In contemporary times, if one were to look at the biggest companies by market capitalisation, an interesting trend as regards to their asset makeup emerges; the bulk of their assets is made up of not tangible but intangible assets. Indeed, the top 5 companies in the world by market capitalisation, Apple, Microsoft, Nvidia, Alphabet, and Amazon, derive the major chunk of their business value and capitalisation not from any significant real assets, but rather rely on intangibles like software, data, online services, digital services, etc. These intangibles, in turn, are a consistent source of revenue for companies because of intellectual property (hereinafter “IP”) which protects valuable software and other intangible assets, allowing companies to monopolise their most prized characteristics and revenue sources from being used by other companies. In other words, the current global economy and markets owe a large part of their valuation to creations of the human mind which do not manifest themselves in tangible objects but are rather intangible ideas, thus necessitating the concept of intellectual property in law so as to evolve a mechanism for protection of these ideas and inventions along the lines of legal protection for physical property.
A logical corollary of the aforementioned state of affairs would be that businesses inclined towards rapid establishment and expansion have a profound opportunity in utilising their IP assets as a base upon which to build the edifice of their concerned business. This phenomenon, although not very recent in inception, has only recently begun to catch the attention of governments and businesses worldwide. Before delving into the intricacies of such an endeavour in the Indian context, one would be benefitted from a clarification and distinction between the multifarious terminology used to refer to such activities. The broadest of these terms is ‘IP Monetisation’, which is simply the earning of money or revenue from IP. However, depending upon how this money is utilised by the IP owner monetising it, it can be either monetisation if the money received therefrom is categorised as revenue, or alternatively it can be termed as ‘IP Capitalisation’ if the IP owner is using the money earned therefrom as capital to form or expand the business. In another class of transactions, money is not directly received from the IP as an asset, but rather acquired by using the IP as a security or collateral for borrowing funds from a creditor. These transactions are broadly termed as ‘IP Financing.’ If the IP is simply used as a collateral in a loan transaction, it is called ‘IP Collateralisation’, and if the lending institution bundles these IP backed loans into issuable securities and further sells them to investors, it is known as ‘IP Securitisation.’
Equipped with a better understanding of the different ways in which a business can utilise its IP assets, as well as the terminology associated therewith, it will be easier to understand why this article serves to deal with only the phenomena termed as ‘IP Collateralisation.’ Since the Indian jurisdiction which this article is primarily concerned with is a developing economy and emerging market, the bulk of businesses found herein are not large established companies or even mid-scale corporations who have been in the market for a substantial amount of time. For these nascent enterprises and start-ups, their most valuable assets are their new and innovative ideas which are registered and protected in the form of intangible IP. Thus, for them to acquire the requisite capital and financing, it is prudent to capitalise on their IP assets. Now, capitalising IP assets itself can be done is a number of ways such as licensing, franchising, assignment, mortgaging, etc, but for the purposes of these start-ups which the article primarily focuses on, mortgaging is the only viable option. This is because new enterprises cannot afford to enter into a capital raising agreement which divests them of full use of their IP assets, as at that point of time their biggest advantage over the rest of the market is their innovative IP. Thus, traditional IP capitalisation methods like licensing, franchising, and assignment are not suited to nascent enterprises and startups as they result in restricting the respective business’s use of their IP assets. On the other hand, mortgaging would be more suitable for these situations as it is a form of hypothecation which does not result in the transfer of possession of the property sought to be collateralised, i.e. it is not a pledge in which the creditor actually has bailment of the goods given as security. Apart from possession, mortgaging also does not affect the mortgagor’s rights to use the mortgaged property in any way, giving the business which owns the IP asset a free rein over commercially exploiting the same. At this juncture, it would also be pertinent to note that this article, whenever it uses the term ‘mortgage’, is referring to a simple mortgage as defined under Section 58(b) of the Transfer of Property Act, 1882.
- Can Intellectual Property be Mortgaged?
Having said all that, a natural question which emerges next is whether intellectual property can even be mortgaged in India. This is a warranted course of enquiry as the concept of mortgage has always been read in the context of immoveable property, more specifically home loans, and even the primary legislation governing mortgages in India restricts them to immovable property. However, it has long been argued that the mortgage provisions of the Transfer of Property Act, 1882 are not exhaustive of the law of mortgages in India, and this is evidenced by having reference to common law principles wherein even movable property or chattels have been recognised as forming the subject matter of a mortgage. Moreover, even specific statutes other than the Transfer of Property Act, 1882 have recognised the mortgage of property other than purely immovable property, like movables and intangibles like IP. Both of these aspects may be taken up one by one.
Mortgage of Movable and Intellectual Property as per General Law
To understand how the general law of the country does not expressly forbid, and to some extent even leaves scope for there to be mortgage of movable and intellectual property, one needs to have reference to the definition of movable and immovable property given in the supreme legislation of the country when it comes to general principles of statutory interpretation and term definition, i.e., the General Clauses Act, 1897. The definition of immovable property in Section 3(26) of this act leaves no scope for the inclusion of intangibles like IP. However, there is some hope in the definition of movable property under Section 3(36):
“movable property” shall mean property of every description, except immovable property
Thus, the phrase ‘property of every other description’ is wide enough to cover even intangibles like IP. This was confirmed by the honourable SC in Vikas Sales Corporation v. Commissioner of Commercial Taxes. Once it has been successfully established that IP comes under the ambit of movable property, it becomes easier to work out a mortgage of IP within the Indian legal context, at least theoretically.
Under statutory Indian law, there are mainly three forms of transactions recognised wherein a security interest or charge is created on property given as collateral, Pledge, Hypothecation, and Mortgage. The former two relate to exclusively movable property, with the only difference being that actual possession is transferred in Pledge while in Hypothecation the possession is retained by the debtor. It might then be a relevant question as to why there is a need to have mortgage of IP at all, since there is already statutory recognition for Hypothecation of movable property which can be used for IP also in lieu of the argument advanced above. However, it must be borne in mind that Hypothecation only results in the transfer of special property with limited rights to the creditor, while mortgage results in transfer of general property with a wider scope of rights over the mortgaged property for the creditor, thus making it more attractive as a collateralising transaction for the lending ecosystem in India. This is particularly important in the context of IP collateralisation, as its widescale adoption is contingent on it overtaking other forms of tangible asset collateralisation in terms of the security provided to the creditor. Thus, mortgage appears to be the obvious choice for the establishment of an IP-backed finance ecosystem in India.
Now, it only need be proved that it is in fact possible for there to be mortgage of movables in India, which is supported by a long line of judicial decisions in tune with general Common Law principles. As long back as in 1916, the Bombay HC held in Tehilram Girdharidas v. Longin D’Mello that in contrast to a mortgage of immovable property under the Transfer of Property Act, 1882, a mortgage of movables can be created even orally and without transfer of actual possession, as long as property passes. This was further reiterated in subsequent cases where even the requirement of court intervention for the mortgagee to sell the mortgaged property and realise the debt was done away with in case the mortgagee had actual possession of the property. Prominent treatises like Mulla on Transfer of Property have also recognised a mortgage of movables, despite there being no statutory recognition of the same, and the mortgagee’s right to get a decree for sale in the same manner as a mortgagee of immovable property is entitled under the Transfer of Property Act, 1882. Implied statutory recognition for mortgage of movables in India can be found in Section 66(3) of the Sale of Goods Act, 1930, which reads:
The provisions of this Act relating to contracts of sale do not apply to any transaction in the form of a contract of sale which is intended to operate by way of mortgage, pledge, charge or other security.
Thus, by explicitly stating that a ‘contract of sale which is intended to operate by way of mortgage’, which is nothing but a mortgage by conditional sale, is out of the scope of an act regulating the sale of movable property, and using ‘mortgage’ and ‘charge’ in the company of ‘pledge’ which is statutorily recognised in the Indian Contract Act, 1872 as only for movable property, there is an implication that mortgage of movables exists in India but is excluded from the provisions of the Sale of Goods Act, 1930 in order to avoid repugnancy with the Transfer of Property Act, 1882.
On a combined reading of the fact that movable property includes IP, and movable property can be mortgaged in India, the logical conclusion is that IP can in fact be mortgaged as per the General principles of Indian and Common Law.
Mortgage of IP as per Specific Laws
The aforementioned analysis and conclusion of a mortgage of IP can further be strengthened with the aid of specific statutes regulating IP in India which permit/not expressly forbid mortgage of the respective type of IP:
- The Patents Act, 1970
This act governs patents in India, and it impliedly recognises the legality of creating a mortgage over patents in Sections 68 and 69, holding that the mortgage of a patent will only be valid if it is made in a written agreement, duly executed, and registered.
- The Copyright Act, 1957
While the Copyright Act itself is silent over the creation of mortgages or other security interests in copyrights, it does not expressly disallow this and only expressly allows assignment of copyrights under Sections 18 and 19.
Similar to the Copyright Act, the Trade Marks Act only talks about assignment and transmission of trade marks under Sections 37-45, without expressly forbidding mortgages or other security interests.
- The Designs Act, 2000
Section 30 of the Designs Act lays down a similar approach as taken by the Patents Act in the context of patents for the mortgage of industrial designs, thus implying mortgages of industrial designs is legal and valid under law as long as procedural formalities have been complied with.
- The Semiconductor Integrated Circuits Layout-Design Act, 2000
This act protects the innovative layout-designs of semiconductor integrated circuits in India. Sections 20-23 of this act talk about assignment and transmission of layout-designs, without creating any explicit legal impediment in the way of mortgaging layout-designs.
- Geographical Indications of Goods (Registration and Protection) Act, 1999
This act basically protects goods whose prime commercial quality and profitability rests upon their connection or origin to a particular geographic area or place. This is the only IP act which expressly prohibits the mortgaging or any form of transfer or creation of a security interest in registered GIs under Section 24.
Thus, it emerges from the above discussion that it may be safe to mortgage at least two types of IP, namely patents and designs, as this is contemplated by the respective acts themselves. However, when it comes to Trade marks, Copyrights, and Layout-designs, the uncertainty created by the absence of any express approval/disapproval of mortgages created over such IPs in the respective statutes may be dispelled by having reference to two general commercial laws, i.e. the Companies Act, 2013 and the Banking Regulation Act, 1949. Since the primary focus of this article is emerging companies and startups, Section 77 of the Companies Act, 2013 is a welcome entrance in the analysis of whether IP can be mortgaged. As per this provision, companies are permitted to create a charge over their property or assets, whether tangible or intangible. Since a mortgage is also a form of a charge as per Section 100 of the Transfer of Property Act, 1882, this contemplates the legality of mortgages over intellectual property in the case of companies. Furthermore, Schedule III of the Companies Act, 2013 under clause (j) elaborates what is meant by ‘intangible assets’ and lists all types of IP, including Trade marks, Copyrights, and even Layout-designs can be included in the ambit of the phrase ‘other intellectual property rights.’ This lends credibility to the notion that despite there being no provisions allowing or recognising the mortgage of Trade marks, Copyrights, and Layout-designs in their respective legislations, companies can legally do so as per the provisions of the Companies Act, 2013.
Furthermore, now that one of the parties in collateralising transactions, i.e. the IP owners of debtors, has been adequately expounded upon in terms of legality and validity, the other party, i.e. lenders, can also be included. Since the bulk of lenders and creditors with regards to companies is constituted of Banks, the Banking Regulation Act, 1949 may be taken into consideration. Specifically, Section 6 of the said act allows banks to make use of securities in their lending business, and to deal with any such property, right, title, or interest in any such property which is the security for the realisation of debts in the case of default by the debtor who gave the security. Thus, this section gives banks powers of a wide amplitude to deal with any securities created in their favour if these arise in their banking business, and this can easily be construed to include intellectual property.
The Department Related Parliamentary Standing Committee on Commerce in its 161st Report on ‘Review of the Intellectual Property Rights Regime in India’ concluded that though there is great scope for IP backed financing in enriching the private and public coffers of the country, the sluggish governmental measures in this area in the form of new legislation and especially in the form of lackadaisical implementation of the National IPR Policy of 2016 which explicitly had IP commercialisation as one of its slated objectives has resulted in significant slowdown of the adoption of IP as a collateral on par to that of other tangible property. For example, the lack of mandatory registration of copyrights under the Copyright Act, 1957 has made banks wary of accepting copyrights as collateral since there is no unified register wherefrom the banks can clearly trace the ownership and title of the IP so as to ensure the loan-seeker has a valid title over the IP. This ‘tracing of title’ is very significant and is one of the primary reasons why land is the most popular collateral for mortgages, as the mandatory registration of most transfers of land under the Indian Registration Act, 1908 provides a public register to record all titles and transfers of land. This can be rectified by improving the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), wherein every financial institution is mandated by the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) to register their security interests in any asset or property. Since the definition of ‘property’ in Section 2(1)(t)(v) includes intangibles like IP, this can provide banks with a reliable source for tracing the title of IP. However, the register at the moment contains all kinds of security interests and not just mortgages, thus making it difficult to navigate and locate specific mortgages created on IP. Thus, categorising the CERSAI as per the various kinds of security interests would be immensely helpful in furthering the cause of IP collateralisation in India.
Similarly, valuation of IP for the purposes of using it as collateral is another hurdle in the successful adoption of IP backed financing. In solving these issues, reference may also be had to the policies and mechanisms in other jurisdictions where IP collateralisation has already caught on, such as Singapore, China, and Australia. In the end, enabling and facilitating the rise of intangibles like IP as collateral for raising capital and loans would be a much-needed boost for the start-up ecosystem in India, which is already the third largest in the world. Therefore, proper progress in this direction would slingshot Indian businesses and economy to the top of the world hierarchy, and enshrine IP as the most important asset of the human race.
References
- Intellectual Property Backed Financing: Using Intellectual Property as Collateral, 2019 Confederation of Indian Industry (CII) and Duff & Phelps India Private Limited, https://ciiipr.in/pdf/CII-Duff-&-Phelps-Report-on-Using-IP-as-Collateral-2019.pdf.
- Md. Sultan And Ors. v. Firm of Rampratap Kannyalal, AIR 1964 AP 201.
- Vikas Sales Corporation v. Commissioner of Commercial Taxes, 1996 (4) SCC 433.
- Tehilram Girdharidas v. Longin D’Mello, AIR 1916 Bom 77.
- 161st Report of the Department Related Parliamentary Standing Committee on Commerce, Review of the Intellectual Property Rights Regime in India, July 23, 2021.
- Bharat Harne, IP Financing in India – Part I: Perfection of Security and (Non) Registration of Copyright, SpicyIP, March 21, 2023, https://spicyip.com/2023/03/ip-financing-in-india-part-i-perfection-of-security-and-non-registration-of-copyright.html.