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SECURITIZATION OF INTELLECTUAL PROPERTY- THE NEW ERA OF CREDIT LENDING MARKET (REQUIRED SOCIO-LEGAL CHANGES)
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SECURITIZATION
OF INTELLECTUAL PROPERTY- THE NEW ERA OF CREDIT LENDING MARKET (REQUIRED SOCIO-LEGAL
CHANGES)
AUTHORED BY
- KRITI VARDHAN PANDEY
ABSTRACT
The global as well as the Indian
economy is very rapidly transforming into a knowledge-based economy with higher
contribution of the service sector in the overall GDP & startups being the
drivers of this change globally. In India the service sector now contributes
more than 53% to the overall Indian GDP, the central challenge with a knowledge
based and service sector dominated economy is that it has very minimum physical
assets which makes it really tough for the banks to lend with the ongoing
physical assets backed financing trend of the lending institutions.
This paper tries to dwell into the
existing lacunas in the physical & tangible asset backed lending and tries
to provide how securitisation of Intangible assets like Intellectual properties
can help in filling this financing void for the startups, the service sector
and the new age knowledge-based businesses as the growth in the value of
Intangible assets has been exponential with its global value increasing ten
folds in just a span of last 25 years.
This paper further makes a thorough
comparative analysis of the Intellectual property financing across different
countries globally and from the European as well as the Asian subcontinent, it
also lays down various key suggestions for the Government to work upon in
sectors like Valuation of the Intellectual properties, Maximising value of
Intellectual property, reducing transaction and overall financing costs &
relevant policy & legislation changes required to ensure making
Intellectual Property & intangible asset financing a viable option for
businesses in India.
Keywords: Intangible assets, Intellectual
Property assets, commercialisation of IPR, Knowledge based Economy.
INTRODUCTION
The credit lending market in India is
highly driven by physical asset backed lending which was a viable exercise in a
physical product manufacturing extensive economy but the Indian economy now has
higher domination of the service sector, and the service sector unlike other
sector’s require very little physical assets.
Moreover, India is also the third
largest startup market[1]
and for new businesses like startups & other small businesses their value
is derived from what they invent and create, these startups and MSMEs
contribute more than half of the total employment globally and more than 90% of
the total business worldwide[2],
which makes it even more integral for the existing lending behaviour to change
in order to keep pace with the changing dynamics of the Indian economy. Also,
the SaaS (software as a service) companies are increasing at an exponential
rate in India as well as globally.
Amidst all these challenges commercialization
& securitization of intellectual property can prove as a positive catalyst
to ensure best outcomes & to fill the existing financial void to ensure
easy availability of finance for the businesses to sustain & grow.
CURRENT
LEGAL FRAMEWORK ON SECURITISATION OF INTELLECTUAL PROPERTY
The current Indian legal framework is
affirmative in case of securitization and commercialisation of intellectual
property and intangible assets as the Government of India came out with
National IPR policy in 2016 to commercialise IPRs. Moreover, the Indian banking
system has already enacted key provisions for acceptance of intangible assets
as collateral via Section 2(1)(t) of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002
(SARFAESI) which defines the expression property, and it specifically includes
intangible assets in the said definition.
NATIONAL
IPR POLICY
The National IPR policy is one of a
kind & first policy by the Government of India to commercialize Intangible
assets esp. Intellectual property and has stated the same in its objectives in
national IPR policy, 2016. The said policy also suggests the following reforms
Awareness of IPR: promotion &
outreach
The office of the Controller General
of Patents, Designs & Trademarks (CGPDTM) in collaboration with the Cell
for IPR promotion & management (CIPAM) along with various other industrial
associations are undertaking various awareness initiatives with more than
hundred such awareness & promotion programs being conducted every year.
The government is also eyeing for the
inclusion of Intellectual Property in curriculum of colleges, universities
& high schools.
Rajiv Gandhi Institute for
Intellectual Property Management (RGNIIPM) is too conducting various IPR
promotion & public training programs.
Legislative & legal framework
New legislations like Administration
of Copyright & Semiconductor Integrated Circuits Layout Designs Act under
Department for promotion of Industry & Internal trade (DPIIT) being
included in the Indian institutional IPR framework.
Furthermore, new Trade Mark Rules,
2017 along with amended Patent rules for keeping MSMEs at par with the startups
& streamlined process for statement furnishing under sec.146 of the Patents
Act.
Accession to treaties of WIPO &
pilot PPH program with Japan too included.
Generation of IPR’S
The government has digitalised the
whole application filing process with options to check real time application
status, with online application fee payment window & regular updates for
efficiency & transparency.
Subsidized & discounted fees for
application filing by startups & SMEs along with financial support for IP
generation by Startups Intellectual Property Protection (SIPP) scheme.
Expedient examination for grant of
patents & for registration of the trademarks for key categories with high
emphasis on startups, SMEs, Women entrepreneurs, and disbursal of license
within time bound manner.
Initiative to set up Technology &
Innovation Support Centres (TISC) with support from IP facilitation centres
& WIPO in universities to help prospective & potential applicants.
Adjudication & Enforcement
Modified & focussed initiatives
by CIPAM to counter counterfeiting of Intellectual properties
Capacity enhancement initiatives for
state level officials along with specific workshops by WIPO.
Specific training programs & tool
kits for police officers.
Administration & Management
Focussed & uniform practices
throughout the country to streamline the complete process & timely disposal
of IP applications.
Industry focussed automation &
re-engineering of IP processes.
Increased emphasis upon digitalization
with hearing through video conferencing, online filing, E- communication &
digital issue of certificates.
Increased manpower in IP offices with
posts & designations increased three to six times in relative departments.
Bilateral agreements with
stakeholders & enhanced cooperation with WIPO in matters of international
PCT applications & e- PCT filings.
Steps taken for modernization of IP
offices & updated websites of the said offices.
Commercialization of IPR
Income tax deductions allowed on
incomes & royalties received on IPRs to make IPR commercialization more
lucrative.
“Patent Box” initiative introduced by
Finance act, 2016 to tax patent revenues differently than the other commercial
revenues & gains.
DIFFERENT
MODES OF SECURING FINANCE & ITS LIMITATIONS
Since long the businesses have had
two sources of finance: Equity & Debt but both has its own limitations
& drawbacks as under the equity finance an enterprise secures finance by
shedding off its ownership rights but after a certain level it’s impossible for
an enterprise to further dilute its ownership as it can lead to losing control over
the enterprise or having very limited to no say in decision making.
This is exactly where the debt
financing comes into picture wherein the company pledges its physical assets to
secure finance from the banks and other financial & lending institutions,
this method of financing though is lucrative for its ease of access & lower
average cost of capital yet is not viable for every organisation esp. for such
organisations which have higher intangible assets and very little hard assets
to pledge for such debt financing.
What is intangible asset finance
& its potential?
Intangible assets are non-physical
assets held by an enterprise such as Goodwill & intellectual property. These
Intangible assets can be used to get finance either by securitising them or by
transferring rights to profits or cash flows generated by such intangible
assets, it can also be used as a key indicator of company’s value & can
assist in checking financing viability and making financing decisions.
The intangible assets are gaining
prominence as intangible assets make almost up to 90% of value of companies in S&P
500, in year 2021 global brand value touched 12.5 trillion dollars with a
stagnant 14% increase in just 2 years of time[3],
also intangible assets including intellectual property add on an average twice
as much value than the tangible assets[4].
Challenges associated with intangible
asset finance & prospective solutions
Intangible asset including
Intellectual Property financing is still at a very nascent stage with various
challenges & roadblocks including legal & structural hardships like the
following: -
1. Lack of understanding of intangibles
in investors & institutions
The number of investors
& financing or lending institutions which accept intangible asset backed
financing in India is very limited due to the lack of proper understanding of
intangibles in terms of cash generating potential, forecasting etc.
As, this mode of
financing is relatively very new and the investors & institutions have
almost no experience in lending against intangible assets which makes them even
more sceptical about the same.
To resolve these issues
& to overcome with these challenges few countries have worked mutually with
the local entrepreneurs & businesses by supporting the credit &
financing decision making process as in the case of Japan.
Japan changing
perspectives
The Patent Office’s IP
Finance Promotion Project, in Japan[5]
introduced in 2015, has led to various regional lending & financing
institutions driving optimistic changes by intellectual property focussed
initiatives in awareness, knowledge & capacity building has led to a
substantial increase in use of Intellectual property information by 25% among
regional business lenders.
2. No clear & established valuation
mechanism
The intangible assets lack
a uniform, clear & established valuation mechanism with discrepancies &
difference between the accounting & the market value of these assets, also
the lack of available information & the terms of transactions involving intangible
assets are also not readily available, these problems further make the valuation
tough.
Also, in matters of cross
border transactions there is no homogenous framework of valuation of intangible
assets across economies which possess a significant roadblock in securitisation
& commercialization of intangibles & intellectual property.
Initiative to create valuing standards for intangible assets
The international valuation standards
council has issued relevant guidance on the valuation standards of intangible
assets in ivs 210[6].
Moreover, the royal institution of
chartered surveyors also provided a guidance note in March 2020 regarding the
valuation of intellectual property which covered different sub groups of
intellectual property assets for instance technology related IP artistic
related IP and brand related IP[7].
INITIATIVE TO SUPPORT PROFESSIONAL
VALUATION SKILLS
Singapore
Singapore chartered valuer and
appraiser program offered in the year of 2016 was integrated to increase
valuation capability it is one of a kind and first business valuation
certificate in the Asian subcontinent that helps regional valuation
professionals to reform their practices in line with international valuation
standards.
Jamaica
The Jamaican intellectual property office
(Jipo) is leading an intrinsic effort to build capacity for the IP valuation in
Jamaica; it also along with the partnership of UK bankers led to the
establishment of Jamaica's first IP valuation association.
3. Very high transaction costs
While intangible assets backed
financing hold a promising future but it's still at a very nascent stage with
very small volume of transactions as compared to the other types of financing
methods and with the existing complexities and challenges associated with the
due diligence and valuation of these assets makes the overall transaction cause
very expensive as well as very time consuming which makes this option very less
attractive.
The policy makers across various
countries have started unique initiative trying to reduce transaction costs by
offering subsidies for IP valuation along with subsidised interest rates and
additional tax benefits for lenders & borrowers.
Financial and sectoral regulators do
not promote the use of intangible assets as collateral.
The financial and sectoral regulators
have a key responsibility to ensure better functioning and overall stability of
the financial system, these regulators require the banks and financial
institutions to hold a certain specified amount of capital to cover the risks
associated with a particular lending, the amount of capital to be held depends
upon the degree of risk involved and these regulations makes it really
impossible for the banks to lend against intellectual property or intangible
assets as the risk profile is relatively high than the physical assets.
But these regulatory constraints may
lead to better opportunities for other type of lenders to support the
intangible asset backed financing, the alternative lenders such as debt funds
can fil this void as they have significantly less regulatory compliances as
compared to the banks.
4. Liquidation challenges for Intangibles as there is lack
of Secondary Markets
The secondary markets ensure better
liquidity and exchange of any security or commodity but it's not the case for
the intangible assets as there is no secondary market which severely impacts
the overall liquidity of these intangible assets.
The contributing reasons for the same
is that the intellectual property financing transactions are still very private
and hardly any information is available in the public.
But there are efforts to bridge this gap.
State initiative’s, development banks
and specialised insurance offers schemes that can significantly change the
overall risk allocation.
For instance, the collateral
protection insurance shall address the banks concerns of being stuck within an
illiquid asset in which the insurer can ensure recoverability of a particular
portion of the collateral value and significantly limit the overall risk of the
banks.
Furthermore, the development banks
can also play an integral role in IP financing considering the lack of lenders
in the market as the development banks have higher risk tolerance and
significant ability to even cater for smaller deals.
Global examples
Republic of Korea
In the Republic of Korea IP backed
lending has been led by two state owned banks industrial Bank of Korea and
Korean development Bank in addition to the bank guarantee these institutions
also facilitate access to finance for intangible asset intensive companies and
the Korean development Bank also runs IP recovery fund of 60 million Us dollars[8].
Canada
In Canada the development banks have
played the key role in improving the IP backed financing in the country as the
development banks supported the growth of small businesses and to call smaller
transactions compared to other landers for instance a division of the
development Bank of Canada BDC capital created a direct investment fund
specifically for IP back financing structures with an overall budget of 160
million Canadian dollars the first round of investments has also concluded in
the year 2022[9].
Jamaica
In Jamaica the Caribbean partnership
facility which is a private sector initiative jointly funded by the
commonwealth and development office Caribbean development Bank government of
Canada and the inter-American development Bank has funded capacity building for
IP valuation[10].
Additionally, one more IDBI project
in Jamaica is working for combining access to capital funding with incubation
services to completely assist evolving SMEs for arranging grants for
innovations & adoption of digital technologies.[11]
Republic of China
The People's Republic of China is
currently the largest government supported intellectual property market, China
has insured direct subsidies to borrowers, credit guarantees and other relevant
schemes to promote IP back financing. China is the first country to encourage
sale and lease back models as a base for securitization.
DIFFERENT
MODELS OF BUSINESS FOR IPR BACKED DEBT FINANCE
If the intellectual property assets have
good liquidity and better prospects it can be considered as a great collateral
for financing and can also assist in challenging scenarios of financial
distress, few of the alternative business models for IPR financing are as
follows.
IPR as risk mitigator
An active IPR is considered as a
source of future cash flow by the investors and can prove to be an integral
factor in making lending decisions and can ensure that debt servicing is
relatively easier.
IPR backed securities
Under this mechanism the IPR along
with the rights over its royalties and income flow is transferred to a special
purpose vehicle which then issues security against it, this leads to separation
of a security from the respective intellectual property assets which helps in
getting favourable risk rating and later the securities can also be issued in
capital market for fundraising.
IPR sale and leaseback
Under the initiative the IP assets
are acquired by the lessor or a bank from the owner of the intellectual
property for a lump sum amount and then its leased back to the previous owner
in lieu of some leasing fee and after the end of the leasing period the lessee
gets the option to repurchase the IP asset.
IP backed loans
The intellectual property backed
loans can be forwarded by respective firms in the market by putting the IP
assets and the relative rights associated with it as collateral with the
funding institution.
WIPO ACTION
PLAN
The World Intellectual Property
Organisation (WIPO) introduced three stream action plans on Intangible assets
finance which are as follows: -
- Raising the profile of
intangible assets finance
WIPO has stressed the integration of
leaders & professionals from various fields of business, finance and IP
from private & public sectors.
It has also vouched for establishing
Expert Consultative Groups (ECGs) for streamlining intangible assets finance.
These groups will collectively contribute in solving the challenges &
technical & operational roadblocks in IP finance.
Furthermore, concept of finance
related forums suggested to raise complete awareness about the challenges,
roadblocks & potentials involved in intangible assets finance.
- Revealing ground reality
Since the IP financing sector
currently lacks better disclosure & information especially for the
investors, policy makers, institutions & other stakeholders, WIPO is
working on evidence-based analysis by series of country reports to reveal
actions of governments, policy makers & commercial actors.
The first such report was launched in
2021 Unlocking IP- backed Financing: Country perspectives Singapore's journey.
- Equipping participants &
stakeholders in IP assets finance & valuation
WIPO stresses about the need of
providing practical tools for businesses to relatively improve chances of using
intangible assets.
A facilitating service for sourcing
of valuation experts which could be used by investors & lending
institutions to ascertain uniform & certain value of intangible assets
including intellectual properties, this can also assist in underpinning programs
by development banks & the government.
CONCLUSION
The potential of the service sector
and startups in a knowledge based economy is exponential and it has full
chances of driving India to a 5 trillion economy in the near future though
without intangible asset and intellectual property financing it would be hard
for the startups, medium sector enterprises and service sector to grow and
thrive considering with the primitive way of funding it will hardly qualify to
get finance considering these sectors and institutions have very less physical
assets. Lack of finance has been the central reason for failure of the majority
of startups as 65% of total failed startups in India described lack of proper
financing option a central reason for their business failure.
Moreover, securitization and
commercialisation of intellectual property assets is a growing practice in all
the major & advanced economies and for a rapidly developing economy like
India it becomes even more crucial to keep pace with the ongoing changing dynamics
of the global economy.
[1] StartupIndia, Department of
promotion of Industry and Internal Trade, available at https://www.startupindia.gov.in/content/sih/en/international/go-to-market-guide/indian-startup-ecosystem.html.
[2] Small and Medium Enterprises
(SMEs), Improving SMEs access to finance and finding innovative solutions to
unlock sources of capital, available at https://www.startupindia.gov.in/content/sih/en/international/go-to-market-guide/indian-startup-ecosystem.html
[3] WIPO (2022). Global Innovation
Index 2022, 15th Edition: What is the future of innovation-driven growth? Top
5,000 brands (% of GDP), source: Brand Finance database
(https://brandirectory.com/); and International Monetary Fund, World Economic
Outlook Database, October 2021, available at
(https://www.imf.org/en/Publications/
[4] WIPO (2017). World Intellectual
Property Report 2017: Intangible Capital in Global Value chains, available at http://wipo.int/publications/en/details.jsp?id=4225
[5] Umbrella term broadly used to
refer to initiatives introduced on the webpage https://chizai-kinyu.go.jp/
[6] IVSC (2020). International
Valuation Standards, including IVS 210, pp. 63-79.
[7] RICS (2020). "Valuation of
intellectual property rights".
[8] OECD (2022). Secured lending for
SMEs: Making effective use of registries and intangibles, 51 et seq.
[9] BDC (2022). “World IP Day: BDC
Capital’s IP-Backed Financing Fund celebrates a busy year helping Canadian
companies grow”, available at https://www.bdc.ca/en/bdc-capital/intellectual-property-backed-financing
[10] Andrew Laidley (2021). “Over 300
trained in intro to IP valuation”, Jamaica Observer, available at www.jamaicaobserver.com/business/over-300-trained-in-intro-to-ip-valuation)
Article Information
SECURITIZATION OF INTELLECTUAL PROPERTY- THE NEW ERA OF CREDIT LENDING MARKET (REQUIRED SOCIO-LEGAL CHANGES)
Authors: KRITI VARDHAN PANDEY
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/02/24
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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