IP can be valuable collateral for credit: CII Report
The Confederation of Indian Industry (CII) released a publication on use of intellectual property rights (IPRs) as collateral. The report, titled “Intellectual Property Rights: A Case for Monetization”, provides detailed analysis of various types of IP assets, benefits of using IP as collateral, types and effects of security interests and how to protect them.
The report, prepared by Singh & Singh Law Firm LLP, highlights global practices in utilising IP as collateral by financial institutions. It points out the various instruments available for this in the country.
The report encourages use of intellectual property (IP) as collateral due to its benefits:-
A wider pool of assets: Lenders often face situations where existing good customers want to borrow more than established asset lending ratios will allow. The value contained within core intangible assets provides a means to lend more, but with increased security.
Potential for value appreciation: The IP assets of a well-run business will increase in value over time, whereas most of their tangible assets will reduce in value. It may be more attractive to finance the IP assets on a basis that is predicated on the strength and performance of the IP assets rather than the creditworthiness of the borrower.
Improved security: At present, any charge placed over a business’s IP and intangibles tends to be floating rather than fixed, weakening its effect if the business gets into difficulties. Defining IP assets as part of a lending agreement puts a bank in a much stronger position with an administrator or insolvency practitioner. IP-based financing may offer some options for businesses to hedge themselves from risks. With securitization, for instance, the obligation of the IP’s performance is shifted away from the originator and the assets are safeguarded from bankruptcy proceedings.
Stronger repayment incentives: Where intangibles are core to business activity, they provide a powerful incentive for borrowers to honour their repayment commitments.
Alternative to personal guarantees (PGs): Lenders recognise the complications which arise from requesting PGs for business transactions. IP and intangibles provide an additional source of security and/or “comfort” which is directly related to the company, not an individual.
Mr Arvind Thakur, Chairman, CII National Committee on IP [other designation required] said, “IPR should be central in a meaningful manner for companies to be able to compete in the global arena.”
The author of the report, Mr K R Pradeep, Partner, Singh & Singh and a practicing advocate, said, “The fast-emerging knowledge-based economy has recognised intellectual property as the driver of productivity and economic growth, leading to a new focus on the role of information, technology and learning in economic performance of an entity, which has resulted in driving IP towards mainstream of business management.”
The report was released at CII’s flagship international conference on IP in New Delhi on Wednesday.