Intellectual Property (IP) financing is an outstanding financial innovation as it allows IP holders to monetize intangible IP assets to secure immediate access to capital. There are several methods of securing such finance: through licensing, collateralization, securitization and sale. IP financing is especially beneficial for upcoming research and development (R&D)-intensive business ventures, which have historically been denied funding by traditional banks as they lack hard assets to serve as collateral. Therefore, IP financing enhances the ease of accessing credit markets for creators and allows them to recover R&D costs quickly, which in turn fuels innovation and economic growth. The growth in popularity of IP financing is following the trend of an increase in intangible asset-dominated companies. For instance, physical assets only account for about 4% and 6% of Amazon and Apple’s net worth, respectively. India is the third-largest startup hub globally and increased recognition of IP financing will make it easier for Indian startups to obtain capital and help spur the country’s progress. At present, India holds the fifth position in trademark registrations and is sixth in patent registrations globally. The utilization of these assets to obtain financing could help the economy attract considerable capital. Indeed, the 161st Report of the Rajya Sabha Parliamentary Committee on Intellectual Property has opined that Indian laws need to enable greater acceptance of IP as collateral. Earlier, the National IPR Policy had also aimed at facilitating the securitization of IP and its use as collateral through enabling legislation.
Intellectual Property (IP) financing is an outstanding financial innovation as it allows IP holders to monetize intangible IP assets to secure immediate access to capital. There are several methods of securing such finance: through licensing, collateralization, securitization and sale. IP financing is especially beneficial for upcoming research and development (R&D)-intensive business ventures, which have historically been denied funding by traditional banks as they lack hard assets to serve as collateral. Therefore, IP financing enhances the ease of accessing credit markets for creators and allows them to recover R&D costs quickly, which in turn fuels innovation and economic growth. The growth in popularity of IP financing is following the trend of an increase in intangible asset-dominated companies. For instance, physical assets only account for about 4% and 6% of Amazon and Apple’s net worth, respectively. India is the third-largest startup hub globally and increased recognition of IP financing will make it easier for Indian startups to obtain capital and help spur the country’s progress. At present, India holds the fifth position in trademark registrations and is sixth in patent registrations globally. The utilization of these assets to obtain financing could help the economy attract considerable capital. Indeed, the 161st Report of the Rajya Sabha Parliamentary Committee on Intellectual Property has opined that Indian laws need to enable greater acceptance of IP as collateral. Earlier, the National IPR Policy had also aimed at facilitating the securitization of IP and its use as collateral through enabling legislation.
Nevertheless, the very nature of intangible assets presents unique challenges in using it to secure funds. First, many financial institutions lack the in-house competence and models needed to grasp the value of IP assets. It is difficult to measure the realizable value of IP assets in the event of a default. Furthermore, the lack of a well-established secondary market for IP makes it difficult to conduct price discovery.
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Nevertheless, the very nature of intangible assets presents unique challenges in using it to secure funds. First, many financial institutions lack the in-house competence and models needed to grasp the value of IP assets. It is difficult to measure the realizable value of IP assets in the event of a default. Furthermore, the lack of a well-established secondary market for IP makes it difficult to conduct price discovery.
Second, the lack of a secondary market also impedes the disposal of such assets when required. The success of IP financing hinges on the existence of processes and channels to liquidate assets. However, the lack of mechanisms to dispose of an asset in case of default may lead to greater volatility in the value of the asset. For instance, Kingfisher Airlines had used its trademarks as collateral to gain loans from a consortium of banks. However, once its performance began to deteriorate, the value of the trademarks also plummeted, as found by two failed auctions for them, and its lenders suffered heavy losses.
Third, the development of IP financing demands legal certainty and effective management of IP assets. Companies need to be better equipped at harnessing the monetary potential of their IP assets and investors need to overcome the lack of familiarity and expertise. Additionally, it is important for regulators to foster an encouraging environment to aid the development of this field. At present, Basel III requirements do not recognize intangible assets such as IP to be suitable collateral that may be used to justify banks maintaining a lower amount of capital to guard against risks. This makes IP-backed loans unattractive. Revising such banking regulations could help lift the appeal of IP-backed loans.
Nevertheless, many countries have been devising systems and schemes to support the IP financing industry. For instance, Singapore has declared that it plans to establish a set of intangible asset valuation guidelines to increase information transparency and standardize the valuation process. The International Valuation Standards Council has also issued guidance on the valuation of intangible assets (IVS 210). In Jamaica, multiple workshops were organized to train IP valuers in advanced valuation methodologies. In addition, companies such as Aon PLC are trying to develop a natural language processing system to determine the value of IP assets. The ability to correctly value IP assets will also enable market participants to hedge against the various risks of this emerging market. The need to mitigate risks posed by IP financing has also led to the creation of an insurance market covering IP assets, which is expected to result in lower interest rates and bigger loan amounts. The Organisation for Economic Co-operation and Development has also recommended that development banks and governments should consider sharing the risks of IP financing with investors and lenders by participating in risk-sharing mechanisms or offering support to IP risk insurance.
In conclusion, it must be re-emphasized that traditional funding provided by commercial banks based on the supply-chain model is failing to meet the demands of a fast-evolving market. IP financing is an impending revolution in the field of finance, and developing countries such as India must make the most of this opportunity at the very onset. Given the comparative novelty of this concept, there is some hesitance on the part of regulators and investors to participate in it. However, there are several measures that are already being taken by various countries to streamline the process and enhance transparency as well as accountability. India must also consider implementing similar policy changes to allow for improved IP asset valuation methodologies and risk management through risk sharing or supporting insurance coverage for such assets. It would favour India’s economic evolution.
Shuchi Agrawal is a research fellow in the corporate law and financial regulation team at Vidhi Centre for Legal Policy.
