Unlocking the Value of Intangible Assets: The Evolving Landscape of Intellectual Property Financing in India

In today’s knowledge-driven economy, intellectual property (‘IP’), such as trademarks, patents, designs, copyright, etc., is increasingly being recognized not just as legal protections but as a valuable financial asset. IP can be effectively leveraged for both equity and debt financing, making it a powerful tool for businesses at various stages of growth. Unlike traditional tangible forms of security, like land machinery – which are limited and deprecate over-time, IP often appreciates in value as innovation and market demand increases. This is especially beneficial for startups and small to medium enterprises (SMEs) that may lack tangible assets in their early stages. By leveraging IP-backed financing, these businesses can attract investment based on the value of their intangible assets. This approach not only broadens funding opportunities but also incentivizes greater investment in research and development, as companies recognize the financial worth of their innovations. Larger, more established companies can also take advantage of IP financing, particularly when seeking debt funding. Various IP-based financing structures are available, including:

·                 Direct collateralisation: businesses can pledge their IP assets as collaterals against a loan. For example, a biotech company collateralises some of its patent portfolio for a bank loan.

·                 Securitization: companies can bundle future income generated from IP, such as royalties or licensing fees, and issue securities to investors. For example, music companies bundle their future royalties from a catalogue of songs and sells them as asset-backed securities. Investors receive regular payments from the royalty income.

·                  Sale and Leaseback: companies can sell its IP to receive cash up front and simultaneously license it back, allowing continued use of the asset. For example, a tech company startup sells it patent for an AI algorithm for a certain sum of money and immediately becomes a licensee to the patent sold so that it can continue developing and commercializing the technology.

Current Legal Framework

IP financing in India is underpinned by a dual-legal framework of general commercial laws such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (‘SARFAESI’), Companies Act, 2013, Banking Regulation Act, 1949, etc., and specific IP legislations.

The SARFAESI Act provides for the creation of rights in intangible assets such as patent, copyright, trade mark, etc., through Sections 2(1)(zg) and 2(t)(v). Similarly, Section 77 of the Companies Act, 2013 provides for the creation of a charge on the intangible assets of a company. Further, Section 6 of the Banking Regulations Act, 1949 allows banks to, among other things, to acquire and hold any property, right, title or interest as security. These sections, amongst other laws, work together to validate IP as a financial instrument.

In parallel, India's IP laws provide for the perfection of IP rights. Sections 68 and 69 of the Patents Act, 1970 and Section 30(2) of the Designs Act, 2000^, allow mortgages and assignments over patents and designs, provided such transactions are registered with the respective Controllers. However, key gaps remain in the treatment of trademarks and copyrights. The Trade Marks Act, 1999, while allowing assignment of trademark rights, does not explicitly recognize the creation of a security interest over trademarks, amongst other issues. Similarly, the Copyright Act, 1957, does not provide a clear statutory process for registering a security interest, largely due to the fact that copyright is created upon fixation and does not require mandatory registration. This fragmented framework creates procedural and enforcement challenges for lenders.

Trademarks

A trademark signifies brand identity and consumer trust. Strong trademarks with market recognition (e.g., logos, slogans, etc.) hold substantial goodwill. They are frequently used as collateral in licensing or financing deals. For example, Ford reportedly pledged its brand between 2006 to 2012[1]. Famous brands like Coca-Cola, Nike, Disney, Starbucks have used multiple strategies such as securing loans through brand licensing agreements, using franchise agreements as collaterals, etc.[2] to leverage their brand value.

A key case in this context is the Kingfisher Airlines financing deal. Banks accepted trademarks such as “Fly Kingfisher”, “Flying Models”, and “Fly the Good Times”[3] as collateral to sanction loans exceeding ₹2,000 crores from the State Bank of India. These trademarks were initially valued at approximately ₹3,000 crores. However, following Kingfisher Airlines’ default and discontinuity of the airline business, lenders faced severe challenges in monetizing these brand assets. The brand’s market value collapsed due to its association with financial failure and negative publicity, which rendered the trademarks unsellable. Valuation of trademarks is dependent on the duration of time it is being used for and the continuity of its use, which is why a brand that was once extremely well-known was seen as a defunct airline brand with limited resale value. This highlights issues in valuation and dependency of trademark valuation on factors such as consumer perception.

Further, the Supreme Court in the case of Canara Bank V. N.G. Subbaraya Setty & Anr[4], held that the trademark “EENADU” “…cannot be said to be property which has come into the possession of the bank in satisfaction or part satisfaction of any of the claims of the bank”. The Court did not interpret the assignment of a trademark to earn royalties as a part of one of the business activities of a bank as per Section 6^[5] read with Section 8^[6] of the Banking Regulations Act, 1949. This ruling overlooked the recognition of intellectual property as an intangible asset under the SARFAESI Act and even under Section 6(1)(f) and (g)^[7] of the Banking Regulation Act, 1949.

At the core of these challenges is the fact that India lacks specific legislation governing the creation, perfection, and enforcement of security interests in trademarks. Consequently, issues such as overvaluation/undervaluation, uncertainty in asset enforcement and disposal arise, as also exemplified in the Kingfisher case. Further, as seen in the Canara Bank case, courts decide disputes based on the interpretation of other laws, leading to unpredictability and risk for parties.

Copyright

Copyright protects original literary, artistic, musical, and cinematographic works. These rights can generate steady royalty income streams, making them suitable for both collateralisation and securitization in financing transactions. Globally, musicians, music labels, and film production houses often leverage their copyright portfolios for funding. In collateralisation, the copyright owner pledges ownership rights as security for a loan, allowing lenders to take over the asset upon default. In securitization, anticipated future royalty streams are packaged into financial instruments, offering investors a share of the income. A famous global example of copyright securitization is David Bowie’s 1997 “Bowie Bonds”, where Bowie raised approximately USD 55 million by securitizing future royalties from his pre-1990 music catalogue. This transaction demonstrated the commercial viability of copyright-backed securities.

In India, however, the use of copyright for both collateralization and securitization remains limited and largely theoretical. One major challenge is that copyright is a right created upon fixation and does not require mandatory registration under the Copyright Act, 1957. This lack of a compulsory registration system creates difficulties for lenders and investors in verifying ownership, checking for prior encumbrances, and validating perfection of security interests. Moreover, India does not have a centralized registry or statutory framework specifically designed for recording and enforcing security interests over copyrights. While the SARFAESI Act, 2002, includes a possible solution in the form of the Central Registry of Securitisation Asset Reconstruction and Security Interest of India, which maintains a record for all registered security interests, the sheer volume of registrations may pose a monumental task for lenders to find and verify ownership. The lack of any central legislation and body overseeing the creation, perfection, and enforcement of security interests poses a significant hurdle in unlocking the true economic potential of copyright.

Conclusion

IP represents a growing and innovative financing option in India’s evolving landscape. While trademarks and copyrights offer significant commercial potential, the current Indian legal framework remains fragmented. The true potential of IP financing is not yet unlocked and, to a certain extent, remains underrecognized in India. Nevertheless, the recognition of intangible assets under broader statutes such as the SARFAESI Act, 2002, Companies Act, etc., and IP laws such as Patents Act, 1970 and Designs Act, 2000^, on perfection of IP assets, signifies a positive shift towards mainstreaming IP-backed financing. Some solutions can be borrowed from other countries, such as Singapore, China, where several efforts have been made to encourage IP financing. For Instance, Chinese government departments, at both central and local level participate in facilitating and encouraging IP financing;[8] Singapore launched the IP financing scheme in 2014 to promote the use of IP as collateral, helping businesses with valuable IP gain access to funding by sharing IP valuation costs and risks with banks. In conclusion, while India’s journey toward embracing IP-backed financing is still unfolding, the groundwork laid through legislative recognition marks a promising trajectory. With targeted reforms, strategic partnerships, and a stronger valuation ecosystem, India has the potential to unlock the true value of its intangible assets and transform its innovation economy from vision to reality.

Eshanika Sharma 

Associate 

eshanika.sharma@iprattorneys.com

References:

[1] Matthes, Jens. Collateralising Your Trademark Rights. World Trademark Review. Available at: World Trademark Review

[2] Hall, Aaron. Trademark Collateralization: Using Your Brand as Security. Aaron Hall Law. Available at: < https://aaronhall.com/trademark-collateralization-using-your-brand-as-security/>

[3] Dasgupta, P. M., & Vyas, M. (2016, March 12). Kingfisher trademark high on brand recall but low on brand valuation. The 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>

[4] AIR 2018 SUPREME COURT 3395

[5] In addition to the business of banking, a banking company may engage in any one or more of the following forms of business, namely :—

(2) No banking company shall engage in any form of business other than those referred to in sub-section (1).

[6] Notwithstanding anything contained in section 6 or in any contract, no banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it, or engage in any trade, or buy, sell or barter goods for others otherwise than in connection with bills of exchange received for collection or negotiation or with such of its business as is referred to in clause (i) sub-section (1) of section 6. [Provided that this section shall not apply to any such business as is specified in pursuance of clause (o) of sub-section (1) of section 6.]

Explanation— For the purposes of this section, “goods” means every kind of moveable property, other than actionable claims, stocks, shares, money, bullion and specie, and all instruments referred to in clause (a) of sub-section (1) of section 6.

[7] (f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part satisfaction of any of its claims;

(g) acquiring and holding and generally dealing with any property or any right, title or interest in any such property which may form the security or part of the security for any loans or advances or which may be connected with any such security;

[8]  World Intellectual Property Organization. (2024). Country Perspectives: China’s Journey. Available at: <https://tind.wipo.int/record/48728?v=pdf>