India should bring in robust infrastructure for IP financing, says report

India should focus on creating an intellectual property (IP) financing ecosystem and would do well to take lessons from IP-friendly countries such as Singapore and Korea, according to Aviral Jain, Managing Director, Valuation Advisory Services, Duff & Phelps.

“We need to have a mechanism for availing requisite financial support as well as a robust marketplace for IP assets in India,” Jain said.

There is a need to encourage the use of IP as a collateral for financing, according to a recent report by Duff & Phelps and the Confederation of Indian Industry (CII), titled ‘Intellectual Property Backed Financing: Using Intellectual Property as Collateral’.

IP-backed financing refers to the use of IP assets to gain access to credit. Globally, more and more MNCs and SMEs are leveraging their IP assets in exchange for finance, and lending institutions around the world are considering IP as collateral when extending loans.

Normally, tangible assets such as real estate, equipment and inventory are used to secure asset-based loans; however, the collateralisation of IP can also increase the amount of available credit. In cases where borrowers pledge their IP (such as patents, trademarks or copyrighted works) as collateral, the collateral pool increases in value and the potential for a successful loan can be increased.

Global examples

The CII-Duff & Phelps report highlights global examples to showcase the virtues of using IP as collateral for financing.

IP financing transactions, where IP is used as a collateral, have declined over the past five years globally, said the report. However, transaction financing where acquired IP is the primary collateral, and monetising IP under a distress situation, have gained traction, it noted.

There is increasing interest from large, global PE funds in innovative, IP-based companies. These funds are not only investing in IP-based companies, but also providing finance to help protect IP in certain situations, it added.

The report highlighted that India is standing at the cusp of an IP revolution, being the third largest economy for start-ups in IP-intensive industries including technology and bio-pharmaceuticals.

Why the slow pace

While government initiatives such as the launch of a National IPR Policy in 2016 for spurring interest in IPR commercialisation have been institutionalised, the traditional asset securitisation process is still deeply embedded in the lending process, the report noted.

Other reasons for the relatively slow pace of IP financing in the country include unwillingness to treat IP as a business asset, insufficient market and legal infrastructure for monetising IP assets, challenges in IP licensing and transfer, and lack of uniformity in the valuation of IPs.

While the regulatory environment is evolving globally and initiatives to provide impetus to IP-backed financing are underway, some economies, such as Singapore, exhibit a sophisticated regulatory environment as well as a robust infrastructure for IP financing, it added. The schemes introduced in these countries not only encourage IP financing for SMEs and start-ups, but also come with benefits for the participating lending institutions.

This will help the industry and banks in developing a good understanding of the subject matter and proceeding in this direction, said Arvind Thakur, Chairman, CII National Committee on Intellectual Property, and Senior Advisor to the Board, NIIT Technologies.

“CII firmly believes that IPR should be at the centre stage in competing in the global world of artificial intelligence in a meaningful manner. It is hoped that it would open a new field of financing in India,” he added.

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