IP Financing – An International and Indian Perspective
In the 21st Century, technologies and innovations are transforming the way in which businesses and the economies work. With globalization, the flourishing knowledge based economy has acknowledged and recognized Intellectual Property (‘IP’) as a primary driving force.
There is a paradigm shift in focus to make one’ intellectual property work for a respective businesses so that it can be a differentiating factor from the other.
IP stimulates and encourages innovation and enhance creativity and further boosts the business by providing the exclusive right to IP holders. When IP is registered, protected and enforced appropriately, the commercial value of IP is of great significance.
Every business entity classifies its asset broadly in following two categories, namely:
1. Tangible assets (buildings, infrastructure, etc.)
2. Intangible Assets (Intellectual Property Rights)
IP assets will have to be created, protected, nurtured, optimised, securitised and regulated so that the ecosystem of IP financing and insurance is complete with a well defined role of every stakeholder for its effective implementation.
CATEGORIES OF IP
The Intellectual Property comprises of various categories like Patents (invented product/process); Trademarks (brands, logos, words etc.); Copyrights (Literary/artistic/ dramatic works); Industrial Designs; Geographical Indications, Trade Secrets etc.
It is a fact that the business competition or management is always evaluated through physical assets but in the due course of time, intangible assets always play an advanced role and portray the actual and potential value of the company.
In the recent past, a paradigm shift has been observed in the working and functioning of corporations where focus has shifted on making a strong IP base and generating revenue from intangible assets. However, in terms of utilizing these IP for financing or raising loan is still an evolving area. Using IP as collateral for debt funding is still an unexplored and grey area.
The term “IP financing” is the use of IP assets for achieving access to credit. The said trend is growing and has become centre of attraction in the IP sector worldwide. Not only, MNCs but also MSMEs have started providing and attaching their IP assets for the purpose of exchange for finance. Also the lending institutions have increasingly started adapting the practice of accepting IP assets as collaterals to provide financial assistance in terms of loans.
This white paper discusses the phase of IP financing from the international as well as Indian perspective.
The act of using IP to gain access to credit and generating revenue for the business is referred to as Intellectual Property Financing. There are multiple ways in which monetising/financing of IP can be done are as follows:
3. assignment, etc.
Transactions wherein IP is used as collateral are considered to be as IP financing transactions. It is an emerging business option that may offer an opportunity for companies with valuable IP assets seeking alternative sources of raising capital.
However, to be able to best cash-in on the value of IP, all businesses require management of IP, which involves identification of the IP portfolio of a particular business and creating economic benefits out of it, by integrating IP into business strategies and maximising its economic worth.
Many companies are not keen on traditional financing options, such as licensing and assignment and wish to explore and continue with exclusivity. In common trade practice, tangible assets are used to secure asset based loans; however, the collateralization of IP is also witnessing an increasing trend so as to escalate the amount of credit to be availed.
The following are the routes that can be explored by business owners considering IP-backed financing, as highlighted in Enquiries into Intellectual Property’s Economic Impact published by the Organization for Economic Cooperation and Development (OECD):
1. Direct Collateral;
3. Sale and Leaseback; and
4. Venture Debt
Collateral, in the context of IP is considered as a borrower’s pledge of specific property, such as future cash flows from existing IP assets or rights to the underlying IP itself, in order to provide recourse for the lender in the event of default in the repayment of loan amount.
NEED FOR IP FUNDING
In the modern times, it is imperative for businesses to maximize their capital by using IP as collateral for funding.
The need for IP Funding arises in multiple facets. For example, Start-Ups wherein:
1. Often IP assets are the most valuable and essential for the start-ups as they aid in obtaining the initial capital which is necessary as well as crucial to start the business or to expand its operations.
2. For many start-up companies in the technology industry particularly, intellectual property assets are often primarily the most appreciated asset, so as to raise its capital and further expand its research and development.
3. Also, start-ups often need short-term or mid-term loans to boost various rounds of funding to make the business operations in full swing.
IP assets used as collateral are a realistic alternative to traditional financing.
ADVANTAGES & CHALLENGES
Benefits of IP Backed Financing
IP-backed financing offers significant benefits as follows:
1. Value of IP assets increases over time, as compared to the value of tangible assets which often tends to depreciate, except for land. Therefore, this turns out to be more attractive option to finance the IP assets.
2. The representation and value of IP asset provides a better mean to lend more along with additional security in cases where the borrower needs more than established asset and the allowed lending ratio.
3. In cases where intangible assets are the core assets of the business activity, they turn out to be great incentive to honour repayment commitments.
Challenges to IP Backed Financing
Surmounting the limitations of IP backed financing, the challenges includes:
1. The market resale value of IP is underdeveloped and offers less certainty about the ability to realize any resale value as compared to tangible assets wherein they have a disposal value, which is sometimes even at a fraction of the original cost.
Hence, the valuation will be a major difficulty at the first place.
2. More established form of collateral, i.e. tangible property is generally more stable and often provides lenders with readily-available market information when assessing the value of the property. Thus, a better picture of intangible resources of company and its value is required to be provided by a Company to the lenders in a significant and plausible way.
The banking regulatory will be a big hurdle if it has to be implemented and will require pragmatic changes.
3. Liquidation of IP assets is quite difficult as compared to Tangible assets. Therefore, it will require a mechanism and exchange at par what is prevailing in the countries UK.
4. Enforceability in law will also bring lot of challenges in the times to come. Various laws have to be revisited and amended to accommodate the IP financing in India.
The value of intangible assets like brands changes rapidly with respect to the company fortunes and as using IP as collateral is still at a nascent stage, it can turn out to be a more expensive alternative than the traditional financing options.
UNCITRAL & WIPO
The World Intellectual Property Organization (WIPO) aims to protect the IPRs throughout the world. WIPO focuses on regulating various policies on IPR worldwide and harmonizing the differences between various nations by putting forward amendments to International Regulation so that there is an effective international IP system along with social, economic and sustainable developments.
Round about in 2003, UNCITRAL (The United Nations Commission on International Trade Law) requested WIPO to cooperate and expand on the development of a Legislative Guide on Secured Transactions and predominantly relating to expanding the regulations with respect to secured financing and IP law.
The purpose of this guide on Secured Transactions by UNCITRAL was to aid states in developing their respective laws related to IP financing through secured transactions and was adopted in December, 2007. The legislative guide initially focused to impart assistance to legislator of nations regarding security rights in movable assets.
However, UNCITRAL provided a Supplement to the legislative guide called as Security Rights in Intellectual Property which specifically dealt with, third-party effectiveness, priority and enforcement of a security right in intellectual property.
The supplement was shaped after receiving a response from various nations on questionnaire on Security Interests over Intellectual Property. With the help of responses, it was quite clear that there is no uniformity over legislations with respect to the security interest over IP which led to the formulation of the Supplement Guide. The guide put forwards recommendations related to security transactions in general and specific recommendations related to creating security interest over intellectual property.
IP BACKED FINANCING: International Perspective
It is a known fact that lenders are gradually more and more underwriting loans on the basis of IPs. In order to understand the system of IP backed financing herein below is an international perspective on the laws of various countries:
For the companies which has IP as the core assets and lacked the tangible assets, in order to amplify the access to IP backed financing for such companies, the IP Financing Scheme (“IPFS”) was launched in the year 2014. The primary objective of the same was to facilitate IP transactions in Singapore.
Under this system, companies could use IP as collateral for the purpose of obtaining loans from the Participating Financing Institutions (“PFIs”) and the risk of such IP backed loans were shared between the Singapore Government with the PFI.
Thus, Singapore is one of those countries which are known for having a robust IP backed financing system which not only supports the monetization of IP rights but also protects them.
Security interests are not covered by IP law alone but by a mixture of IP laws and other laws. In Canada, the Canadian Personal Property Act deals with creation of security interest along with ways to make it effective against the third parties. For the same, recording of security interests takes place in IP-specific register. This step is followed by execution of security agreement in the IP-specific register for the purpose of obtaining protection of the security interest and the perfecting it.
This security agreement denotes the rights and liabilities of the parties so governed. In cases of repayment defaults, the security can be realised as per the terms of agreement by the security taker. Under these security agreements, the obligation is casted on proprietors to maintain the registrations and applications of the IP in good standing.
The China National Intellectual Property Administration (“CNIPA”) is essentially responsible for the organization and coordination of IPR protection work. Its aim is to act as the central registry of IP-backed financing pledges and set standards for IP pledge loans from various banks.
Government bodies namely, China Bank Insurance Regulatory Commission, National Trademark Administration and the National Intellectual Property Administration jointly work on strengthening IP Pledge Financing work and have also released a press note having objectives:
- Optimization of IP Pledge financing service system
- Strengthening IP pledge financing innovation
- Optimization of IP pledge financing risk management
In UK, securities can be transferred through mortgage but it also requires transferring the title of the asset from right holder to lender. In such cases, option of Special Purpose Vehicle is available wherein IP rights are assigned and transferred to the SPV in return of a lump sum payment made to the owner. Thus, a lender for monetizing IP issues a security receipt as per estimated cash flow of a particular asset in the SPV ad this is called as securitization.
But the most common practice in U.K. is either to create a fixed or floating charge of the concerned IP. In U.K. Specific Legislations, Part 25 of the Companies Act, 2006 mentions that company registered in England, Wales or Northern Ireland can grant a charge including a mortgage, over its assets – expressly including patents, trademarks or registered design.
Along with this, Section 30 of the Patents Act, 1977 provides that any patent/patent application may be mortgaged. Also, Section 24 of the Trade Marks Act, 1994 provides that a registered mark or application thereof may be the subject of a charge in the same way as other personal or moveable property, and can be assigned by way of security and further Section 15B (6) of the Registered Designs Act, 1949 provides that a registered design may be the subject of a charge in the same way as other personal or moveable property, and can be assigned by way of security.
United States of America
The Uniform Civil Code (UCC) in USA takes care of the issue of creation or the grant of security interests and together with the United States Code. This code covers the cases of creating security interests against third parties and priority to be given to them and their enforcement.
Article 9 of the UCC aims to secure the party against purchasers and creditors of the debtor, which usually covers creation of security interest over all kinds of personal property. Along with this, the Article 9 focuses on protection of the security interest by perfection.
This system of Security interests in IP under federal law has been established in order to make it enforceable against the third parties. Thus, UCC filings alone are insufficient, and the lender must comply with the requisite federal/state system.
A brief overview of different IP laws of US has been dealt with herein below:
1. The Copyright Act provides for security interests in registered copyrights. The lender should file for copyright protection under the Copyright Act (17 U.S.C. 201) through the USPTO and in order to record security interest, the lender should record the same at U.S. Copyright Office.
For security interests in copyrights not registered with the U.S. Copyright Office, the lender must perfect through a state UCC filing.
2. Unlike the Copyright act, the Federal Trademark Statute (Lanham Act) never addresses the issue of security interest in case of federal registered trademarks and recording a security interest in federally registered trademarks and trademark applications with the US Patent and Trademark Office (USPTO) is never sufficient.
Thus, the federal trademark statue does not pre-empt the UCC and the suitable way of recording and issuing security interests over trademark is through a state UCC filing.
By filling an appropriate financing statement, under Article 9 of UCC, the security interests in trade secrets can be perfected.
3. Similar to Lanham Act, patents are governed under the U.S. Code, Title 35 (the Patent Statute) which is a federal law and does not unequivocally talks about the issue of perfection of security interests. The courts have realised that the Patent Act has not pre-empted the state UCC filing requirements.
Although a state UCC filing should be made to perfect a security interest but for perfection of security interest against a bona fide purchaser or mortgagee, recording of security interest should also be undertaken with USPTO by secured creditor.
Thus, the courts in USA have always struggled with the question of the system which controls the requisite requirements of filing for security interests in IP (Federal or State). Though the right of security is well created and recognised but there is no uniform system present which deals with security interests in IP.
IP BACKED FINANCING: Indian Perspective
In India, security interest in IP is governed through both general law as well as specific law. There are regulations which talks about creation of charge on intangible property including IPRs.
1. Companies Act, 2013: Chapter VI, Section 77 of the Act allows a company to create a charge on its “property or asset: whether tangible or otherwise.
Also, Schedule III of the Act classifies intangible assets under Clause (j) and includes: Goodwill, Computer Software, Mining Rights, Brands / Trademarks, Copyrights, patents and other intellectual property rights, services and operating rights and others.
2. SARFAESI (The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest) Act, 2002: Under the Act “Property” has been defined under Section 2(1)(t)(v) to include intangible assets, being know-how, patent, copyright, trade mark, license, franchise or any other business or commercial right of any nature.
Also, Section 2(1)(zf) of the Act defines “security interest” to mean right, title and interest of any kind whatsoever upon property created in favour of a secured creditor and includes mortgage, charge, hypothecation, assignment.
3. Patents Act, 1970: Section 68 of the Act provides that an assignment of a patent or a share in a patent, a mortgage, license or the creation of any other interest in a patent shall not be valid unless the same were in writing and the agreement between the parties concerned is reduced in the form of a document.
Thus, the Patents Act does not prohibit creation of a security interest in IP, but merely requires that the same be captured in writing and be registered with the Registrar.
4. Trade Marks Act, 1999: There is no specific provision prescribing creation of security interests/mortgage of trade marks. The only provision for creating the interest is by way of assignment of trade mark.
Section 37 of the said Act allows a proprietor of a registered or unregistered trade mark to assign his rights in said trade mark, either with or without the goodwill associated with such trade mark.
5. Designs Act, 2000: Section 30(2) of the Act provides for security interest created by way of mortgage, license or other interest apart from assignment to be recorded.
Further, the creation of such security interests must be in writing and communicated to Registrar of Designs in the form prescribed being Form-12.
6. Income Tax Act, 1961: Section 32 of the Act talks about depreciation of assets. Sub clause (1) (ii) of the section mentions about “deductions allowed in respect of depreciation of know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature, being intangible assets acquired on or after the 1st day of April 1998.”
In case of CIT Vs. Smifs Securities Ltd. (v), the SC held that Goodwill would fall under the expression “any other business or commercial rights of a similar nature” as mentioned under clause (b) of explanation of this section. The question before the Apex Court in present case was – “Whether goodwill is an asset within the meaning of Section 32 of Income Tax Act, 1961 and whether depreciation on ‘goodwill’ is allowed under this section?”
In the case of Smifs Securities Limited, the company entered into an amalgamation scheme with YSN Shares & Securities Private Limited as per which the assets and liabilities of YSN Shares & Securities Private Limited were transferred to Smifs Securities Limited.
During the process, goodwill had arisen in the books of Smifs due to the excess consideration paid to the Transferor and the Smifs claimed depreciation on goodwill under section 32(1)(ii) of the Income-tax Act, 1961. The Supreme Court in this case stated that goodwill is in the nature of ‘any other business or commercial rights of similar nature’ and the principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b).
Section 35AB of the act talks about the deductions in the case of expenditure on know-how. It further elaborates that “where the assessee has paid in any previous year, any lump sum consideration for acquiring any know-how for the use of his business, one-sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal installments for each of the five immediately succeeding previous years.”
Section 80 – O talks about deduction in royalties etc from certain foreign enterprises. The section specifies that in case of Indian company or person, “where the gross total income of assessee included any income received by assessee from any foreign enterprise or government of any foreign state in respect of consideration for using any invention, design, registered trademark or patent outside India and concerned income is received inf form of convertible foreign exchange in India or having been received as convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India is brought into India, there shall be an allowed deduction equal to:
a. 40% deduction for an assessment year beginning on the 1st day of April, 2001,
b. 30% deduction for an assessment year beginning on the 1st day of April, 2002,
c. 20% deduction for an assessment year beginning on the 1st day of April, 2003
d. 10% deduction for an assessment year beginning on the 1st day of April 2004.
e. But no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and for subsequent years.”
Section 80 – QQB refers to the deductions in respect of royalty income, etc., of authors of certain books other than text-books. The section mentions that “any individual being an author is resident in India, the gross total income including any income derived by him in the exercise of his profession on account of any lump sum consideration for the assignment or grant of any of his interests in the copyright of any book being work of artistic, scientific nature, literary or of royalties or copyright fees (whether receivable in lump sum or otherwise) in respect of such book, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such income of an amount equal to either Rs. 3,00,000 or income from royalty as stated above, whichever is lower.”
Section 80 – RRB of the act specifies Deduction in respect of Royalty on Patents. “In case the assessee, being an individual patentee and resident in India as well as in receipt of any income by way of royalty in respect of a patent registered on or after the 1st day of April, 2003 under the Patents Act, 1970, and his gross total income of the previous year includes royalty, then in such cases, in accordance with provision of this section, a deduction from such income will be allowed of an amount equal to whole of such income or three lakh rupees, whichever is less.”
7. RBI Guidelines on Intangible Funding: Guidelines on Compliance with Accounting Standard (AS) by Banks. These guidelines were put forward on recommendations made by committee under Chairmanship of Shri N.D. Gupta, former president of ICAI in order to recommend steps to eliminate/ reduce gaps in compliance by banks with the Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI). The guidelines mention about following Accounting Standards (AS) namely: AS 24, AS 26 and AS 28.
Action which needs to be taken by the bank, include Intangible assets recognised and carried in the balance sheet of banks in compliance with AS 26 will attract provisions of Section 15(1) of the BR Act according to which “banks are prohibited from declaring any dividend until any expenditure not represented by tangible assets is carried in the balance sheet. The intangible assets which would be created in the books of banks subsequent to adoption of AS 26 would represent payments made by enterprises towards acquisition of assets which may not be tangible and would not be in the nature of deferred revenue expenditure.”
8. Accounting Standard of IP in balance sheet
International Accounting Standard 38 was issued under International Financial Reporting Standard by International Accounting Standards Committee which describes the “accounting treatment of intangible assets. This mandates that if certain criteria are met by the asset then only it will be recognized as an Intangible asset. The AS also describes regarding impairment, amortisation, retirement and disposal of intangible assets.”
Following IAS, many other countries have also adopted separate AS on Intangible asset. The guidance note along with IAS 38 in India is AS 26.
In respect of Accounting Standard 26, the guidelines laid down the “accounting standards in respect of the intangible assets which are not dealt specifically in any other Accounting Standard. This standard briefly describes the disclosures regarding intangible assets, measure regarding carrying amount of intangible assets. It describes that after initial recognition, an intangible asset should be carried at its cost less any accumulated amortisation and any accumulated impairment losses. This Statement also deals with amortisation of intangible assets, including amortisation period, amortisation method etc.”
9. Implication of GST on Intellectual Property Rights: As introduced in 2017, CGST Act through Section 9 along with equivalent section 9 of respective SGST Act mentions that whatever the case may be, the CGST or SGST shall be levied on the transaction value or the price actually paid or payable for the supply of concerned goods or services or both and at such rate to be notified on the recommendations of the GST Council.
Subsequently, Under Sl. No. 17, Heading 9973– “Temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property right in respect of goods other than Information Technology software is permissible at the rate of 12% (6% CGST and 6% SGST).” Whereas “temporary or permanent transfer or permitting the use or enjoyment of Intellectual Property right in respect of Information Technology software is allowed at the rate of 18% (9% CGST and 9% SGST).”
With respect to GST rates on brand names, it has been clarified that by the notification of Central Board of Indirect Taxes and Customs (CBIC) that “registered brand name” means brand name or trade name, that is to say, a name or a mark, such as symbol, monogram, label, signature or invented word or writing which is used in relation to such specified goods for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified goods and some person using such name or mark with or without any indication of the identity of that person, and which is registered under the Trade Marks Act, 1999.”
Therefore, unless and until the brand name or trade name is registered under the Register of Trade Marks and is in accordance with the Trade Marks Act, 1999, GST rate of 5% (2.5% CGST and 2.5% SGST) will not be applicable on the supply of such goods.
Moreover, by referring Section 9(1) of CGST Act 2017, it can be deduced that “GST has to be deposited by the person supplying the goods or services or both.” But, Section 9(3) of the CGST Act, 2017 talks about Reverse Charge Mechanism in which “the tax liability is to be undertaken not by the supplier of goods or services or both, but by the person who is recipient of such services.”
Thus, the government came up with notification [https://www.cbic.gov.in/resources//htdocs-cbec/gst/Notification13-CGST.pdf] to spell out categories of supply of goods or services or both on which, the mechanism shall be applicable. “Entry no. 9 of the notification mentioned that Supply of services by an author, music composer, photographer, artist or the like by way of transfer or permitting the use or enjoyment of a copyright covered under clause (a) of sub-section (1) of section 13 of the Copyright Act, 1957 relating to original literary, dramatic, musical or artistic works to a publisher, music company, producer or the like then in such cases publisher, music company or producer or like person or company will be the one liable to discharge the tax liability on receipt of such services.”
10. Foreign Exchange Management Act (FEMA): Earlier as provided in Rule 5 of the Foreign Exchange Management (Current Account Transactions) Rules, 2000, “RBI’s prior approval is required for remittance towards use and/or purchase of trademark/franchise in India. Henceforth, ADs may freely allow remittances for use of trade mark/franchise in India. However, RBI’s prior approval will continue to be required for remittance towards purchase of trademark/franchise.”
But with a view of liberalisation, the provisions with respect to prior approval of the RBI for remittance for purchasing a foreign trademark or overseas franchise for use in India, has been done away with. Under Master Direction issued by the government, in which rule 4.10 talks about drawl of foreign exchange for remittance for purchase of trademark or franchise in India. The rule mentions that “AD Category-I banks may permit drawl of foreign exchange by person for purchase of trademark or franchise in India without approval of the Reserve Bank.”
For effecting current account remittances not exceeding USD 2,50,000 under the Liberalised Remittance Scheme “Form A2 cum LRS Declaration” is required to transfer funds abroad. AD banks are required to prepare a sample form for the purpose of statistical inputs of remittance and further cross check purpose.
In order to identify the cross-border transactions, a ‘Purpose code’ has been assigned by RBI to classify each transaction. Thus, as per Annexure to Form A-2, the following transactions were mentioned for filing of Form A2 for transfer related to IPR which are as follows:
1. Acquisition of non-produced nonfinancial assets (Purchase of intangible assets like patents, copyrights, trademarks etc., land acquired by government, use of natural resources) – Government [S0017]
2. Acquisition of non-produced nonfinancial assets (Purchase of intangible assets like patents, copyrights, trademarks etc., use of natural resources) – Non Government. [S0019]
3. Payment for use, through licensing arrangements, of produced originals or prototypes (such as manuscripts and films), patents, copyrights, trademarks and industrial processes etc. [S0902]
Along with Form A2, Form 15CA and 15CB under Income Tax Act are required to be filed by the remitter to AD Bank for the cross border transaction related to IPR. As per Section 195(6) of the Income Tax Act, 1961, “any Indian company or individual who remits or make the payment to any NRI or Foreign company shall furnish the information and declaration relating to such payment in the prescribed form.” Form 15CA is a declaration of remitter acting as a tool to collect information regarding payments which are chargeable to tax in the hands of recipient non-resident and Form 15 CB is Form which is required to be signed by a Chartered Accountant for obtaining a certification regarding rates and right kind of tax paid by a person.
11. Insurance Sector: It has always been stated that in order to maintain the quality of intellectual property, one should always maintain the security of it. The best way to maintain security over an IP is through insurance policy. Insurance is one such way of protecting against the risk of financial loss faced by an IP. Thus, insurance helps in a way by covering the legal costs for the company which is associated in case of any kind of infringement.
The concept of IP Insurance in India is still evolving. IP insurance is gaining views as it is one of the best ways to minimize monetary risks encompassing IP protection in cases of infringement.
Reliance can be placed on various IP infringement cases, amongst one of them, it is evident through the case of TVS Motors vs. Bajaj Auto [2009 SCC Online Mad 901] wherein Bajaj auto obtained an order of injunction against TVS Motors and preventing them from launching Two wheeler model TVS Flame, which was claimed by Bajaj to be similar to its patented DTS – I technology. The case no wonder resulted in heavy loss to TVS Motors. It can be deduced that in case the corporation have had IP insurance, the losses could have avoided to some extent. IP insurance is truly the need of the hour in India as developments in IP would create a need of protecting the risk involved in IP through insurance.
Insurance is that arrangement with the help of which a company or state can provide a guarantee of compensation for certain loss, damage, illness or death in return of payment of specific premium.
This concept of IP and insurance is a new concept in the Indian economy. The entire coverage of concept of insurance is usually related to costs of legal proceedings and charges. Usually the large amount of time involved in registration process and the unpredictable nature of IP leaves the IP holder only with the option of covering the costs of legal proceedings.
The general concept of insurance policy related to IP are usually in the pattern of Before Litigation Expense (BLE) wherein the insurance provided covers the applicant’s own legal costs or costs of the entire legal proceedings or the Legal Expenses Insurance (LEI) in which only the risk before a claim is made is covered.
The concept of IP Insurance is gaining prominence in the economy and thus posses certain advantages such as:
1. The insurance act as a monetary security and ensures uninterrupted cash flow.
2. It acts as a safeguard against all the baseless claims and makes sure that the IP does not turns out to be any kind of financial burden but turns out to be relief and beneficiary in light of insurance.
3. Insurances improves and facilitates value of mortgaging while taking up the loan and being considered as collateral itself, enhances the worth of the concerned company and the credibility of the same.
4. IP insurance improves the position of the company while licensing or negotiation as it adds to the reliability score of the parties by adding as an escrow.
Among all other IPs, the most common form of IP insurance is involved in Patents. The patent insurance usually involves the liability insurance against the infringement of patents along with the costs involved and protects them against all sorts of damages.
IP insurance covers companies for the legal costs associated with pursuing infringement or theft of IP. It also covers legal defense costs for policyholders accused of IP infringement or theft. There are two basic types of IP insurance:
1. Infringement Defence Actions – It covers policyholders for infringement claims brought against them by the owner of the IP.
2. Enforcement Coverage – This coverage empowers the IP owners i.e. the insured with financial resources to enforce their IP rights and pursue infringement claims.
The scope of development in sector of IP insurance is undoubtedly very promising. It is the general liability insurance which protects any company from risks against tangible assets but is not sufficient enough to safeguard against intangible assets which possess greater risks and liabilities.
Due importance and emphasis on insurance of IP has made clear that there is a crucial need and attention of enforcement agencies towards IP insurance. Though the concept of IP Insurance seems to be completely alien to the economy but nevertheless it is the next big step driving the facilitation of development of IP sector in future times in India.
From the above statutes, it is clear that even though there is no special legislation that deals with creating a security interest in Intellectual property, the power to do the same finds basis and can be derived from both the general and specific laws related to IP and its protection prevalent in India.
The Government has taken steps towards the commercialization of IP by way of its recent policy initiatives. The Government of India is making constant efforts at improving the IP culture in India by building awareness of IPR. Some of the efforts taken by the Government are that all IPR laws are in compliance with the Agreement on TRIPS.
NATIONAL IPR POLICY
The nodal head of IPRs, the Department of Industrial Policy & Promotion (“DIPP”), has deliberated a National IPR Policy which is in compliance with the World Trade Organization’s Agreement on TRIPS. The policy focuses to inspire innovation and creativity across sectors and provide a clear vision regarding IPR.
This policy specifically aims at securitization of IP rights, by allowing them to be used as collateral to raise funds for their commercial development. The policy also suggests financial support for developing IP assets through banks, venture capital, angel funds and crowd funding mechanisms. Additionally, the policy suggests for setting up of an IP exchange to bring investors and IP owners together on one platform.
The National IPR Policy summarizes the following seven objectives:
1. IPR Awareness: Outreach and Promotion
2. Generation of IPRs
3. Legal and Legislative Framework
4. Administration and Management
5. Commercialization of IPR
6. Enforcement and Adjudication
7. Human Capital Development
Recently, in the case of Canara Bank v. N.G. Subbaraya Setty & Anr., [(2018) 16 SCC 228], a borrower had entered into some credit facilities with the bank and on default of payment, signed an assignment deed for the trademark EENADU in respect of agarbatties. The Court opined that a trademark cannot be assigned to the creditor by a borrower who has defaulted on a loan.
The Supreme Court while dealing with Sections 6 and 8 of the Banking Regulation Act, 1949, and Section 45 of the Trademarks Act, 1999, held as under:
“41. Equally, a reference to Section 6, 8 and 46(4) of the Banking Regulation Act would also make it clear that a bank cannot use the trade mark “EENADU” to sell agarbathis. This would be directly interdicted by Section 8, which clearly provides that notwithstanding anything contained in Section 6 of in any contract, no banking company shall directly or indirectly deal in selling of goods, except in connection with the realisation of security given to or held by it. Also, granting permission to third parties to use the trade mark “EENADU” and earn royalty upon the same would clearly be outside Section 6(1) and would be interdicted by Section 6(2) which states that no bank shall engage in any form of business other than those referred to in sub-section (1).”
The Court further went on to hold that the trademarks in the present case were not a part of any security for loan or advances made to the Respondent. The above judgment was rendered in the peculiar facts of the above case, where instead of giving the trademark as a security for availing of a loan, the Respondent sought to repay the loan by entering into an assignment deed with the bank. This is clearly hit by section 8 of the Banking Regulation Act. However, this does not mean that the intellectual property cannot be used as collateral for a loan.
In the era of 21st century where competition is toughest, the IPR plays a crucial role. This has led to efforts in reducing the uncertainty around IP and developing an IP commercial framework.
The specific nature of IP governed through precise legislations in respect of its protection, maintenance along with enforcement worldwide has given rise to a unique set of issues in the creation of security interest over IP rights.
Therefore, it is essential that lenders have a nuanced understanding of the features of IP as feasible assets along with compliances required to perfect the security interest as well as key principles governing the intellectual property right and its valuation.
Though, it is clear that the practicability and significance of IP as an asset is slowly but surely gaining importance with Governments across the globe taking active steps to help finance a business on the basis of the strength of its IP. India is one of the countries to be a part of this IP revolution. There was a rising need for an effective communication of the changes in IP Regime.
No matter how much IP rights are recognized but people in India do not have sufficient knowledge about the regime or obligations thereunder. It is the scenario where either owner is not aware of the value of the asset or the financial institutions do not wish to undertake the risk of lending against IP. Thus, there is a need to evolve clear practice and rules to bring in about certainty to encourage the creation of security interest in IP.
IP Insurance is also going to play a big role in the years to come and IP owners as well as Insurance Companies need to be prepared to add this to their portfolio. Especially now and the post COVID era, the major focus would be how to maximise the profits and IP Financing would aid to that. Similarly Insurance brokers and companies would have a huge task in hand in insuring these IP transactions.
Government of India has launched various schemes for purpose of awareness and ease in IP regime across the countries. All these initiatives are creating an investment friendly environment for IP intensive industries. Thus, all that is left is a joint effort between the lending institutions and the policy framers to establish a system of progressive IP financing infrastructure, which can then harvest the value locked in our country’s IP assets.
We anticipate the major challenges in IP financing will be valuation, banking regulations, legal enforceability and liquidity.
The best in this field is yet to come and IP Financing in India is just in its nascent stage. It would be interesting to see how the various stakeholders, including Financial Institutions, Insurance Companies, etc. make the most of this growth and ensure that they too have a bigger role to play in generating revenues basis a firm’s intellectual property. It all comes down to anticipation coupled with correct advisory and action.
Ultimately, the businesses have got to work on optimisation of their resepctive IP assets and legisltaion should be categorically be enacted for securitisation of such IP assets so that the IP financing and IP insurance becomes a reality in India.