Ip Valuation in Corporate Finance: Can Trademarks Get You A Loan?

As ideas, innovation, and intangibles increasingly dominate the global business landscape, intellectual property (IP) has quickly become a bedrock of corporate value. Intellectual property is no longer just a legal construct for safeguarding creativity or a legal right that enables companies to stop 3rd parties from copying their ideas. IP has now evolved into a strategic business asset.  From global tech leaders, to Indian start-ups, many enterprises are recognizing the phenomenal economic leverage that exists within our IP portfolios.  Ironically, when needing to raise funds (especially debt) there appears to be little leverage afforded from these assets as they tend to remain dormant on balance sheets.

The issue surrounding whether trademarks and other IP assets can be leveraged as collateral for loans in India lies at the crossroads of many disciplines including finance, law, innovation, valuation science, and business. Although IP has been core to many brand-driven enterprises and big tech, its use as an actual bona-fide financial instrument in Indian capital markets is still has not fully materialized in any sustainable or predictable way. With the digital economy beginning to accelerate, and the valuation of intangibles exceeding the valuation placed on physical infrastructure, it is timely to consider IP-backed financing in greater depth.

What is IP Valuation?

Intellectual Property valuation is the process of determining the different aspects of the economic value of intangible property like a patent, trademark, copyright and trade secret. These rights and assets, though intangible and not seen by the naked eye, can be worth hundreds of millions of dollars and are often the crown jewels of a company’s competitive advantage. For example, a strong brand can lead to brand loyalty, the ability to charge price premiums, and valuable collaborative arrangements. The amount of intangible property may be the largest component of a firm’s total market capitalization in sectors such as technology, media, pharmaceuticals, and consumer products.

Intellectual Property valuation can be useful beyond corporate transactions involving mergers, acquisitions, or licensing; it is also used for financial statements, pitch decks for investors, tax computations, dispute settlements, and increasingly for raising capital – venture capital firms and private equity players review the strength of a companies’ IP portfolio as part of any due diligence to indicate sustainability and potential growth. With India’s developing innovation ecosystem and emerging startup sector, the importance of valuing and exploiting intellectual property will likely become an essential skill for IP lawyers, as well as CFOs, auditors, investors, and new business owners.

Methods of IP Valuation

Traditionally, there are three general accepted approaches for valuing IP:

Cost Method: Evaluates what it would cost to recreate the asset, inclusive of development costs, registration, compliance, and marketing. Typically used for early stages or internally developed IP, where market data is unavailable.

Market Method: This approach utilizes publicly available prices from transactions similar to the IP being valued. However, in India, this is challenging due to limited public information and transparency surrounding private deals. Nevertheless, international benchmarks or data from IP marketplaces can often provide a rough sense of comparable value.

Income Method: This method forecasts revenue directly attributed to the IP, including any brand premium, license income, or fees from franchises, as well as the overall share of market gains between forecasting periods. Although the complexity and variables of future income can be difficult to accurately predict, this method is usually preferred by lenders because it predicts the actual economic value of an ownership interest in the asset over time.

A hybrid model that combines two or more valuation methods is often used, especially for significant transactions or litigation. Currently, AI tools and analytical platforms are being used increasingly to minimize variability in IP valuation, particularly when determining future income potential for brand or tech-driven IP.

Legal Framework in India

India’s legal framework does not yet offer a dedicated or legislated mechanism for financing IP, but various legal provisions can provide a foundation to create a suitable loan scheme:

Companies Act, 2013: Provides for recognition of intangibles, including IP, on a company’s balance sheet, subject to complying with accounting rules. This legal backing is critical for lending institutions to be able to view IP as an asset class.

Indian Accounting Standards (Ind AS 38): Provide for the recognition of IP if the cost and future economic benefits can be measured reliably. Only internally generated goodwill cannot be recognised; however, there are, for example, trademarks and patents, which have been generated internally and could be recognised if identifiable and measurable.

SARFAESI Act, 2002: Generally applied to tangible secured assets; however, if formally secured by way of a hypothecation or an assignment, IP may also be secured. However, there is limited judicial precedent that would clarify enforcement mechanisms under SARFAESI for intangible asset recovery.

Banking Regulation Act, 1949: As the Banking Regulation Act does not explicitly state that IP is valid collateral, many lending institutions are reluctant to lend against IP. Consequently, some non-banking financial institutions (NBFCs) and other alternative finance providers may seek to carve out a loan scheme using IP as security.

India’s insolvency framework under the Insolvency and Bankruptcy Code (IBC) also remains largely untapped to resolve pre-IBC defaults involving IP or to monetize intangibles for use in funding post-resolution.

Using IP as Collateral

Despite the hesitation, the concept of using IP as collateral is slowly gaining acceptance. However, certain conditions must be met: Recorded Ownership: IP must be recorded and registered with undisputed ownership. IP that has pending applications, disputed ownership, or unregistered trademarks generally will not qualify.

Certified Valuation: The value must be verified with a reliable and recent valuation undertaken by certified professionals, ideally specialists in intangible asset valuation. Banks may require third-party validated or insurer-backed guarantees for higher value amounts of IP.

Loan Structuring: The asset may be hypothecated (retained ownership by the borrower) or assigned conditionally (transferred to the lender in the event of default). This may be recorded with the Trademark Registry or IP office in some jurisdictions.

Active Maintenance: IP must be maintained and protected, with active renewals and various enforcement actions in case of infringement. If lenders advance general creation and/or marketing loans, they may insist on clauses in the contract around legal protection and brand activities.

Example: The case of Kingfisher Airlines, which used its brand value as leverage for bank loans, is a case in point. When the airline failed, banks struggled to liquidate the brand, demonstrating the high-risk nature of such loans without recovery methods in place.  It is important to note that brand value is inherently linked to remaining operational and goodwill in the marketplace.

Challenges in IP Financing

There are insurmountable challenges with IP-backed financing:

Valuation is subjective: There is no accepted standard for valuation, resulting in valuations that vary considerably. Also, changes in consumer perceptions or changes in regulations may cause an overnight decline in the price of the IP.

Difficulties of Enforcement: Recovery of the IP collateral is difficult when there is no authoritative engaged legal framework or liquid markets for resale. The same issues arise when there are jurisdictional issues in the cases of foreign patents or trademarks engaged in cross-border cases.

Lender Inertia: Lenders (typically banks) lend against physical assets. Probably because of earlier NPAs and with pressure from regulators, lenders remain afraid to engage an IP. Until, at least, the Reserve Bank of India formally recognizes IP as collateral, it is improbable that there will be widespread adoption.

Knowledge Void: Borrowers may not accurately appreciate the value of their IP, and the lender may not have the means to make appropriate assessments. Financial institutions have to develop their capacity for SME awareness programs.

As India aspires to become a $5 trillion economy, it is well-positioned to leverage IP-backed finance to innovate and access capital in a transformative way. Traditional collateral-based lending is inadequate for the current digital-first economy. IP could be a powerful financial lever that rewards innovation and creates new accessibility to financial inclusion if it is valued accurately, protected, and maintained.

For Indian start-ups and knowledge-based companies, this shift can provide a fundraising opportunity without forfeiting ownership rights or control. It can provide an additional growth path inherently aligned with global best practice and create a material reward for innovation. A combination of legal reforms, digital valuation tools, investor appetite for IP utilization, and policy support could potentially trigger an IP finance revolution within the next few years..

Author: Ujjval Verma, in case of any queries please contact/write back to us via email to [email protected] or at Khurana & Khurana, Advocates and IP Attorney.

References

1. “Indian Startup Secures Loan Using Trademarks,” Business Standard, 2024.
2. “Intellectual Property Valuation,” World Intellectual Property Organization, 2023, www.wipo.int.
3. “Kingfisher Airlines Brand Pledge,” Economic Times, 2010.
4. “China’s IP Financing Surge,” China Daily, 2023.
5. “Ind AS 38: Intangible Assets,” Institute of Chartered Accountants of India, 2020, www.icai.org.