secured lending with patents is a form of “credit market innovation”. Since the 1970s, the largest change in the USA is the structural evolution of the US economy, which has been transitioning from a manufacturing driven economy to a service driven economy.

The number of patents pledged as collateral grew from less than 10,000 in 1995 to nearly 50,000 in 2013.[4] Since 1980, 16 percent of all US patents have been pledged as collateral before their expiration.

By 2013, 40 per cent of all firms with patents outstanding had pledged their patents as collateral at some point. Several technology-based firms consider IP as their most valuable assets. The rise of companies such as Google, Facebook and Twitter highlight the importance of IP in today’s economy.

 Singapore

Singapore, recognising the importance of IP in a growing economy, launched the IP Financing Scheme (“IPFS”) in 2014 with the objective of increasing access to IP-backed financing. The initiative worked as a catalyst and allowed the IP industry to thrive. IPFS allowed companies to use IP as collateral in order to obtain loans from authorised financial institutions and the risk of the IP-backed loan will be shared with the Government of Singapore. The initiative was in place till 31 March 2018 and allowed companies to increase their capital by pledging their intangible assets.

Korea

The Korean Development Bank has advanced USD 100 million to eighty IP rich companies in the form of collateralised loans. In order to raise funds against IP as collateral, the valuation of IP becomes a part of the process. The valuation is subsidized by the Korean Intellectual Property Office, and the valuation activity is undertaken by other bodies such as the Korea Invention Promotion Association.

Malaysia

The Malaysian Government has introduced multiple schemes to help and promote the use of IP as collaterals.  The Malaysian Debt Ventures Bhd (“MDV”) provides financing for companies in exchange for IP as collateral. Furthermore, MDV’s RM200 million Intellectual Property Financing Scheme was introduced in 2013 to enable the technology sector to secure funding from banks and other financial institutions.

Conclusion

“Development and innovation is an inalienable human right by virtue of which every human person and all peoples are entitled to participate in, and enjoy, economic, social, cultural and political development.”

– United Nations Declaration on the Right to Development

It is the need of the hour to proactivity commit to developing the use and ambit of IP. The world is gradually recognising the multifaceted value of IP and its benefits when monetised. However, the potential of IP-backed financing remains still unrealised. The concern is rooted in identifying the measures to overcome obstacles when it comes to standardise IP-backed transactions as well as inadequate legislative framework. It is difficult to make estimates and forecasts about the future development because forthcoming perspectives are partly consequences of the current situation which is not as rosy as one might wish.

Although in the recent past the Indian Government has made significant progress in creating awareness with the introduction of the IPR Policy in 2016, it still has a way to go with regards to exploiting the full potential of IP. It is essential for lawmakers to take cognizance of the changing landscape and companies to take a more strategic and holistic view when it comes to IP-backed financing. An independent authority should be assigned to oversee transactions and bridge the gap in the existing framework and governance.  The authority should also be tasked with creating a valuation technique to determine the worth of IP used for raising finance and expanding the current definition and use of IPR. MSMEs would greatly benefit from the acknowledgment and recognition of IP-backed financing options. The objective of raising funds via IP is twofold: First, to facilitate availability of credit to IPR holders to utilize when they are faced with financial difficulties; and second, to inject creativity and promote innovation in the economy. It is vital for companies to invest in research and development in order to increase their value in the market and be financially secure. Due to the lack of internal structure, India must take inspiration from countries like Singapore, USA, Malaysia and Korea who have taken concrete steps towards setting up a thriving IP financing and investment industry.

Read the first part of our two-part series on IP-backed financing here.


*Naintara Bipin Balakrishnan is a technology law enthusiast with a keen interest in data protection and privacy law.

Tanya Garg, on the Executive Board at IntellecTech Law, completed her B.B.A. LLB. (Hons) degree from Symbiosis Law School, Pune (Batch of 2020) with specialization in dispute resolution, intellectual property, technology and antitrust laws.

[1] Irfaan Khota, and Anees Stern, Leveraging Intellectual Property for Strategic Advantage in Product Development, South African Journal of Information Management Vol. 7 (2005).

[2] Fatma Mrad, The Effects of Intellectual Property Rights Protection in the Technology Transfer Context on Economic Growth: The Case of Developing Countries, Journal of Innovation Economics & Management Vol. 2 (2017).

[3] Canara Bank v. N.G. Subbaraya Shetty, (2018) 16 SCC 228

[4] William Mann, Creditor Rights and Innovation: Evidence from Patent Collateral, Journal of Financial Economics Vol 130 Issue 1 (2015).

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