Intellectual Property Financing

The value of an idea lies in its using of it. -Thomas Edison

With the advent of innovations worldwide and the growth of startups, a knowledge-based economy has become an essential source of economic growth worldwide. Knowledge/Intangible assets are now the principal form of economic assets, more valuable than tangible ones. As per the Global Intangible Finance Tracker 2020, physical assets account for only 4% of Amazon’s net worth, while the corresponding numbers were only 6% for Apple, 7% for Microsoft, 16% for Facebook, and 26% for Alphabet. This has led to growth towards using intellectual Property as collateral, even for emerging business opportunities that may help further boost the startup economy.

India is a bustling startup center with the world’s third-largest startup ecosystem. However, the emerging startup economy has not stabilized yet; the NASSCOM survey (2020) found that nearly 40% of startups have temporarily shut down or are on the verge of closing and 70% have less than three months of cash runway.

The rapidly increasing awareness and significance of intellectual Property has spread to micro, small, and medium enterprises (MSMEs) and startups. We cannot deny the role of IPR as a factor in the success of Indian Startups. Possession of registered IPRs gives an edge to startups; rivals can use an unregistered invention.  Monetization of IPR in the Indian economy, where the primary source of capital for startups is family and friends( 43 %) and only 36% as loans from banks and financial institutions, IPR financing can be a significant source of capital for emerging startups.

Interestingly, using IPR and other intangible assets as security for debt financing is not new, though it has not gained popularity. Going back to the bulb’s invention, Thomas Alva Edison used it as his patent as security to borrow money to launch the General Electric Company.

Legal Framework in India

The 161st report of the Rajya Sabha Parliamentary Committee on Intellectual Property disregarded the use of Intellectual Property as collateral in financing transactions. The Committee believed there is a need to reform Indian laws to embrace IP as collateral by banks and financial institutions. However, the Committee did not focus on any specific legal issues to improve.

The Indian banking system has made provisions ahead of its time to accept intangibles as collaterals. Section 2(1)(t) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) defines the expression property, and it includes explicitly intangible assets being knowhow, trademark, copyright, license, or franchise. Further, Section 2(1)(zf) defines ‘security interest’ as a right, title, or interest of any kind upon Property created in favor of the secured creditor and includes such rights as title or interest in intangible assets.

However, in the case of  Canara Bank v N.G. Subbaraya Setty & Anr, the Supreme Court restricted the use of Intellectual Property as collateral for financing transactions. Basing its argument on Section 6 and Section 8 read with Section 41 of the Banking Regulations Act, 1949, the apex court took the view that a bank cannot use the trademark to sell goods (here EENADU trademark for agarbattis) nor can it allow 3rd parties to use the trademark and get a royalty. This judgment has been criticized, but it still stands today.

Policy changes

Business engagement in IPR in India is driven by the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Federation of Micro, Small, and Medium Enterprises (FISME). FICCI has established the Intellectual Property Rights Facilitation Centre (IPFC) in collaboration with the Ministry of Micro, Small, and Medium Enterprises (MSME) to increase awareness and acceptance of IPRs among small entrepreneurs and startups. Recognizing the rising value of IPR to member organizations, FISME has launched numerous projects with support from the Ministry of MSME’s national manufacturing competitiveness program. FISME has been concentrating on IPR valuation and developing a system to sell and realize the value of IPR.

Moreover, The Department for Promotion of Industry and Internal Trade (DPIIT) adopted the National Intellectual Property Rights Policy in 2016; one of its objectives is the commercialization of IPRs


Intellectual Property is an emerging market in a few developed countries, and India is in its nascent stage. Financial Institutions are risk averse and are afraid to use it as collateral, especially after the negative experience with Kingfisher, which had taken a loan backed by its trademark. There is a lack of institutions for standardized IPR valuations. Most importantly,  there is a need to change the law to introduce and encourage the acceptance of intellectual Property as a security.

If IPR financing is developed in India, it can significantly contribute to the capital generation potential of startups, where most of the capital is generated through family and friends.  This mechanism has also helped save the iconoclast Kodak from bankruptcy; it secured a loan of 525 billion dollars in exchange for a loyalty stream on Kodak’s digital imaging patents. 

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Shivangi Singh
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