Using IPR as collateral: Business Continuity in Post-Covid Landscape

I. Introduction:
The COVID-19 pandemic has thrown open dilemmatic questions to various business houses quizzing them about their survival, expansion plans and business continuity. The pandemic and subsequent restrictions have given way to a number of policy decisions which have been pending implementation. The current scenario where financial packages are being announced and “liquidity is being injected” in the economy, the situation is ripe for implementation of reforms which remained lapsed due to usual administrative lethargy.

II. IPR as Collateral
Intellectual Property is an intangible property (intangible assets) and includes Patents, Trademarks, Copyrights, Geographical Indication, etc. The idea of using this property as a collateral has long been followed in IP-rich countries like the USA & Japan. Globally speaking, the World Intellectual Property Organization (WIPO) has constantly pushed for securitization of such intangible assets. In addition to this, the United Nations Commission on International Trade Law (UNCITRAL) in its Legislative Guide on Secured Transactions[1] and subsequently in its Legislative Guide on Secured Transactions: Supplement on Security Rights in Intellectual Property[2] extensively deals with the methodologies, issues and future of Security Rights in the IPR realm.

Locally speaking, Indian legislations – both on IPR & on Securitization – have incorporated provisions regarding the use of such intangible assets as collateral. More so, the idea culminated in the National IPR Policy of 2016[3] under which one of the five objectives is commercialization of IPRs. Specifically, 5.11.1., of the IPR policy reads – “Enabling valuation of IP rights as intangible assets by application of appropriate methodologies and guidelines; facilitating securitization of IP rights and their use as collateral by creation of enabling legislative, administrative and market framework”. This objective creates a legislative intent and a path for future judicial interpretation of existing laws, in view of giving a push towards commercialization of IPRs.

It is, however, noteworthy that the existing securitization framework is sufficiently placed for commercialization of IPRs. To mention a few, the existing framework succinctly provides a platform for securitization of Patents, Trademarks, Industrial Designs, and Geographical Indication Tags as well. In furtherance to the prevailing laws & the policies, there has been a constant impetus from various industrial, commercial and corporate fronts which has aided in making the scenario ripe for financial institutions to seek lending in terms of intangible assets as well.

A. Patents
Primarily, Section 68 under the Patents Act, 1970 (Patents Act) provides for assignments of patents only when reduced to writing. Patents, being a long term intangible asset, are ideal to be used as collateral. However, only registered patents are eligible for the process of securitization. Subsequent to valuation of the Patent, the same can be mortgaged or be used as  collateral. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) under Section 2(1)(t) defines “property” and in particular, includes the intangible assets beingknow-how, patent, trademarks, copyrights, license or franchise or other commercial right of similar nature. In addition, Section 2 (1) (zf) explains “security interest” as a right, title or interest of any kind on the property created in favour of a secured creditor and includes this right, title or interest in the intangible assets.

The perusal of the above provisions makes it clear that the current framework is robust for giving impetus to Patent-backed financing. This could indeed, turn fruitful for MSMEs, SIDBI-backed enterprises, and many other such enterprises which have the necessary requisites of registering a Patent. A fundamental obstacle that comes to fray is the lesser number of Patents that are granted in India. The reasons for the same can be attributed to the stringent guidelines on registration of patents inter alia a time consuming prosecution process, lack of uniformity or procedures as well as some degree of lethargy on part of the officials.

Primarily, the industrial lobby also validates and encourages such financing. The Confederation of Indian Industry (CII) in its report on Intellectual Property Rights: A Case for Monetization (CII Report)[4] lays down a detailed methodology for Patent monetization. Another obstacle as identified by said report and that lends weight against the Patent commercialization is the valuation of the Patents. Patent Valuation process, firstly, requires identification of such monetize-able assets. Admittedly, this exercise is not undertaken by various stakeholders as the focus has been on traditional ways of lending. Sans the obstacles, which can be overcome easily, the post COVID world can definitely look forward to Patent commercialization and its use in financing the businesses. It thus becomes important for business houses to change guard with respect to IP asset valuation and seek financing on the basis of the same.

B. Trademarks
The Trademarks Act, 1999 (Trademarks Act) under Chapter V provides for transmission and assignment of trademarks. For usage in financing, both registered and unregistered trademarks can be undertaken.[5] However, it is advisable to use a registered trademark for such purposes. The Indian Banking system has been appreciative of using trademarks of gigantic brands as collateral for lending purposes,e.g., Kingfisher, Daawat, etc. The valuation of such trademarks provides strong footing for the financial institutions to lend capital and invest in such enterprises.

Apart from large brands which are riding or have ridden on years/decades of goodwill, trademark monetization and subsequent financing can be an emphatic financial booster for  MSMEs. This is particularly because trademarks are the most valuable IP asset for them and developing these trademarks (trade names) into brands of tomorrow can fetch sufficient capital for such MSMEs. [6]

However, despite the legal & industry-friendly framework, commercialization of trademarks has been marred by various controversies. For starters, the valuation of a trademark does not always yield constant value. For times when the brand is doing exceptional business, it does help in enhancing the valuation of the trademark. This becomes contrary when the business/enterprise is involved in a controversy and the goodwill drops down. [7]Apart from the business fluctuations, various regulatory and judicial interpretations have resulted in stagnation of this evolving concept. The Supreme Court in Canara Bank vs NG Subbaraya Setty & Anr. (Civil Appeal No.4233 of 2018)[8] held that trademarks cannot be used as collateral in banks because it would then require banks to use such trademarks and earn royalty, which is devoid of the primary business of the bank as mandated under the Banking Regulation Act, 1949. However, in 2009, Kingfisher Airlines secured a loan of about Rs. 2000 Cr. from the State Bank of India by placing its various trade marks as collateral.[9] Only a handful of of cases have been dragged to the court for the simple reason that usage of Trademark/tradename as collateral is already shunted at an early stage and traditional ways of financing are encouraged.

Post COVID, the picture does not look bleak. With the economic call for an Atmanirbhar Bharat, it becomes imperative that a catena of local trademarks will come up. At this juncture, it becomes important for various financial institutions, NBFCs, and lenders to consider IP backed financing in a more policy & industry friendly way.

C. The Way Ahead

The post COVID world is ready to pose difficult questions for businesses and even start-ups with respect to business continuity and capital financing. Commercialization of IP assets and their subsequent usage as collateral or other forms, can indeed help such enterprises in the coming years. The regulatory framework as discussed above as well as the industrial intent is highly inclined towards seeking the IPR line of financing. Sans the few obstacles as mentioned hereinabove, the IPR-based financing can help businesses thrive. This also makes the market ripe with opportunities for the professionals and experts in IP valuation, asset management and financing.

[1]UNCITRAL LEGISLATIVE GUIDE TO SECURED TRANSACTIONS. Available at: https://www.uncitral.org/pdf/english/texts/security-lg/e/09-82670_Ebook-Guide_09-04-10English.pdf
[2]UNCITRAL LEGISLATIVE GUIDE TO SECURED TRANSACTIONS: SUPPLEMENT ON SECURITY RIGHTS IN INTELLECTUAL PROPERTY. Available at: https://www.uncitral.org/pdf/english/texts/security-lg/e/10-57126_Ebook_Suppl_SR_IP.pdf
[3] NATIONAL IPR POLICY, 2016; DIPP. Available at: https://dipp.gov.in/sites/default/files/National_IPR_Policy_English.pdf
[4]See generally IPR: A CASE FOR MONETIZATION; CII AND SINGH & SINGH ASSOCIATES: Available at:https://www.mycii.in/KmResourceApplication/64693.CIISinghSinghReportIPRACaseforMonetization.pdf
[5]Id.at Page 10
[6]RAHUL BAGGA, How Trademarks can Work as Assets for MSMEs, ECONOMIC TIMES. Available at: https://economictimes.indiatimes.com/small-biz/legal/how-trademarks-can-work-as-assets-for-msmes/articleshow/70509011.cms?from=mdr
[7]For overview, please visit: https://indianexpress.com/article/business/companies/cbi-probes-how-banks-took-brand-kingfisher-as-collateral/&https://www.firstpost.com/business/kingfisher-auction-finds-no-takers-again-trademark-is-worth-almost-nothing-2976976.html
[8]Canara Bank vs NG SubbarayaSetty&Anr. (C.A. No.-004233-004233 / 2018), Supreme Court in Para 39-41 https://main.sci.gov.in/supremecourt/2017/29767/29767_2017_Judgement_20-Apr-2018.pdf
[9]Pritha Mitra Dasgupta, ECONOMIC TIMES.Available at: https://economictimes.indiatimes.com/news/company/corporate-trends/kingfisher-trademark-high-on-brand-recall-but-low-on-brand-valuation/articleshow/51366949.cms?from=mdr
See alsohttps://timesofindia.indiatimes.com/business/india-business/Kingfisher-seeks-Rs-2000cr-loan-from-SBI/articleshow/4488667.cms