Article: Can Intellectual Property be Securitised?

Author: Intern - Manvee Kumar Saidha

Introduction

Securitisation may be defined as a process by which a company pools the rights to receive future payments for certain assets and sells that right in the form of securities. With IP becoming one of the most invaluable assets of businesses, this concept was extended in that direction, and WIPO, among others, describes the securitisation of IP assets as a “new trend” [1]. This began with securitisation of royalties, the first-ever being the Bowie bonds, which were music royalties. In 1993, Calvin Klein raised US $58 million with the securitization of royalties on perfume brands, arising from the exclusive right to use its trade mark on existing and future products; and the practice continued since [2].

The numbers associated with IP securitisation are a testament to the growth and applicability of this trend. For instance, the number of patents pledged as collateral grew from less than 10,000 in 1995 to nearly 50,000 in 2013. According to an IP merchant bank, Ocean Tomo, intangible assets as a percent of market value are at an all-time high of 84% for S&P 500 companies. Additionally, since 1980, 16% of all U.S. patents have been pledged as collateral before their expiration, and by 2013, 40% of all firms with patents outstanding had pledged their patents as collateral at some point.[3]

Indian Position

The United Nations Commission on International Trade Law (UNCITRAL), to which India is a signatory, has undertaken an elaborate exercise to prepare a legislative guide on secured transactions along with a supplement on security rights in IP. The objective of the guide with respect to IP is to promote secured credit for businesses that own or have the right to use IP, by permitting them to use rights pertaining to intellectual property as encumbered assets without interfering with the legitimate rights of the owners, licensors and licensees of the intangible property. UNCITRAL has also approved a model Law on Secured Transactions, applicable to all secured lenders, for adoption by the member countries, though India is yet to consider its enactment.

Judicial Interpretation

There has been only one recent case that has dealt with the issue specifically. In the case of Canara Bank vs NG Subbaraya Setty (AIR 2018 SC 3395) [4], the Supreme Court [Adarsh Kumar Goel and Rohinton Fali Nariman, JJ] held that assignment of a trademark “EENADU,” as a security for a loan outstanding is against Section 45 of the Trade Marks Act of 1999 and Sections 6, 8 and 46(4) of the Banking Regulation Act, 1949. In reference to the former, the Court stated that any unregistered assignment cannot be presented as evidence in court of law. Since the assignment deed between the parties was never registered and the IP had not been attached as security or collateral at the time of entering into the loan agreement, it was held that subsequent attachment does not justify securitisation. Reference to provisions under Banking law was itself interpretive, and the ambiguity does not draw conclusion to the issue itself. It is also interesting to note that the Court didn’t discern the question in general, but limited its reasoning and application to the matter at hand.

Legislative Interpretation

The National Intellectual Property Rights Policy, 2016 [5] proposes the securitisation of innovation rights, allowing them to be used as collateral to raise funds for their commercial development. The Policy does allow for an IP to be attached as a security, and also suggests financial support for developing intellectual property assets through banks, venture capital and angel funds and crowdfunding mechanisms. The more recent legislations attempt to include intangible assets in the loop of legal procedure and substance. For instance, Section 2(1)(t) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) [6], defines the expression property and specifically includes intangible assets being knowhow, trademark, copyright, licence or franchise. Section 2(1)(zf) of the 2002 Act defines “security interest” as a right, title or interest of any kind upon property created in favour of secured creditor and includes such right title or interest in intangible assets. Further, the expression secured creditor is defined to include any bank or financial institution holding any right, title or interest upon any tangible asset or intangible asset as a secured creditor. Even Section 6(1)(f) & (g) of the Banking Regulation Act, 1949 [7] clearly provides for dealing with any property or any right, title or interest in such property which forms the security for the loan.

Conclusion

While Indian jurisprudence on IP securitisation is limited and remains unresolved, with the global development of the trend of IP securitisation, and foreseeable acceptance under the Indian regime, it is safe to hope that the practise will be incorporated in commercial transactions. The risk that financial institutions are apprehensive of are fair, but post the initial dubiety, IP securitisation will be a boon for businesses, especially for start-ups and smaller businesses who may not have a lot to offer otherwise. This will also encourage IP registrations, thereby simultaneously strengthening the commercial and IP regime of India in the long run.

REFERENCES:

[1] https://www.wipo.int/edocs/mdocs/sme/en/wipo_wasme_ipr_ge_03/wipo_wasme_ipr_ge_03_17.pdf,  last accessed on February 15, 2021.

[2] https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source,  last accessed on February 15, 2021.

[3] https://www.itcilo.org/sites/default/files/inline-files/Erdenechimeg.pdf , last accessed on February 17, 2021.

[4] Canara Bank vs NG Subbaraya Setty, AIR 2018 SC 3395.

[5] https://dipp.gov.in/sites/default/files/National_IPR_Policy_English.pdf,  last accessed on February 17, 2021.

[6] https://www.indiacode.nic.in/handle/123456789/2006?view_type=search,  last accessed on February 18, 2021.

[7] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/BANKI15122014.pdf,  last accessed on February 18, 2021

Disclaimer: Views, opinions, interpretations are solely those of the author, not of the firm (ALG India Law Offices LLP) nor reflective thereof. Author submissions are not checked for plagiarism or any other aspect before being posted.

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