Secured Lending on Intellectual Property Rights in India: Issues on Valuation
| Published date | 01 July 2023 |
| DOI | http://doi.org/10.1177/23220058231172092 |
| Author | Sudipta De Sarkar,N. L. Mitra |
| Date | 01 July 2023 |
| Subject Matter | Articles |
Secured Lending on Intellectual
Property Rights in India:
Issues on Valuation
Sudipta De Sarkar1 and N. L. Mitra2
Abstract
Valuation is a critical exercise for commercial enterprises, as it is used to assess the best possible value
for various transactions. It has been observed that many of these transactions involve intangible assets,
including intellectual property (IP) assets. However, present Indian valuation standards treat IP rights
as a class within intangible assets, which affects the realization of the true value of IP. As enterprises
push towards maximizing value from IP assets, the ability to avail credit backed by such assets from
traditional financial organizations in India, through a transparent mainstream process, will be one of
the focal points of consideration. However, this will require a standardized valuation approach that
can be clearly understood and applied by all the stakeholders. This paper presents a method to identify
and value IP in its own right, in light of applicable Indian accounting standards and that of some leading
economies of the world.
Preface
The issue of valuation of IPR assets, such as patents, copyrights, trademarks etc., specically for the
purpose of secured lending, is a very complex and delicate matter. The role of intellectual property and
its related assets in a corporate system is rapidly growing. This paper is specic to (i) the role of
‘intellectual property assets’ in secured lending, (ii) the obstacles in developing security instruments as
well as a market-based procedure for IPR-generated securities and (iii) the creation of security interest
thereon in India.
In this context, the paper is based on the set data and economic significance of secured lending that
reduces the interest rate on lending, especially on unsecured lending. There are two sides to the story:
one of ‘secured lending by banks for IP asset generation and acquisition’ and the other is ‘using IP asset
as a secured lending business credit’ on short-term or long-term debt of current capital financing.
Article
Asian Journal of Legal Education
10(2) 217–242, 2023
© 2023 The West Bengal National
University of Juridical Sciences
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/23220058231172092
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1 School of Law, KIIT Deemed to Be University, Bhubaneswar, Odisha, India.
2 Emeritus Professor of Law, KIIT Deemed to Be University, Bhubaneswar, Odisha, India.
Corresponding author:
Sudipta De Sarkar, School of Law, KIIT Deemed to Be University, Bhubaneswar, Odisha, India.
E-mail: sdesarkar@kls.ac.in
218 Asian Journal of Legal Education 10(2)
While the British experience in the former is very energizing,3 the US research in the latter case is
discouraging if not depressing.4
Collateralization of security interest on IP assets is generally kept included in ‘intangible asset’ category.
Indian accounting standards (Ind AS) and international financial standards statements include intellectual
property as intangible assets. It linguistically means ‘an asset which does not have a material presence in
any form of physicality and cannot be touched, smelt, or seen’ but can be identified. In accounting language,
it is a non-monetary asset bereft of physical substance and which is identifiable. Intellectual property is also
similarly defined by Stanford Encyclopaedia of Philosophy as ‘generally characterized as non-physical
property that is the product of original thought’.5 In this sense, IP assets are shown as intangible assets. It is
to be noted here that the tangibility of an asset is a very key factor in the valuation of assets.
Should IP Assets Be Shown in the Class of Intangible Assets?
IPRs may be shown as intangible assets but all intangible assets are not IP assets.6 There is one
fundamental aspect of IPRs that needs to be considered here:
3 Intangible Asset Market Value Study, Ocean Tomo (2022). https://www.oceantomo.com/intangible-asset-market-value-study/ (last
visited Feb. 20, 2023); also see K. Catechis & L. Labedzki, Deep Waves: The Quiet Undertow of Intangible Assets (2022). https://
www.franklintempleton.com/articles/strategist-views/deep-waves-the-quiet-undertow-of-intangible-assets (last visited Feb. 20, 2023);
S. Ponczek, Epic S&P 500 Rally Is Powered by Assets You Can’t See or Touch, Bloomberg (2020). https://www.bloomberg.com/
news/articles/2020-10-21/epic-s-p-500-rally-is-powered-by-assets-you-can-t-see-or-touch (last visited Feb. 20, 2023). Lending by
banks for IP asset generation and acquisition may be more secure than perceived, with a study by British Business Bank conducted
to analyse the default and loss rates on Enterprise Finance Guarantee (EFG) backed loan, noting that the loans to companies with IP
assets resulted in lower losses than loans to companies without such IPR, which could be availed by banking institutions to create
incentive for IP-rich rms to register and value their IP, and increase the demand for loans by IP- rich rms (Using Intellectual Property
to Access Growth Funding 2018). https://www.british-business-bank.co.uk/wp-content/uploads/2018/10/502-IP-Report_singles.pdf.
Britsh Business Bank. https://www.british-business-bank.co.uk/ ((last visited Feb. 20, 2023).
4 Nicolas Crouzet and Janice Eberly recently noted that accumulation of intangible capital has spurred market concentration in
favour of those rms that can best leverage the scaling benets of advanced technological infrastructure. They also observe that
intangible capital is hard to use as collateral for nancing. The increase in intangible capital investment likely reduced the proportion
of overall investment nanced through bank debt and may have opened the door for such non-banking players as private debt funds
in corporate lending. A. PucA & M. ZylA, The InTAngIble VAluATIon RenAIssAnce: FIVe MeThods (CFA Institute 2019). https://
blogs.cfainstitute.org/investor/2019/01/11/a-renaissance-in-intangible-valuation-ve-methods/ (last visited Feb. 20, 2023); citing N.
Crouzet & J. Eberly, (2018). Understanding Weak Capital Investment: The Role of Market Concentration and Intangibles, https://
www.kansascityfed.org/. Federal Reserve Bank of Kansas City. https://www.kansascityfed.org/Jackson%20Hole/documents/6977/
crouzeteberly_JH2018.pdf (last visited Feb. 20, 2023).
5 A. Moore & H. Ken, (2022) Intellectual Property, The Stanford Encyclopedia of Philosophy. https://plato.stanford.edu/archives/
fall2022/entries/intellectual-property/> (last visited Mar. 21, 2023).
6 The (Indian) Income Tax Act, 1961, provides an exhaustive list of intangible assets, many of which are actually in the form of
intellectual property. Section 92B(2)(ii) states—‘the expression “intangible property” shall include—(a) marketing related intangible
assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents,
patent applications, technical documentation such as laboratory notebooks, technical know-how; (c) artistic related intangible assets,
such as, literary works and copyrights, musical compositions, copyrights, maps, engravings; (d) data processing related intangible
assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters;
(e) engineering related intangible assets, such as, industrial design, product patents, trade secrets, engineering drawing and schema-tics,
blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer
relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements,
franchise agreements, non-compete agreements; (h) human capital related intangible assets, such as, trained and organised work
force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation
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