IP-Backed Financing: What Is It And What Are Its Benefits And Limitations?
This piece discusses the current state of IP-backed financing and future prospects based on legal provisions in India.
Means for monetisation include methods such as licensing, franchising, or assignment of these rights. Companies who do not want to leverage traditional financing methods like licensing or assignment, which can relinquish control of their IP, may find IP-based collateral a more appealing option. This emerging strategy allows them to maintain exclusivity while leverage their intellectual property for funding.
In India, The Department of Promotion of Industry and Internal Trade (DPIIT) is in the process of establishing comprehensive IP valuation system. This strategic endeavor aims to facilitate IP financing as new means for raising capital for IP creat/IP owners. This also strengthens IP as revenue channel for businesses.
This piece of writing is reflecting on the current state of IP-backed financing and future prospects based on legal provisions in India.
The Need for IP-Backed Financing:
IP-intensive industries not only support jobs, but high-paying jobs. "In the EU and U.S., workers earn 46% more in IP-intensive sectors than workers in other sectors." By safeguarding more IP-intensive businesses from counterfeit, the business will contribute to increased quality of living of the collective through wider employment and GDP of the country.
Currently, IP owners are unsure of applicability of IP ownership. In India, no metrics and protocol are available for IP-backed loans through banks.
Whether scaling up or expanding, these businesses need capital. With 1 Lac+ startups in India, innovation and IP would be the biggest differentiator soon. However, startups are cash crunched especially in early stage. Securing financing remains challenging for many firms. IP-backed financing can help businesses to sustain longer and contribute to the economy. Intellectual property is akin to real property but currently, IP cannot be used as collateral in securing loans from mainstream banks. So, entrepreneurs, businesses and inventors are unable to secure loan from banks during scale or Valley of Death (VoD) in startup journey.
“Death valley curve” is the early phase of new enterprise when substantial work has begun but no cash flow. During this period, companies spend their initial capital to establish the business. In cases of technology and processes that have longer gestation period, initial capital can be depleted due to continued operational or administrative costs during R&D. This leads to enterprises seeking additional funds in loans or equity.
In today’s day, the most popular trigger for IP valuation includes:
Equity-based funding in DeepTech ecosystem. Here intangible assets are valued as part of company valuation to determine equity in exchange for funding requirements.
IP valuation is important merger and acquisition.
However, IP valuation is not standardised in the financing community. Thus, assessing IP collateral presents challenges for most banks or debt providers. There is no clear formula to determine how much the collateral will be worth if a borrower defaults. Most of the financing community need more experience with IP assets there by creating bigger gap in bringing IP as collateral to practice.
Benefits of IP-Backed Financing:
There is a need to standardise the IP valuation for facilitating IP-backed financing, including through disclosure, valuation, and secondary markets for intangible assets. This will open door to alternate institutions and private lending firms who can do exclusive IP-banked loans.
Standardised IP valuation can be especially beneficial for MSME (Micro, Small and Medium Enterprise). Here is how it can empower MSMEs:
IP valuation is a credible KPI to assert the value of intangible assets. This can help create evidence for long-term growth prospects during investor conversations.
This KPI and knowledge help MSMEs to make smart IP investment strategies.
A standardised IP valuation helps banks assess risks and determine loan amounts more accurately.
Limitations:
Unavailability of standardised methodology or automation or a score to help determine IP valuation is the gap in the market currently. This gap is not fulfilled by any mainstream LegalTech tools or accreditation agencies. However, there is a huge opportunity to apply technology and AI bridge for automation to further the goal of frictionless financing among governments. It would realise the founding principles of intellectual property which endorses incentivising IP owner and also sets precedence to assume IP as equivalent of tangible property.
What is IP-Backed Lending?
Loan lender file notice of their rights -- known as a security interest -- to the IP in the case of a borrower’s default on a loan. In India, a local IP office or a movable collateral registry needs to establish as means to issue a security interest.
While value of tangible assets are likely depreciate with time, the value of IP or intangible assets increases over a period of time. Thus IP-backed financing can be better alternative to traditional financing.
Why IP as collateral?
When we review deals closed based on IPs, here are impressive stats:
Almost $25 billion worth of deals since 2009 honored IP
195000 patent assets were involved in 8100 deals.
Minimum Pre-Requisite to Implement IP-Backed Lending:
Criteria to value an IP asset includes the following:
It must be separately identifiable (subject to specific identification and with a recognisable description)
Availability of evidence of the existence of the asset such as license or in financial statements, etc.
It should have been created at an identifiable point in time.
It should be capable of being legally enforced and transferred.
Its income stream should be separately identifiable and isolated from those of other business assets.
It should be able to be sold independently of other business assets.
It should be subject to destruction or termination at an identifiable point in time.
Laws Governing Capitalisation of IP:
In India, the following laws pose support and limitations to IP being source of capital for business:
The Companies Act, 2013
Banking Regulation Act, 1949
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
Foreign Exchange Management Act, 1999
Reserve Bank of India, 1934
IP acts such as Trademarks Act, 1999
Patent Act, 1970, Copyright Act, 1957
The provisions of the Banking Regulation Act only allow a bank to deal with the property (tangible or intangible), which forms the security of the loan. Thus, the pre-requisites for establishing each type of IP as security is crucial. Here are few aspects that pose as limitation to explore full scope of holding IP as collateral.
Tracing of the title is important while it is held as collateral: Transfer of land is mandatorily registrable under the Registration Act, of 1908. Registration gives banks a history of ownership of that land there. This acts as validation and transparency makes it easy to use the land as collateral.
Patent and trademark law in India requires mandatory registration on the transfer/assignment of IP (Section 45 Trademark Act 1999; Section 68 Patents Act 1970). However, tracing the title is not easy.
Readiness for banks: Banks conduct due diligence before loan approval. The ease of due-diligence depends on the IP entity. It is easy for Copyright as they can seek visibility through section 77 of Companies Act 2013.
Every financial institution is mandated to register security interests with CERSAI. This creates transparency so banks can access the CERSAI (Central Registry of Securitization Asset Reconstruction and Security Interest of India) to see whether any prior interests exist over the property.
Trademark as collateral: The Banking Regulation Act permits assignment of trademark as a security ( by means of execution of a deed of hypothecation) towards a loan. However, banks need to do due-diligence to ensure the trademark is a “security” against the loan sanctioned.
Finding buyers for IP assets: It can be challenging to find buyers for IP assets. So, banks needs to create a cohort of IP buyers to ensure the ability to recover bank’s lending/investment.
Market changes: Value of IP can vary over time and can be influenced by technology. An obsolete technology can impact the commercial viability of product/process associated with IP and the value of IP itself. Furthermore, the duration of loan will be bound by life of the IP held as collateral. This has to be exclusively included in documentation nomenclature.
A good example of IP held as collateral and its consequences followed by interpretation by Supreme Court of India:
In Canara Bank v. N.G. Subbaraya Setty case* (Civil Appeal No. 4233 of 2018), the Supreme Court has held that the assignment of trademark “Eenadu” in favour of the bank was impermissible under the provisions of the Banking Regulation Act. The assignment was made after the borrower had defaulted on the loan. Subsequent to this landmark judgement, the protocol is that trademark cannot be assigned to the bank in the wake of defaulted loan because it was not part of the security while granting the loan.
India at The Cusp of Mainstreaming IP-Valuation
In June 2022, Economic Advisory to PM recommended hiring more Patent Officers. Subsequent to hiring, Indian Patent Office has granted 1,01,311 patents between Mar 2023 and March 2024. This is demonstrative of quick action.
Additionally, 12000 patents were filed by startups in 2023. This complements the innovation demonstrated by MSMEs and startups over the past decade.
Over the last few years, Indian government has put constant efforts towards increasing ease of doing business and strengthening the rights of IP holders. This is evident in the policies passed in recent years as well as landmark judgements in safeguarding the rights of IP owners.
Let us reflect on these landmark milestones:
IP Judgements/Orders
Patent disputes between telecom giants has paved way to setting patent value through interim security by Delhi High Court. So far 3 cases are filed for violating 3G and 4G SEPs. The cases are listed below:
Nokia Technologies v. Guangdong Oppo Mobile Telecommunications Corp:
It was established that Court can issue “Pro-tem security” orders in cases directing an implementer to pay a security amount to safeguard the interest of the SEP (Standard Essential Patents) holder.
This led to resolution when Nokia and Oppo signed cross-license deal as stated by Nokia in their official statement.
“Nokia signs 5G patent cross-license agreement with OPPO
License covers Nokia’s fundamental inventions in cellular technologies
Nokia to receive payments from OPPO for a multi-year period along with catch-up payments to cover non-payment during the dispute period”
The agreement resolves all pending patent litigation between the parties”
The above Nokia Vs Oppo order had a major role to play in the high stakes SEP dispute between Phillips and One Plus. Here the Court directed One Plus to deposit Rs 53.25 crore as pro-tem security. This is landmark judgement because of assigning value to patent as interim security.
In April 2024, the Delhi High Court ordered Lava smartphone to pay Rs 244 crore as damages to Ericsson for infringing 2G and 3G SEPs owned by Ericsson.
Each of these are an attempt to honor the IP holder’s R&D and contributions to open standards. By setting interim security, it has set new precedence to valuing patents. Bigger telecom giants as well MSME will benefit from this precedence.
IP Legislative and Policy Related Developments
In January 2016, DPIIT started recognising startups under Startup India Scheme. This certificate is sign of novelty and innovation of the startup’s offerings. The certificates are issued with due validation of innovation and the questionnaire that startups submit in the regard are very similar to criteria of invention disclosure form (IDF) in patent registration process. This indicates Indian government’s commitment to mainstream IP.
As part of strategic blueprint in IP regime, DPIIT strives to establish reasonable methods for formulating a uniform system for the valuation of IP as an intangible asset. This will create a framework to identify and appoint IP evaluators.
Startups Intellectual Property Protection (SIPP) : Indian government introduced SIPP to create awareness among startups about the importance of IP protection, provide financial support for filing patents, trademarks and designs, and also offer legal assistance to protect their IP assets against infringement. Startups can avail patent, trademark, and design services by paying them only required statutory fees and professional fees are excluded as part of the SIPP scheme.
National Intellectual Property Rights (IPR) Policy: This policy aims to facilitate the valuation of IP rights for recognising them as valuable intangible assets.
The amendments in Indian Patent Rules in 2024 aims at streamlining patent procedure, empowering inventor with certificate of inventorship and strengthening enforcement mechanisms.
In July 2023, the Parliament Passed Cinematograph (Amendment) Bill, 2023. It tackles film piracy. The Bill lays down a three-year jail term and a fine of up to 5% of a movie's production cost for those making its pirated copies.
The Department of Biotechnology (DBT) under the Ministry of Science and Technology on September 6 2023, issued the DBT Intellectual Property Guidelines. It regulates ownership, transfer/ commercialisation of intellectual properties from DBT-funded (extra-mural and intra-mural) institutions.
All of these policies and measures by the Government of India assets IP-First India in this Industry 5.0 era and acts as tailwinds for continued innovation in the industry.
IP-Banked Financing Across Countries
DPIIT is examining the IP financing models from countries like Singapore, the UK, and Japan.
Here is a summary of few campaigns, from across the globe, to facilitate IP-backed financing options:
Campaign in Jamaica: Jamaica’s JIPO has successfully involved various stakeholders, such as its central bank, development banks and commercial lenders in its campaign to facilitate IP-backed financing for SMEs.
Targeted investment in Canada: In 2021, BDC Capital in Canada launched a dedicated fund for businesses with strong intellectual property portfolios. Their first investment used a seven-figure sum to support Novarc Technologies, a Vancouver-based robotics company. Notably, BDC has committed to further developing Novarc's IP strategy alongside the investment.
Policy shift in Japan: Japan is implementing several policy initiatives that encourage companies to view intellectual property as a valuable asset. These initiatives include:
IP Business Valuation Reports: These reports streamline communication between businesses and lenders during the loan application process.
Corporate Governance Code Revision: The recent revision emphasises the importance of protecting intellectual property.
Awareness Campaigns: Efforts are underway to raise awareness of IP financing and its potential to revitalise the domestic economy.
Insurance Enables Large Deals: Aon, a multinational insurance company based in Singapore, facilitated two significant IP-backed financing deals in 2021. They provided IP collateral protection insurance, which:
Helped Indigo, an agritech firm, secure a $100 million loan – the largest bespoke policy of its kind to date.
Enabled entrinsic biosciences to raise nearly $50 million in new capital, all while protecting the equity stake of early investors.
Amrutha is Founder of Patenti Technology Solutions, a new age IP tool.
