IP Financing in India: Using Trade Marks to Access Credit

In the modern world, a corporation’s primary competitive strength is less derived by its physical capital and more by its intangible assets. Among these, trade marks play a pivotal role in shaping brand identity, market presence, and long-term commercial value. This article explores the rising practice of leveraging trade marks as collateral, and how businesses can use the value of their brands to access funds.

Trade Marks as Collateral: Concept and Method

A trade mark which is tied to a commercial product or service becomes inherently valuable owing to its marketing and use, which generates goodwill in the market. Such trade marks have become potent financial and lending assets globally, primarily because unlike other forms of intellectual property, the protection accorded to trade marks can be renewed till perpetuity.

As trade marks are a form of property, albeit intangible, they may be offered as collateral for securing loans through the creation of a security interest. This is typically accomplished by establishing a security interest in the trade mark. Under such an arrangement, a charge is created on the trade mark through a contractual obligation, whereby the owner pledges the mark to the lender or collateral agent to secure the loan. This can be structured in either of the following ways:

i. By way of transfer – This method involves the actual transfer of ownership through a written assignment or the grant of an exclusive licence executed by both the trade mark owner and the lender. Such assignments or licence agreements are recorded with the Trade Marks Registry by filing the requisite applications.

ii. By way of charge – This approach does not entail a transfer of ownership. Instead, it grants the financier certain rights over the trade mark, including priority over other creditors. Consequently, in the event of the trade mark owner’s default in repayment, the financier is entitled to dispose off, or appropriate the trade mark to satisfy the outstanding debt.

The security interest described above must be perfected by creating a public record to avoid the possibility of multiple and conflicting interests being created over the same asset. As the records of most IP Offices worldwide, including the Indian Trade Marks Registry, are publicly accessible, the recording of such interests ensures that any subsequent lender or financier can verify whether the trade mark(s) offered as security have already been encumbered in favour of another creditor.

Challenges in Using Trade Marks as Financial Assets

While the idea of using trade marks as financial assets for raising capital is conceptually sound, several practical obstacles impede its effective implementation. Key challenges include:

i. Valuation Difficulty – The value of a trade mark depends on goodwill, reputation, continued commercial use, and consumer perception. Determining an accurate monetary value is often challenging, as IP transactions are typically confidential and actual brand valuations are not publicly disclosed. For example, a review of records on the IP India website indicates that many trade mark assignment agreements are recorded for nominal consideration merely to comply with procedural requirements.

ii. Lack of Institutional Expertise: Most financing institutions lack in-house expertise to assess the value of trade marks or other forms of intellectual property. This knowledge gap leads lenders to either refrain from offering credit against trade marks or classify such assets as high-risk collateral.

iii. Complex Regulatory Compliance: Banking regulations in several jurisdictions, including India, tend to favour tangible security over intangible assets like trade marks. This preference stems from the understanding that, in the event of a borrower’s default, the goodwill associated with a trade mark is often the first to erode. Consequently, trade marks are perceived as less reliable assets compared to traditional forms of security.

iv. High Transaction Costs: Financing arrangements based on trade marks typically require extensive due diligence, a clear legal assessment of rights and encumbrances, and contractual obligations to maintain the trade mark. These fixed and recurring legal costs can render low-value transactions unviable for start-ups and small businesses.

v. Limited Liquidity and Challenges in Recovery: In the event of default, lenders may find it difficult to monetise a trade mark, as identifying buyers and transferring rights is more complex than selling tangible property. Additionally, insolvency or default can damage the brand’s goodwill, reducing the trade mark’s value when lenders attempt recovery.

Legal Framework and Practice in India

In India, the practice of using trade marks as collateral has gained limited traction, and primarily high net-worth corporations with established brand portfolios resort to this option. The Trade Marks Act, 1999 does not expressly provide for the creation of security interests over trade marks. Nevertheless, several statutory provisions and policy measures offer brand owners avenues to leverage their intangible assets.

i. SARFAESI Act, 2002 - This legislation enables financial institutions to create security interests over various forms of property, including intangible property such as trade marks.

ii. Companies Act, 2013 - Section 77 permits companies to create charges over intangible assets. Schedule III recognises intangible assets as a distinct class, expressly covering IP assets. Companies must register any charge created over such assets with the Registrar of Companies in the Register of Charges.

iii. National IPR Policy, 2016 - This policy led to the establishment of the Cell for IPR Promotion and Management (CIPAM), which is tasked with the commercialisation and monetisation of IP assets. Its mandate includes (a) formulating guidelines for IP valuation, (b) facilitating investment in IP-based enterprises, and (c) recommending incentives for financial institutions to support the development and commercialisation of IP.

Despite these enabling legal provisions and policy initiatives, adoption at the ground level remains limited. A general lack of awareness among stakeholders, along with inconsistent judicial rulings and a few unfavourable case studies have obscured the legal landscape, making lenders hesitant and ultimately restricting widespread implementation.

For instance, in 2009, Kingfisher Airlines secured loans worth hundreds of crores from banks by pledging its trade mark portfolio, including KINGFISHER, the KINGFISHER BIRD LOGO, FLY KINGFISHER, and its tagline FLY THE GOOD TIMES, as collateral with the State Bank of India. When the airline defaulted, the banks attempted to sell the trade marks but failed to recover adequate value.

Further, Deccan Chronicle Holdings Limited, one of South India’s largest print media houses, secured a loan exceeding INR 400 crores from IDBI Bank using its DECCAN CHRONICLE trade marks as part of the collateral. During insolvency proceedings, the bank struggled to find buyers for the trade marks, highlighting the challenges of monetising intangible assets in India.

Conclusion: Unlocking the Potential of Trade Mark-Backed Financing

Trade marks embody the commercial identity and goodwill of an enterprise, making them potentially powerful financial assets. Developed economies have successfully integrated trade mark-backed financing into credit systems through transparent registries, standardised valuation mechanisms, and policy support.

In India, while the legal foundation exists, practical and institutional challenges, from valuation uncertainties to lack of expertise, have limited adoption. As the country transitions to a knowledge-driven economy, embracing IP-based securitisation could unlock significant untapped capital for innovation-led growth. India can draw lessons from other Asian countries such as Korea, China, and Malaysia, which have strengthened IP financing ecosystems.

With coherent policies, skilled intermediaries, secondary marketplaces for IP transactions, and strong regulatory co-ordination, India can transform trade marks from passive identifiers of origin into active instruments of economic leverage, bridging the gap between IP and financial inclusion in the digital age.